Annual Report
2017
Overview
Business
CTS is a leading designer
and manufacturer of
sensors, actuators and
electronic components.
Headquarters
Lisle, Illinois - USA
Locations
15 manufacturing
locations in North
America, Asia and Europe.
Founded
1896
Ticker
CTS (NYSE)
Number of
Employees
~3,200 Globally
Our Vision
We aim to be a leading
provider of sensing and
motion devices as well as
connectivity components,
enabling an intelligent and
seamless world.
Sense. Connect. Move.
A Letter to
our Fellow
Shareholders
Kieran M. O’Sullivan
Chairman, President and
Chief Executive Officer
Thank you for your support and investment in CTS. We are
proud of our progress this year. We focused on the continued
transformation of our company while driving sales growth and
future new business. Our team is eager to make more progress in
the year ahead.
We continue to be guided by our vision to enable an intelligent
and seamless world by advancing our capabilities in sensing
and motion devices, as well as connectivity components. Our
strategy is simple - development of technologies and products that
Sense, Connect & Move. Our targeted end market diversification
continues to be a priority for our company.
Progress on Results
In 2017, we improved our sales growth and profitability as we
continued to reposition our company. The following achievements
were most significant:
• Sales increased 6.6% to $423M
• Adjusted earnings per share increased 14% to $1.23
• Operating cash flow increased 23% to $58M
• Total booked business increased from $1.5bn at the end of
2016 to $1.7bn at the end of 2017
• We acquired Noliac, a European designer and
manufacturer of tape cast, bulk ceramics and transducers.
Sales
($ Millions)
$423M
$397M
2016
2017
Adjusted Gross Margin
35.4%
34.3%
2016
2017
Adjusted Diluted EPS
$1.23
$1.08
2016
2017
Operating Cash Flow
($ Millions)
$58M
$47M
2016
2017
Advancing Defense Sonar Applications
with Single Crystal Technology
Whether for one-time, multiple events or over
their lifetime, our sensing and control products
provide vital inputs into electronic systems.
$1.7Billion
Total Booked
Business
22% Increase
in European Sales
14% Europe
55% Americas
2017 Sales
by Region
31% Asia
We saw our adjusted gross margin decline slightly to 34.3% as a
result of certain production rework issues. We will be focused on
making improvements in profitability as we move forward.
As identified in our strategic plan, the CTS leadership team
continues to focus on the simplification of our company while
maintaining a relentless focus on driving profitable growth. Our
target annual growth rate is 10% through a combination of
organic growth and acquisitions. This past year we improved
our growth rate to 6.6%, up from 3.8% in 2016. At the same
time, we substantially increased our total booked business to
$1.7bn – a record. We added more than twenty new customers
and continued the transformation of our end markets with a
36% increase in medical and a 22% increase in our European
sales driven primarily by new automotive customers and the
acquisition of Noliac.
Growth
Our automotive end-market sales increased 4.8% over the
prior year and we secured a multiyear next generation actuator
platform in the commercial vehicle market. Additionally, our
automotive products continued to gain share in international
markets. The acquisition of Noliac marked an important step
forward in the ceramics product line strategy, adding a third
technology to the portfolio and providing capabilities to move
up the value chain from materials formulations to engineered
sensors and transducers. With this acquisition we also expanded
our customer base and gained a second ceramic foundry that
is strategically located in Europe which is important for our
customers and our growth. In other electronic components, we
expanded our sensor and switch portfolio and launched a new
series of low power OCXO products for various electronic timing
applications in communications. Our investment in RF filters
is gaining traction in the market with several design wins and
revenue growth in the communications end-market.
Agility and Execution
The simplification of our company continues as we transition
the Elkhart location to an R&D center and move manufacturing
to our targeted footprint. This transition will advance our best
cost footprint to more than 80% in the next year, compared to
less than 50% in 2013. This transition, though challenging for our
teams, positions us to be more competitive, respond faster, and
improve profitability as a company.
Building on the work of footprint simplification, we are now
implementing a new enterprise resource planning system
globally. This implementation will provide a more modern and
efficient platform to engage in the next steps of simplification
as we continue to seek better performance and expand our
operating margins.
Enabling Small Cell Deployment with
Compact Radio Frequency Filters
Our connectivity components ensure that
electronic systems talk to each other
in the same language and in perfect sync.
IT 3%
Comm. 2%
Def. / Aero. 4%
Medical 8%
2017 Sales
2017 Sales
by Market
by Market
Transportation 65%
153%
Shareholder
Return over
Five Year Span
Looking Forward
Industrial 18%
Our balance sheet is healthy, with a net positive cash position
which enables growth through product development and
strategic acquisitions. Our operating cash flow continues to
grow, with 23% improvement in 2017. Our capital deployment
model is primarily focused on strategic acquisitions, capital
investments and return to shareholders. In the year ahead, we
will substantially increase our capital spending as we invest for
growth and continue to modernize our systems. You can expect
a return toward more normal levels of capital spending in the
following years.
Over the past five years, our shareholders benefited from our
improved performance, with a total shareholder return of 153%.
We have positioned our company to benefit from the global
mega trends in safety, and the reduction of harmful emissions by
driving efficient and smart solutions as our world becomes more
connected and intelligent. Our strategic investments in R&D
and innovation are becoming visible as our new products gain
traction in new markets.
As the connectedness of our world expands, we are pleased to
have our high quality material formulations expand into new
haptic applications, an expanding new market opportunity. In
the past year, we also launched new products that sense and
enable advanced security access in mobile applications. Our
phase loop lock modules are applied in autonomous vehicles to
provide a clear and precise signal in safety critical applications
and our RF filters condition signals in the deployment of small
cell communications. With our single crystal technology, we
secured a new customer engagement in a new naval application
while continuing a double-digit growth rate in medical
ultrasound. Our focus on emission reduction and improving our
environment advanced with our largest customer where next
generation actuators which will be launched in 2020.
Even with the aforementioned advances, we have more to do
to advance our strategic plan and profitable growth around
products that Sense, Connect & Move. We are focused on adding
new technologies, sensing applications, and transducers to our
product portfolio. We want to be a stronger partner for our
customers and to continue growing globally.
Fingerprint
Identification
Sensing
Autonomous
Vehicle
Safety
Variable
Geometry
Turbo
Creating New Mobile Device Haptic
Experiences using Piezo Technology
Our actuator products make sure that a
movement requirement gets effectively and
accurately executed in the real world; in the
cleanest or most challenging environments.
Our People & Culture
When I reflect on the past year, I am proud of our progress and
the significant improvements our team has made as we continue
on our transformational journey. Manufacturing is core to our
company. This past year, we moved to a combined corporate
and manufacturing site in Lisle to consolidate operations. Our
company continues to evolve and so does our culture, which is an
important part of our foundation. We continue to modernize to
help us retain and attract talent, while building global collaboration
and innovation internally and externally with our partners. I am
constantly inspired by all the efforts of our employees toward
building customer loyalty and expanding our partnerships.
I am proud of the commitment of our leadership team and every
employee around the world, and know that we will continue to
advance our company towards superior performance for our
customers, satisfaction for our employees, and strong returns
for our shareholders. On behalf of our employees and board of
directors, I thank you for your support.
Kieran M. O’Sullivan
Chairman, President and Chief Executive Officer
Our Product Portfolio
Controls
Pedals
Piezoelectric Products
Sensors
Switches
Transducers
EMI/RFI Filters
Frequency Control Products
RF Filters
Specialty Capacitors
Specialty Resistors
Piezoelectric Products
Rotary Actuators
Thermal Products
CTS aims to be at the forefront of technology, delivering
innovative sensing, connectivity and motion solutions
to enable an intelligent and seamless world.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of
incorporation or organization)
4925 Indiana Avenue, Lisle, IL
(Address of principal executive offices)
35-0225010
(IRS Employer
Identification Number)
60532
(Zip Code)
Registrant's telephone number, including area code: 630-577-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common stock, without par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
No
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 and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting and non-voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS
common stock on June 30, 2017, was approximately $706,120,000. There were 32,938,466 shares of common stock, without par value, outstanding on
February 20, 2018.
(1) Portions of the Proxy Statement to be filed for the annual meeting of shareholders to be held on or about May 17, 2018 are incorporated by
reference in Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
ITEM
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
PART III
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statements Schedules
PART IV
SIGNATURES
Management's Report on Internal Control Over Financial Reporting
PAGE
2
7
14
14
15
15
16
18
19
30
31
72
72
72
73
73
73
73
73
74
77
78
Safe Harbor
Forward-Looking Statements
This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other
guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are
not based solely on historical fact. Forward-looking statements are based on management's expectations, certain assumptions and
currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are
subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties and other factors, which
could cause our actual results, performance or achievements to differ materially from those presented in the forward-looking
statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to:
changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating
acquisitions; the results of actions to reposition our business; rapid technological change; general market conditions in the
transportation, communications, and information technology industries, as well as conditions in the industrial, defense and
aerospace, and medical markets; reliance on key customers; unanticipated natural disasters or other events; environmental
compliance and remediation expenses; the ability to protect our intellectual property; pricing pressures and demand for our products;
and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical
risks. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of this Annual Report on Form 10-
K. We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or
circumstances that arise after the date hereof, including market or industry changes.
PART I
Item 1. Business
CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronic components, and
actuators. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana
corporation in February 1929. Our principal executive offices are located in Lisle, Illinois.
We design, manufacture, and sell a broad line of sensors, electronic components, and actuators primarily to original equipment
manufacturers ("OEMs") for the aerospace, communications, defense, industrial, information technology, medical, and
transportation markets. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components,
enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense
products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other
systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our
vision by continuing to invest in the development of products and technologies within these categories.
We operate manufacturing facilities in North America, Asia, and Europe. Sales and marketing are accomplished through our sales
engineers, independent manufacturers' representatives, and distributors.
See the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K for financial
information regarding the Company.
PRODUCTS BY MAJOR MARKETS
Our products perform specific electronic functions for a given product family and are intended for use in customer assemblies.
Our major products consist principally of sensors and actuators used in passenger or commercial vehicles, electronic components
used in communications infrastructure, information technology and other high-speed applications, switches, and potentiometers
supplied to multiple markets, and fabricated piezoelectric materials and substrates used primarily in medical, industrial, defense
and aerospace, and information technology markets.
2 The following table provides a breakdown of net sales by industry as a percent of consolidated net sales:
Industry
Transportation
Industrial
Medical
Defense and Aerospace
Information Technology
Communications
% of consolidated net sales
2017
2016
2015
65%
18%
8%
4%
3%
2%
66%
17%
7%
4%
4%
2%
67%
17%
3%
5%
5%
3%
100%
100%
100%
The following table identifies major products by industry. Products are sold to several industry OEMs and through distributors.
Product Description
Transportation
Industrial
Medical
Defense
and
Aerospace
IT
Communications
SENSE
(Controls, Pedals, Piezo Sensing
Products, Sensors, Switches,
Transducers)
CONNECT
(EMI/RFI Filters, Capacitors,
Frequency Control, Resistors, RF
filters)
MOVE
(Piezo Microactuators, Rotary
Actuators, Thermal)
MARKETING AND DISTRIBUTION
Sales and marketing to OEMs is accomplished through our sales engineers, independent manufacturers' representatives, and
distributors. We maintain sales offices in China, Czech Republic, Denmark, Germany, India, Japan, Scotland, Singapore, Taiwan,
and the United States. Approximately 90% of 2017 net sales were attributable to our sales engineers.
Our sales engineers generally service the largest customers with application-specific products. The sales engineers work closely
with major customers in designing and developing products to meet specific customer requirements.
We utilize the services of independent manufacturers' representatives for customers not serviced directly by our sales engineers.
Independent manufacturers' representatives receive commissions from us. During 2017, approximately 5% of net sales were
attributable to independent manufacturers' representatives. We also use independent distributors. Independent distributors purchase
products from us for resale to customers. In 2017, independent distributors accounted for approximately 5% of net sales.
RAW MATERIALS
We utilize a wide variety of raw materials and purchased parts in our manufacturing processes. The following are the most significant
raw materials and purchased components:
Conductive inks and contactors, passive electronic components, integrated circuits and semiconductors, certain rare earth
elements ("REEs"), ceramic powders, plastic components, molding compounds, printed circuit boards and assemblies,
quartz blanks and crystals, wire harness assemblies, copper, brass, silver, gold, platinum, lead, aluminum, and steel-based
raw materials and components.
These raw materials and parts are purchased from a number of suppliers, and we generally do not believe we are dependent upon
one or a limited number of suppliers. Although we purchase all of our semiconductors, REEs, conductive inks, and silver pastes
from a limited number of suppliers, alternative sources are available.
3 We do not currently anticipate any significant raw material shortages that would limit production. However, the lead times between
the placement of orders for certain raw materials and purchased parts and actual delivery to us may vary. Occasionally, we may
need to order raw materials in greater quantities and at higher prices to compensate for the variability of lead times for delivery.
PATENTS, TRADEMARKS, AND LICENSES
We maintain a program of obtaining and protecting U.S. and non-U.S. patents relating to products that we have designed and
manufactured, as well as processes and equipment used in our manufacturing technology. We were issued 6 new U.S. patents and
17 non-U.S. patents in 2017 and currently hold 151 U.S. patents and 157 non-U.S. patents. We have 8 registered U.S. trademarks,
20 registered foreign trademarks and 4 international trademark registrations. We have licensed the right to use several of our
patents. In 2017, license and royalty income was less than 1% of net sales.
Sales to our 15 largest customers as a percentage of total net sales were as follows:
MAJOR CUSTOMERS
Total of 15 largest customers / net sales
Years Ended December 31,
2017
64.4%
2016
63.1%
2015
61.4%
Our net sales to significant customers as a percentage of total net sales were as follows:
Cummins Inc.
Honda Motor Co.
Toyota Motor Corporation
Years Ended December 31,
2017
13.4%
11.2%
10.2%
2016
9.9%
10.7%
10.4%
2015
9.3%
10.7%
10.1%
We sell automotive parts to these three customers for certain vehicle platforms under purchase agreements that have no volume
commitments and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
We continue to broaden our customer base. Changes in the level of our customers' orders have, in the past, had a significant impact
on our operating results. If a major customer reduces the amount of business it does with us, or substantially changes the terms
of that business, there could be an adverse impact on our operating results.
We expect to continue to depend on sales to our major customers. Because our customers are under no obligation to continue to
do business with us on a long-term basis, it is possible that one or more customers may choose to work with a competitor and
reduce its business with us. Customers may also reduce or delay their business with us because of economic or other conditions
or decisions that reduce their need for our products or services. Since it is difficult to replace lost business on a timely basis, it is
likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay, or reduce
a large amount of business with us in the future. If one or more of our customers were to become insolvent or otherwise unable
to pay for our products and/or services, our operating results, financial condition, and cash flows could be adversely affected.
ORDER BACKLOG
Order backlog, as previously disclosed, is comprised of firm open purchase orders we have received from our customers and
generally represents 1 to 2 months of sales. Our business is a mix of purchase order based business, shorter-term contracts, and
multi-year awards, such as with customers who serve the automotive end-market. As such, order backlog does not provide a
meaningful indication of future sales.
4 COMPETITION
We compete with many domestic and foreign manufacturers principally on the basis of product features, technology, price, quality,
reliability, delivery, and service. Most of our product lines encounter significant global competition. The number of competitors
varies from product line to product line. No one competitor competes with us in every product line, but many competitors are
larger and more diversified than we are.
Some customers have reduced or plan to reduce their number of suppliers, while increasing their volume of purchases. Customers
demand lower cost and higher quality, reliability, and delivery standards from us as well as from our competitors. These trends
create opportunities for us, but also increase the risk of loss of business to competitors. We are subject to competitive risks that
are typical within the electronics industry, including in some cases short product life cycles and technical obsolescence.
We believe we compete most successfully in custom engineered products manufactured to meet specific applications of major
OEMs.
Our net sales to customers originating from our non-U.S. operations as a percentage of total net sales were as follows:
NON-U.S. REVENUES AND ASSETS
Net sales from non-U.S. operations
Our percentages of total assets at non-U.S. locations were as follows:
Total assets at non-U.S. operations
Years Ended December 31,
2017
32%
2016
30%
2015
38%
Years Ended December 31,
2017
49%
2016
48%
2015
46%
A substantial portion of these assets, other than cash and cash equivalents, cannot readily be liquidated. We believe the business
risks to our non-U.S. operations, though substantial, are normal risks for global businesses. These risks include currency controls
and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and
inflation, government regulations, and expropriation. Our non-U.S. manufacturing facilities are located in China, Czech Republic,
Denmark, India, Mexico, and Taiwan.
See Note 19 "Geographic Data" in the Notes to Consolidated Financial Statements for further geographic information.
A summary of amounts spent for research and development activities is as follows:
RESEARCH AND DEVELOPMENT ACTIVITIES
(in thousands)
Research and development
Years Ended December 31,
2017
$25,146
2016
$24,040
2015
$22,461
Ongoing research and development activity is primarily focused on expanded applications, new product development, and current
product and process enhancements.
We believe a strong commitment to research and development is required for growth. Most of our research and development
activities relate to developing new, innovative products and technologies to meet the current and future needs of our customers.
We provide our customers with engineering support to ensure quality and reliability through all phases of design, launch, and
manufacturing to meet or exceed customer requirements. Many such research and development activities benefit one or a limited
number of customers or potential customers. All research and development costs are expensed as incurred.
5 EMPLOYEES
We employed 3,222 people at December 31, 2017, with 80% of these employees located outside the U.S. We employed 2,796
people at December 31, 2016. Approximately 117 employees at one location in the United States were covered by two collective
bargaining agreements as of December 31, 2017. Both agreements are scheduled to expire upon completion of our 2016
Restructuring Plan activities.
ADDITIONAL INFORMATION
We are incorporated in the State of Indiana. Our principal corporate office is located at 4925 Indiana Avenue Lisle, IL 60532.
Our internet address is www.ctscorp.com. We make available free of charge through our website our annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission ("SEC"). Other than the documents that we file with the SEC that
are incorporated by reference herein, the information contained on or accessible through our website is not part of this or any other
report we file or furnish to the SEC.
Further, a copy of this annual report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our
filings at www.sec.gov.
EXECUTIVE OFFICERS OF THE COMPANY
Executive Officers. The following serve as executive officers of CTS as of February 23, 2018. The executive officers are
expected to serve until the next annual shareholders meeting, scheduled to be held on or about May 17, 2018, at which time the
election of officers will be considered again by the Board of Directors.
Name
Kieran O'Sullivan
Ashish Agrawal
Luis Francisco Machado
Age
55
47
55
Positions and Offices
President, Chief Executive Officer and Chairman of the Board
Vice President and Chief Financial Officer
Vice President, General Counsel and Secretary
Kieran O'Sullivan - 55 - President, Chief Executive Officer and Chairman of the Board. Mr. O'Sullivan joined CTS on January 7,
2013. Before joining CTS, Mr. O'Sullivan served as Executive Vice President of Continental AG's Global Infotainment and
Connectivity Business and led the NAFTA Interior Division, having joined Continental AG, a global automotive supplier, in 2006.
Mr. O'Sullivan is a member of the board of directors, is chairman of the compensation committee, and is a member of the risk
committee of LCI Industries, a supplier of components for manufacturers of recreational vehicles, manufactured homes and for
the related aftermarkets of those industries.
Ashish Agrawal - 47 - Vice President and Chief Financial Officer. On November 11, 2013, Mr. Agrawal was elected Vice President
and Chief Financial Officer for CTS. Mr. Agrawal joined CTS in June 2011 as Vice President, Treasury and Corporate Development,
and was elected as Treasurer on September 1, 2011. Before joining CTS, Mr. Agrawal was with Dometic Corporation, a
manufacturer of refrigerators, awnings and air conditioners, as Senior Vice President and Chief Financial Officer since 2007. Prior
to that, Mr. Agrawal was with General Electric Co. in various positions since December 1994.
Luis Francisco Machado - 55 - Vice President, General Counsel and Secretary. Mr. Machado joined CTS in August 2015. Before
joining CTS, Mr. Machado was at L Brands, Inc., a retailer of intimate apparel, home fragrance and beauty products under the
Victoria's Secret, Pink, and Bath and Body Works Brands, as Senior Vice President, Legal and Assistant Secretary since August
2010, and Associate General Counsel, Corporate and Assistant Secretary of Wm. Wrigley Jr. Company since February 2006.
Information with respect to Directors and Corporate Governance may be found in our definitive proxy statement to be delivered
to shareholders in connection with our 2018 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
6 Item 1A. Risk Factors
The following are certain risk factors that could affect our business, financial condition and operating results. These risk factors
should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K or
in any other reports filed or furnished by us, because these factors could cause our actual results and financial condition to differ
materially from those projected in any such forward-looking statements. Before you invest in us, you should know that making
such an investment involves risks, including the risks described below. The risks that are highlighted below are not the only ones
that we face. If any of the following risks occur, our business, financial condition or operating results could be negatively affected.
Because we currently derive a significant portion of our revenues from a small number of customers, any decrease in orders
from these customers could have an adverse effect on our business, financial condition and operating results.
We depend on a small number of customers for a large portion of our business, and changes in the level of our customers' orders
have, in the past, had a significant impact on our results of operations. If a major customer significantly delays, reduces, or cancels
the level of business it does with us, there could be an adverse effect on our business, financial condition and operating results.
Significant pricing and margin pressures exerted by a major customer could also materially adversely affect our operating results.
In addition, we generate significant accounts receivable from sales to our major customers. If one or more of our major customers
were to become insolvent or otherwise unable to pay or were to delay payment for our products, our business, financial condition
and operating results could be materially adversely affected.
Negative or unexpected tax consequences could adversely affect our results of operations.
We operate globally and changes in tax laws could adversely affect our results. The international tax environment continues to
change as a result of both coordinated actions by governments and unilateral measures enacted by individual countries, such as
the comprehensive tax reform enacted in the U.S. at the end of 2017. Although the Company continues to evaluate the impact of
the recent U.S. tax reform, it could significantly impact our effective tax rate, tax liabilities and our ability to utilize deferred tax
assets.
Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to changes
in our valuation allowances against deferred tax assets and other tax accruals that could materially and adversely affect our results
of operations. In addition, acquisitions or divestitures may cause our effective tax rate to change.
We base our tax accounting positions upon the anticipated nature and conduct of our business and upon our understanding of the
tax laws of the various countries in which we have assets or conduct activities. However, our tax accounting positions are subject
to review and possible challenge by taxing authorities and to possible changes in law, which may have a retroactive effect.
We may be unable to compete effectively against competitors.
The industries in which we operate are highly competitive and characterized by price erosion and rapid technological change. We
compete against many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research
and development and marketing resources than we do. If any customer becomes dissatisfied with our prices, quality or timeliness
of delivery, among other things, it could award business to our competitors. Moreover, some of our customers could choose to
manufacture and develop particular products themselves rather than purchase them from us. Increased competition could result
in price reductions, reduced profit margins and loss of market share, each of which could materially adversely affect our business,
financial condition and operating results. These developments also may materially adversely affect our ability to compete
successfully going forward. We cannot assure you that our products will continue to compete successfully with our competitors'
products, including OEMs.
We may be unable to keep pace with rapid technological changes that could make some of our products or processes obsolete
before we realize a return on our investment.
The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes.
End markets for our products are characterized by technological change, frequent new product introductions and enhancements,
changes in customer requirements, and emerging industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover
any or all of our research, development and commercialization expenses, or our capital investments. Furthermore, the life cycles
of our products and the products we manufacture for others vary, may change, and are difficult to estimate.
7 We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new products
or product enhancements and our new products or product enhancements may not adequately meet the requirements of the
marketplace or achieve market acceptance. If we are unable, for technological or other reasons, to develop and market new products
or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be
materially adversely affected.
Our customers may cancel their orders, change production quantities or locations or delay production.
We generally do not obtain firm, long-term purchase commitments from our customers, and regularly experience reduced or
extended lead times in customer orders. Customers cancel orders, change production quantities and delay production for a number
of reasons. Uncertain economic and geopolitical conditions may result in some of our customers delaying the delivery of some of
the products we manufacture for them and placing purchase orders for lower volumes of products than previously anticipated.
Cancellations, reductions or delays by a significant customer or by a number of customers may harm our results of operations by
reducing the volumes of products we manufacture and sell, as well as by causing a delay in the recovery of our expenditures for
inventory in preparation for customer orders, or by reducing our asset utilization, resulting in lower profitability.
In addition, customers may require that manufacturing of their products be transitioned from one of our facilities to another to
achieve cost reductions and other objectives. Such transfers may result in inefficiencies and costs due to resulting excess capacity
and overhead at one facility and capacity constraints and the inability to fulfill all orders at another. In addition, we make key
decisions based on our estimates of customer requirements, including determining the levels of orders that we will seek and accept,
production schedules, component procurement commitments, personnel needs and other resource requirements. The short-term
nature of our customers' commitments and the changes in demand for their products may reduce our ability to estimate future
customer requirements accurately. This may make it difficult to schedule production and maximize utilization of our manufacturing
capacity. Anticipated orders may not materialize and delivery schedules may be deferred as a result of changes in demand for our
products or our customers' products. We often increase staffing and capacity, and incur other expenses to meet the anticipated
demand of our customers, which causes reductions in our gross margins if customer orders are delayed or canceled. On occasion,
customers require rapid increases in production, which may stress our resources and reduce margins. We may not have sufficient
capacity at any given time to meet our customers' demands. In addition, because many of our costs and operating expenses are
relatively fixed over the short-term, a reduction in customer demand could harm our gross margin and operating income until such
time as adjustments can be made to activity and operating levels or to structural costs.
We sell products to customers in cyclical industries that are subject to significant downturns that could materially adversely
affect our business, financial condition and operating results.
We sell products to customers in cyclical industries that have experienced economic and industry downturns. The markets for our
products have softened in the past and may again soften in the future. We may face reduced end-customer demand, underutilization
of our manufacturing capacity, changes in our revenue mix and other factors that could adversely affect our results of operations
in the near-term. We cannot predict whether we will achieve profitability in future periods.
We derive a substantial portion of our revenues from customers in the transportation, information technology and
communications industries and are susceptible to trends and factors affecting those industries.
Sales to the transportation, information technology and communications industries represent a substantial portion of our revenues.
Factors negatively affecting these industries and the demand for their products also negatively affect our business, financial
condition and operating results. Any adverse occurrence, including among others, industry slowdown, recession, political instability,
costly or constraining regulations, reduced government budgets and spending, armed hostilities, terrorism, excessive inflation,
prolonged disruptions in one or more of our customers' production schedules or labor disturbances, that results in a decline in the
volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries,
could materially adversely affect our business, financial condition and operating results. These industries are generally unionized
and some of our customers have experienced labor disruptions in the past. Furthermore, these industries are highly cyclical in
nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. The failure of
manufacturers that we serve may result in the failure to receive payment in full for products sold in the past and an abrupt cancellation
in demand for certain products. Weakness in demand, the insolvency of manufacturers that we serve or their suppliers, and
constriction of credit markets may negatively and materially affect our facility utilization, cost structure, financial condition, and
operating results.
8 Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our
products or services and liability claims against us.
Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or
manufacturing errors or component failure. Product defects could result in delayed shipments and reduced demand for our products.
We may be subject to increased costs due to warranty claims on defective products. Product defects could result in product liability
claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. As we grow our business
in the transportation and medical device markets, the risk of exposure to product liability litigation increases. We may be required
to participate in a recall involving products which are, or are alleged to be, defective. We carry insurance for certain legal matters
involving product liability; however, we do not have coverage for all costs related to product defects and the costs of such claims,
including costs of defense and settlement, may exceed our available coverage. Accordingly, our results of operations, cash flow
and financial position could be adversely affected.
We are exposed to fluctuations in foreign currency exchange rates that may adversely affect our business, financial condition
and operating results.
We transact business in various foreign countries. We present our consolidated financial statements in U.S. dollars, but a portion
of our revenues and expenditures are transacted in other currencies. As a result, we are exposed to fluctuations in foreign currencies.
Additionally, we have currency exposure arising from funds held in local currencies in foreign countries. Volatility in the exchange
rates between the foreign currencies and the U.S. dollar could harm our business, financial condition and operating results.
Furthermore, to the extent we sell our products in foreign markets, currency fluctuations may result in our products becoming too
expensive for foreign customers.
Our operating results vary significantly from period to period.
We experience fluctuations in our operating results. Some of the principal factors that contribute to these fluctuations are: changes
in demand for our products; our effectiveness in managing manufacturing processes, costs and timing of our component purchases
so that components are available when needed for production, while mitigating the risks of purchasing inventory in excess of
immediate production needs; the degree to which we are able to utilize our available manufacturing capacity; changes in the cost
and availability of components, which often occur in the electronics manufacturing industry and which affect our margins and our
ability to meet delivery schedules; general economic and served industry conditions; and local conditions and events that may
affect our production volumes, such as labor conditions or political instability.
We face risks relating to our international operations.
Because we have significant international operations, our operating results and financial condition could be materially adversely
affected by economic, political, health, regulatory and other factors existing in foreign countries in which we operate. Our
international operations are subject to inherent risks, which may materially adversely affect us, including: political and economic
instability in countries in which our products are manufactured; expropriation or the imposition of government controls; changes
in government regulations; export license requirements; trade restrictions; earnings repatriation and expatriation restrictions;
exposure to different legal standards, including related to intellectual property; health conditions and standards; currency controls;
fluctuations in exchange rates; increases in the duties and taxes we pay; inflation or deflation; greater difficulty in collecting
accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing our
international operations; limitations on insurance coverage against geopolitical risks, natural disasters and business operations;
and communication among and management of international operations. In addition, these same factors may also place us at a
competitive disadvantage compared to some of our foreign competitors.
We may face risks associated with violations of the Foreign Corrupt Practices Act ("FCPA") and similar anti-bribery laws. The
FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making
improper payments to government officials for the purpose of obtaining or retaining business. Our Code of Ethics mandates
compliance with these anti-bribery laws. We operate in many parts of the world where strict compliance with anti-bribery laws
may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect
us from the detrimental actions by our employees or agents. If we are found to be liable for FCPA violations (either due to our
own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other
sanctions, which could have a material adverse effect on our business.
Public health or safety concerns, conditions, or restrictions that impact the availability of labor or the movement of goods in some
of the countries in which we operate could have a material adverse effect on our business, financial condition and operating results.
9 We may restructure our operations, which may materially adversely affect our business, financial condition and operating
results.
We have announced and initiated restructuring plans at various times in the recent past designed to revise and consolidate certain
aspects of our operations for the purpose of improving our cost structure. We may incur restructuring and impairment charges in
the future if circumstances warrant. Additionally, if we are unsuccessful in implementing restructuring plans, we may experience
disruptions in our operations and higher ongoing costs, which may materially adversely affect our business, financial condition
and operating results.
Losses in the stock market could negatively impact pension asset returns and cash flow due to possible required contributions
in the future.
We make a number of assumptions relating to our pension plans in order to measure the financial position of the plans and the net
periodic benefit cost. The most significant assumptions relate to the discount rate and the expected long-term return on plan assets.
If these assumptions prove to be significantly different from actual rates, then we may need to record additional expense relating
to the pension plans, which could require cash contributions to fund future pension obligation payments and could have a material
adverse effect on our financial condition and results of operations.
We may pursue acquisition opportunities that complement or expand our business as well as divestitures that could impact
our business operations. We may not be able to complete these transactions, and these transactions, if executed, may pose
significant risks that could materially adversely affect our business, financial condition and operating results.
On an ongoing basis we explore opportunities to buy other businesses or technologies that could complement, enhance or expand
our current business or product lines or that might otherwise offer us growth opportunities. We may have difficulty finding suitable
opportunities or, if we do identify these opportunities, we may not be able to complete the transactions for any number of reasons
including a failure to secure financing. In addition, we may not be able to successfully or profitably integrate, operate, maintain
and manage our newly acquired operations or employees. Any transactions that we are able to identify and complete may involve
a number of risks, including: the diversion of management's attention from our existing business to integrate the operations and
personnel of the acquired or combined business; possible adverse effects on our operating results during the integration process;
difficulties managing and integrating operations in geographically dispersed locations; increases in our expenses and working
capital requirements, which could reduce our return on invested capital; exposure to unanticipated liabilities of acquired companies;
and our possible inability to achieve the intended objectives of the transaction. Even if we are initially successful in integrating a
new operation, we may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational
inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional
debt. These and other factors could harm our ability to achieve anticipated levels of profitability from acquired operations or realize
other anticipated benefits of an acquisition, and could adversely affect our business and operating results.
We have in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of
risks, including the diversion of management's attention, significant costs and expenses, the loss of customer relationships and
cash flow, and the disruption of operations in the affected business. Failure to timely complete or consummate a divestiture may
negatively affect valuation of the affected business or result in restructuring charges.
If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on others' intellectual property
rights, our business, financial condition and operating results could be materially adversely affected.
The success of our business depends, in part, upon our ability to protect trade secrets, trademarks, copyrights and patents, obtain
or license patents and operate without infringing on the intellectual property rights of others. We rely on a combination of trade
secrets, copyrights, patents, nondisclosure agreements and technical measures to protect our proprietary rights in our products and
technology. The steps we have taken to prevent misappropriation of our technology may be inadequate. In addition, the laws of
some foreign countries in which we operate do not protect our proprietary rights to the same extent as do the laws of the United
States. Although we continue to evaluate and implement protective measures, there can be no assurance that these efforts will be
successful. Our inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we
derive from our technology, cause us to lose sales or otherwise harm our business.
We believe that patents will continue to play an important role in our business. However, there can be no assurance that we will
be successful in securing patents for claims in any pending patent application or that any issued patent will provide us with any
10 competitive advantage. We also cannot provide assurance that the patents will not be challenged by third parties or that the patents
of others will not materially adversely affect our ability to do business.
We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringed
on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our
intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be
required to cease marketing or selling certain products, pay penalties and spend significant time and money to develop a non-
infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be
successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms,
if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially
adversely affect us even if we are successful in the litigation.
We may experience shortages and increased costs of raw material and required electronic components.
Unanticipated raw material or electronic component shortages may prevent us from making scheduled shipments to customers.
Our inability to make scheduled shipments could cause us to experience a shortfall in revenue, increase our costs and adversely
affect our relationship with affected customers and our reputation as a reliable supplier. We may be required to pay higher prices
for raw materials or electronic components in short supply and order these raw materials or electronic components in greater
quantities to compensate for variable delivery times. We may also be required to pay higher prices for raw materials or electronic
components due to inflationary trends regardless of supply. We are also dependent on our suppliers' ability to supply and deliver
raw materials on a timely basis at negotiated prices. Any delay or inability to deliver raw materials by our suppliers may require
that we attempt to mitigate such failure or fail to make deliveries to our customers on a timely basis. As a result, raw material or
electronic component shortages, price increases, or failure to perform by our suppliers could adversely affect our operating results
for a particular period due to the resulting revenue shortfall and/or increased costs.
Loss of our key management and other personnel, or an inability to attract key management and other personnel, could
materially affect our business.
We depend on our senior executive officers and other key personnel to run our business. We do not have long-term employment
contracts with our key personnel. The loss of any of these officers or other key personnel could adversely affect our operations.
Competition for qualified employees among companies that rely heavily on engineering and technology is at times intense, and
the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the
operation and expansion of our business could hinder our ability to conduct research activities and develop marketable products
successfully.
We are subject to a variety of environmental, health, and safety laws and regulations that expose us to potential financial
liability.
Our operations are regulated by a number of federal, state, local and foreign environmental, health, and safety (“EHS”) laws and
regulations that govern, among other things, air and water emissions, worker protection, and the handling, storage and disposal of
hazardous materials. Compliance with EHS laws and regulations is a major consideration for us because we use hazardous materials
in our manufacturing processes. If we violate EHS laws and regulations, we could be liable for substantial fines, penalties, and
costs of mandated remedial actions. Our environmental permits could also be revoked or modified, which could require us to cease
or limit production at one or more of our facilities, thereby materially adversely affecting our business, financial condition and
operating results. EHS laws and regulations have generally become more stringent over time and could continue to do so, imposing
greater compliance costs and increasing risks and penalties associated with any violation, which also could materially affect our
business, financial condition and operating results.
We have been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, groups of
potentially responsible parties, that we are potentially liable for environmental contamination at several sites currently and formerly
owned or operated by us, including sites designated as National Priorities List sites under the U.S. Environmental Protection
Agency’s Superfund program. Superfund liability is joint and several and we may be held responsible for more than our share of
contamination at a site. Although we estimate our potential environmental liability and reserve for such matters, we cannot assure
you that our reserves will be sufficient to cover the actual costs that we incur as a result of these matters.
Future events, such as the notification of potential liability at new sites, the discovery of additional contamination or changes to
an approved remedy at existing sites, changes to existing EHS environmental laws and regulations or their interpretation, and more
11 rigorous regulatory action by government authorities, may require additional expenditures by us, which could have a negative
impact on our operations.
In addition, we could be affected by future laws or regulations imposed in response to climate change concerns. Such laws or
regulations could have a material adverse effect on our business, financial condition, and results of operations.
Our indebtedness may adversely affect our financial health.
Our debt consists of borrowings under our revolving credit facility. Our indebtedness could, among other things: increase our
vulnerability to general economic and industry conditions, including recessions; require us to use cash flow from operations to
service our indebtedness, thereby reducing our ability to fund working capital, capital expenditures, research and development
efforts and other expenses; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which
we operate; place us at a competitive disadvantage compared to competitors that have less indebtedness; or limit our ability to
borrow additional funds that may be needed to operate and expand our business. Moreover, an increase in interest rates could
increase our interest expense.
Our credit facility contains provisions that could materially restrict our business.
Our revolving credit facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other
debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or
engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and repurchases stock or
make dividend payments above a certain amount.
The restrictions contained in our credit facility could limit our ability to plan for or react to changes in market conditions or meet
capital needs or could otherwise restrict our activities or business plans. These restrictions could adversely affect our ability to
finance our operations, make strategic acquisitions, fund investments or other capital needs or engage in other business activities
that could be in our interest.
Further, our ability to comply with our loan covenants may be affected by events beyond our control that could result in an event
of default under our credit facility, or documents governing any other existing or future indebtedness. A default, if not cured or
waived, may permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further
extensions of credit under our credit facility. If our indebtedness is accelerated, we cannot be certain that we will have sufficient
funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable
to us or at all.
Regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability
concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo ("DRC")
and adjoining countries. As a result, the SEC adopted annual disclosure and reporting requirements for those companies who may
use conflict minerals mined from the DRC and adjoining countries in their products. There have been and will continue to be costs
associated with complying with these disclosure requirements, including diligence costs to determine the sources of minerals used
in our products and other potential changes to products, processes or sources of supply to the extent necessary as a consequence
of such verification activities. These rules could adversely affect the sourcing, supply and pricing of materials used in our products.
As there may be only a limited number of suppliers offering conflict-free minerals, we cannot be sure that we will be able to obtain
necessary conflict-free minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational
challenges if we determine that certain of our products contain conflict minerals or if we are unable to sufficiently verify the origins
for all minerals used in our products through the procedures we may implement.
Ineffective internal control over our financial reporting may harm our business.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").
Our controls necessary for continued compliance with Sarbanes-Oxley may not operate effectively or at all times and may result
in a material weakness. The identification of material weaknesses in internal control over financial reporting could indicate a lack
of proper controls to generate accurate financial statements. Further, the effectiveness of our internal controls may be impacted if
we are unable to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such
personnel among publicly traded companies.
12 Natural disasters may adversely impact our capability to supply product to our customers.
Natural disasters, such as storms, flooding and associated power outages, occurring at any of our locations or supplier locations
may lead to disruption of our manufacturing operations and supply chain, adversely impacting our capability to supply product to
our customers. In the event of a natural disaster, it may not be possible for us to find an alternate manufacturing location for certain
product lines, further impacting our capability to recover from such a disruption.
We could face risks to our systems, networks and production including increased IT security threats and more sophisticated
and targeted computer crime.
Increased global information technology security threats and more sophisticated and targeted computer crime pose a risk to the
security of our systems and networks and the confidentiality, availability and integrity of our data and communications. While we
attempt to mitigate these risks by employing a number of measures - including employee training, comprehensive monitoring of
our networks and systems, and maintenance of backup and protective systems - our systems, networks and products remain
potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to
the compromising of confidential information and communications, improper use of our systems and networks, manipulation and
destruction of data, defective products, production downtimes and operational disruptions, which in turn could adversely affect
our reputation, competitiveness and results of operations. Additionally, any updates to or implementation of systems may cause
delays or disruptions in our processes or production which could adversely affect our results.
13 Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of February 23, 2018, we had manufacturing facilities, administrative, research and development and sales offices in the
following locations:
Manufacturing Facilities
Albuquerque, New Mexico
Bolingbrook, Illinois
Elkhart, Indiana
Haryana, India
Hopkinton, Massachusetts
Hradec Kralove, Czech Republic
Juarez, Mexico
Kaohsiung, Taiwan
Kvistgaard, Denmark
Matamoros, Mexico
Nogales, Mexico
Ostrava, Czech Republic
Prague, Czech Republic
Tianjin, China
Zhongshan, China
Total manufacturing
Square
Footage
Owned/Leased
102,800
30,600
319,000
19,400
32,000
30,680
114,200
75,900
30,680
51,000
64,000
67,600
13,660
225,000
112,600
1,289,120
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Owned (1)
Leased
Owned
Leased
Leased
Leased
Owned (2)
Leased
(1) Ground lease through 2026; restrictions on use and transfer apply.
(2) Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights.
Non-Manufacturing Facilities
Square
Footage
Owned/Leased
Description
Brownsville, Texas
Brownsville, Texas
El Paso, Texas
Matamoros, Mexico
Elkhart, Indiana
Farmington Hills, Michigan
Glasgow, Scotland
Lisle, Illinois
Malden, Massachusetts
Nagoya, Japan
Singapore
Yokohama, Japan
Total non-manufacturing
N/A
10,000
22,400
20,000
93,000
1,800
18,600
105,925
3,600
800
5,600
1,400
283,125
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Land
Warehouse
Office and warehouse
Warehouse
Idle facility
Sales office
Administrative offices and research
Administrative offices and research
Administrative offices and research
Sales office
Sales office
Sales office
We regularly assess the adequacy of our manufacturing facilities for manufacturing capacity, available labor, and proximity to our
markets and major customers. Management believes our manufacturing facilities are suitable and adequate, and have sufficient
capacity to meet our current needs. The extent of utilization varies from plant to plant and with general economic conditions. We
also review the operating costs of our facilities and may from time-to-time relocate a portion of our manufacturing activities in
order to reduce operating costs and improve asset utilization and cash flow.
14 Item 3. Legal Proceedings
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and
currently certain claims are pending against us. In the opinion of management, based upon presently available information, either
adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated
financial position, results of operations, or cash flows.
See NOTE 9 "Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
15 PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol "CTS." On February 20, 2018, there were
approximately 1,022 shareholders of record.
Our quarterly dividend was $0.04 per share, or an annual rate of $0.16 per share, for the years ended December 31, 2017, and
2016. The declaration of a dividend and the amount of any such dividend is subject to earnings, anticipated working capital,
capital expenditures, other investment requirements, our financial condition, and any other factors considered relevant by the Board
of Directors.
Per Share Data (Unaudited)
2017
4th quarter
3rd quarter
2nd quarter
1st quarter
2016
4th quarter
3rd quarter
2nd quarter
1st quarter
High(1)
Low(1)
Dividends
Declared
Net Earnings (Loss)
Basic
Diluted
$
28.35 $
23.95 $
0.04 $
(0.41) $
(0.41)
24.70
22.75
23.60
21.05
19.30
20.78
0.04
0.04
0.04
0.29
0.30
0.26
$
24.80 $
16.35 $
0.04 $
0.25 $
19.79
19.09
17.39
17.10
15.06
12.87
0.04
0.04
0.04
0.11
0.44
0.24
0.29
0.30
0.25
0.25
0.11
0.44
0.24
(1) The market prices of CTS common stock presented reflect the highest and lowest sales prices on The New York Stock Exchange for each quarter of the last two
years.
As shown in the following table, we did not repurchase stock during the twelve months ended December 31, 2017:
(in thousands, except share data)
Balance at December 31, 2016
January 1, 2017 – December 31, 2017
(a)
Total Number of
Shares
Purchased
(b)
Average Price
Paid per
Share
(c)
Total Value
of Shares
Purchased as
Part of Plans
or
Program
(d)
Maximum
Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs(1)
— $
— $
$
— $
17,554
17,554
(1) In April 2015, the Board of Directors authorized a program to repurchase up to $25 million of our common stock in the open market. The authorization has
no expiration.
16 Shareholder Performance Graph
The following graph shows a five-year comparison of the cumulative total shareholder return on CTS common stock with the
cumulative total returns of a general market index and a peer group index (S&P 500 and Dow Jones Electrical Components &
Equipment Industry Group). The graph tracks the performance of a $100 investment in the Company's common stock and in each
of the indexes (with the reinvestment of all dividends) on December 31, 2012.
17 Item 6. Selected Financial Data
Five-Year Summary
(Amounts in thousands, except percentages and per share amounts)
Summary of Operations
Net sales from continuing operations
Cost of goods sold
Gross Margin
Selling, general and administrative
expenses
Research and development expenses
Non-recurring environmental expense
Restructuring and impairment charges
Loss (gain) on sale of assets
Operating earnings from continuing
operations
Other income (expense)
Earnings before income taxes from continuing
operations
Income tax expense from continuing
operations
Earnings from continuing operations
Loss from discontinued operations, net of
tax
Net earnings (loss)
Retained earnings - beginning of year
Dividends declared
Retained earnings - end of year
Net earnings (loss) per share:
Basic:
Continuing operations
Discontinued operations
Total
Diluted:
Continuing operations
Discontinued operations
Total
Average basic shares outstanding (000s)
Average diluted shares outstanding (000s)
Cash dividends per share (annualized)
Capital expenditures
Depreciation and amortization
Financial Position at Year End
Current assets
Current liabilities
Current ratio
Working capital
Inventories
Net property, plant and equipment
Total assets
Long-term debt
Long-term obligations, including long-term
debt
Shareholders' equity
Common shares outstanding (000s)
Equity (book value) per share
Stock price range
______________________________
2017
% of
Sales
2016
% of
Sales
2015
% of
Sales
2014
% of
Sales
2013
% of
Sales
$
422,993
282,562
140,431
71,943
25,146
—
4,139
708
38,495
1,758
40,253
25,805
14,448
—
14,448
410,979
(5,267)
420,160
0.44
—
0.44
0.43
—
0.43
32,892
33,420
0.160
18,094
20,674
233,609
102,412
2.3 to 1
131,197
36,596
88,247
539,696
76,300
93,479
$
$
$
$
$
$
$
$
$
$
$
100.0 $
66.8
33.2
17.0
5.9
—
1.0
396,679
256,251
140,428
61,624
24,040
—
3,048
100.0 $
64.6
35.4
15.5
6.1
—
0.8
382,310
255,201
127,109
59,586
22,461
14,541
14,564
100.0 $
66.8
33.2
15.6
5.9
3.8
3.8
(2.9)
(11,450)
(2.9)
(2,156)
(0.6)
4.7
(1.5)
3.2
1.4
1.8
$
$
$
$
$
$
$
$
$
$
9.1
0.4
9.5
6.1
3.4
$
$
$
$
$
$
$
$
$
$
63,166
(5,921)
57,245
22,865
34,380
—
34,380
381,840
(5,241)
410,979
1.05
—
1.05
1.03
—
1.03
32,728
33,251
0.160
20,500
18,992
215,707
98,129
2.2 to 1
117,578
28,652
82,111
517,697
89,100
101,686
15.9
(1.5)
14.4
5.8
8.7
$
$
$
$
$
$
$
$
$
$
18,113
(5,852)
12,261
5,307
6,954
—
6,954
380,145
(5,259)
381,840
0.21
—
0.21
0.21
—
0.21
32,959
33,484
0.160
9,723
16,254
245,954
94,620
2.5 to 1
151,334
24,600
69,872
483,373
90,700
107,099
100.0 $
67.8
32.2
15.1
5.6
—
1.5
(0.5)
10.5
(0.7)
9.8
3.2
6.6
$
$
$
$
$
$
$
$
$
$
404,021
274,058
129,963
61,051
22,563
—
5,941
(1,915)
42,323
(2,975)
39,348
12,826
26,522
—
26,522
358,997
(5,374)
380,145
0.79
—
0.79
0.78
—
0.78
33,618
34,130
0.160
12,949
16,971
240,401
79,982
3.0 to 1
160,419
27,887
71,414
456,926
75,000
87,155
409,461
288,108
121,353
100.0
70.4
29.6
17.5
5.7
—
2.5
(0.4)
4.3
0.1
4.4
3.9
0.5
71,646
23,222
—
10,455
(1,657)
17,687
376
18,063
16,066
1,997
(5,926)
(3,929)
367,800
(4,874)
(358,997)
0.06
(0.18)
(0.12)
0.06
(0.18)
(0.12)
33,601
34,249
0.145
13,982
21,169
236,269
95,120
2.5 to 1
141,149
32,226
74,869
480,265
75,000
88,416
343,805
32,938
10.44
19.30-28.35
$
317,882
32,762
9.70
12.87-24.80
$
281,654
32,548
$
8.65
15.30-20.25
289,789
33,392
$
8.68
15.58-21.65
296,729
33,559
8.84
9.33-20.10
$
Certain acquisitions, divestitures, closures of operations or product lines, and certain accounting reclassifications affect the
comparability of information contained in the "Five-Year Summary."
18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move.
Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent
and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs
to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure
required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in
the development of products and technologies within these categories.
We manufacture sensors, actuators, and electronic components in North America, Europe, and Asia. CTS provides solutions to
OEMs in the aerospace, communications, defense, industrial, information technology, medical, and transportation markets.
There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing
connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing
the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We
are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the
ability to add new customers, launch new products or penetrate new markets.
Results of Operations: Fourth Quarter 2017 versus Fourth Quarter 2016
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings (Loss) for the
quarters ended December 31, 2017, and December 31, 2016:
Three Months Ended December 31,
Percent of Net Sales
Net sales
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Research and development expenses
Restructuring and impairment charges
Loss on sale of assets
Total operating expenses
Operating (loss) earnings
Other income (expense)
Earnings before income tax
Income tax expense
Net (loss) earnings
Diluted earnings per share:
Diluted net (loss) earnings per share
2017
2016
$
110,910 $
101,584
78,035
32,875
24,973
6,714
1,197
10
32,894
(19)
164
145
13,766
(13,621) $
65,723
35,861
15,165
5,626
873
51
21,715
14,146
(2,775)
11,371
3,061
8,310
(0.41) $
0.25
$
$
Percent
Change
9.2
18.7
(8.3)
64.7
19.3
37.1
(80.4)
51.5
(100.1)
(105.9)
(98.7)
349.7
(263.9)
2017
2016
100.0
100.0
70.4
29.6
22.5
6.1
1.1
—
29.7
—
0.1
0.1
12.4
(12.3)
64.7
35.3
14.9
5.5
0.9
0.1
21.4
13.9
(2.7)
11.2
3.0
8.2
Sales of $110,910 in the fourth quarter of 2017 increased $9,326 or 9.2% from the fourth quarter of 2016. Sales to transportation
markets increased $4,899 or 7.3%. Other sales increased $4,427 or 12.7%. Our Noliac acquisition, which we completed in May
2017, added $2,987 in sales for the quarter. Changes in foreign exchange rates increased sales by $1,229 year-over-year due to
the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.
In the fourth quarter of 2017, we recorded a $13,415 one-time, non-cash pension settlement charge. During 2017, CTS offered
its pension participants the opportunity to receive a lump sum payment to settle their future pension benefits. A number of
participants elected the lump sum option, and the total lump sum payments distributed to these participants when the offer window
closed in the fourth quarter was large enough to trigger a pension settlement charge under U.S. GAAP. This charge was recorded
in the amount of $4,796 to cost of goods sold, $6,557 to selling, general and administrative expenses and $2,062 to research and
development expenses.
Gross margin as a percent of sales was 29.6% in the fourth quarter of 2017 compared to 35.3% in the fourth quarter of 2016. The
pension settlement charge impacted gross margin unfavorably by $4,796 or 4.3% of sales.
19 Selling, general and administrative expenses were $24,973 or 22.5% of sales in the fourth quarter of 2017 versus $15,165 or 14.9%
of sales in the comparable quarter of 2016. The pension settlement charge impacted selling, general and administrative expenses
unfavorably by $6,557 or 5.9% of sales. The remaining increase is primarily attributable to the addition of amortization of
intangibles and other operating costs from the Noliac acquisition and timing of certain other expenses.
Research and development expenses were $6,714 or 6.1% of sales in the fourth quarter of 2017 compared to $5,626, or 5.5% of
sales, in the comparable quarter of 2016. The pension settlement charge impacted research and development expenses unfavorably
by $2,062, or 1.9% of sales. The remaining decrease is related to an increase in the reimbursements received from customers for
research and development expenses in the fourth quarter of 2017 and timing of certain other expenses. Research and development
expenses are focused on expanded applications of existing products, new product development, and enhancements for current
products and processes.
Restructuring and impairment charges were $1,197 in the fourth quarter of 2017. These charges were mainly for building and
equipment relocation, severance, and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring
Plan. In the fourth quarter 2016, restructuring and impairment charges consisting of severance and other costs totaled $873, which
were also in connection with our 2016 Restructuring Plan.
Our operating loss was $19, or 0.0% of sales, in the fourth quarter of 2017, compared to operating earnings of $14,146, or 13.9%
of sales, in the comparable quarter of 2016 as a result of the items discussed above.
Other income and expense items are summarized in the following table:
Interest expense
Interest income
Other income (expense)
Total other income (expense), net
Three Months Ended December 31,
2017
2016
$
$
(1,134) $
370
928
164 $
(956)
223
(2,042)
(2,775)
Interest expense increased in the fourth quarter of 2017 versus 2016 due to a one-time charge related to a liability that was settled
in 2017. Interest income increased due to higher foreign cash balances. Other income in the fourth quarter of 2017 was driven
mainly by foreign currency translation gains due to the appreciation of the Chinese Renminbi compared to the U.S. Dollar. Other
expense in the fourth quarter of 2016 was driven by foreign currency translation losses, mainly due to the appreciation of the U.S.
Dollar compared to the Chinese Renminbi.
Effective tax rate
Three Months Ended December 31,
2017
2016
9,493.8%
26.9%
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted in the United States, instituting fundamental changes
to the tax system. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system,
expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings, and new measures to deter base erosion.
The Tax Act also permanently reduces the corporate tax rate from 35% to 21%, imposes a one-time mandatory transition tax on
the historical earnings of foreign affiliates, and implements a territorial style tax system. The impacts of these changes are reflected
in tax expense in the fourth quarter of 2017, resulting in a provisional non-cash charge of approximately $18,001. This amount
is subject to adjustment in 2018 as we finalize the impact of the Tax Act on our operations. As a result, the effective income tax
rate for the fourth quarter of 2017 was 9,493.8%. The effective income tax rate for the fourth quarter of 2016 was 26.9%, which
included the impact of restructuring charges, one-time items, the tax impact of non-recurring stock compensation changes, and
adjustments to valuation allowances.
Net loss was $13,621, or $(0.41) per diluted share, in the fourth quarter of 2017, compared to net earnings of $8,310, or $0.25 per
diluted share, in the comparable quarter of 2016.
20 Results of Operations: Year Ended December 31, 2017, versus Year Ended December 31, 2016
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years
ended December 31, 2017, and December 31, 2016:
Years Ended December 31,
Percent of Net Sales
Net sales
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Research and development expenses
Restructuring and impairment charges
Loss (gain) on sale of assets
Total operating expenses
Operating earnings
Other income (expense)
Earnings before income tax
Income tax expense
Net earnings
Diluted earnings per share:
Diluted net earnings per share
2017
2016
Percent
Change
$
422,993 $
282,562
140,431
71,943
25,146
4,139
708
101,936
38,495
1,758
40,253
25,805
14,448
396,679
256,251
140,428
61,624
24,040
3,048
6.6
10.3
—
16.7
4.6
35.8
(11,450)
(106.2)
77,262
63,166
31.9
(39.1)
(5,921)
(129.7)
57,245
22,865
34,380
(29.7)
12.9
(58.0)
$
0.43 $
1.03
2017
2016
100.0
100.0
66.8
33.2
17.0
5.9
1.0
0.2
24.1
9.1
0.4
9.5
6.1
3.4
64.6
35.4
15.5
6.1
0.8
(2.9)
19.5
15.9
(1.5)
14.4
5.8
8.7
Sales were $422,993 for the year ended December 31, 2017, an increase of $26,314, or 6.6% from 2016. Sales to transportation
markets increased $12,586 or 4.8%. Other sales increased $13,728 or 10.2%. The Noliac acquisition added $7,084 in sales in
2017.
Gross margin as a percent of sales was 33.2% in 2017 versus 35.4% in 2016. The pension settlement charge recorded in the fourth
quarter of 2017 impacted gross margin unfavorably by $4,796, or 1.1% of sales. The remaining decrease in gross margin resulted
from costs relating to certain production rework issues that were resolved in 2017 and an unfavorable impact of foreign exchange
rate movements.
Selling, general and administrative expenses were $71,943, or 17.0% of sales for the year ended December 31, 2017, versus $61,624
or 15.5% of sales in the comparable period of 2016. The pension settlement charge recorded in the fourth quarter of 2017 impacted
selling, general and administrative expenses unfavorably by $6,557 or 1.6% of sales. The remaining increase was primarily
attributable to an increase in stock-based compensation as well as incremental costs resulting from the Noliac acquisition in 2017
and the single crystal acquisition in 2016, including amortization of intangibles.
Research and development expenses were $25,146 or 5.9% of sales in 2017 compared to $24,040 or 6.1% of sales in 2016. The
pension settlement charge recorded in the fourth quarter of 2017 impacted research and development expenses unfavorably by
$2,062, or 0.5% of sales. The remaining decrease is related to higher reimbursements from customers for research and development
costs in 2017 and timing of certain expenses. Research and development expenses are focused on expanded applications of existing
products, new product development, and enhancements for current products and processes.
Restructuring and impairment charges were $4,139 for year ended December 31, 2017. The charges were mainly for building and
equipment relocation, severance and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring
Plan. Restructuring charges were $3,048 in 2016.
The loss on sale of assets in 2017 was driven by a loss on the sale of vacant land at our Hopkinton, Massachusetts facility in
September 2017. The 2016 gain on sale of assets of $11,450 is driven principally by a gain on the sale of our former manufacturing
facility in Canada in June 2016.
Operating earnings were $38,495, or 9.1% of sales in 2017, compared to $63,166, or 15.9% of sales in 2016 as a result of the items
discussed above.
21 Other income and expense items are summarized in the following table:
Interest expense
Interest income
Other income (expense)
Total other income (expense), net
Years Ended December 31,
2017
2016
$
$
(3,343) $
1,284
3,817
1,758 $
(3,702)
1,305
(3,524)
(5,921)
Interest expense decreased in the year ended December 31, 2017, versus the same period in 2016 primarily as a result of a reduction
in interest related to interest rate swaps. Interest income was down slightly in 2017 versus 2016. Other income in the year ended
December 31, 2017, was driven mainly by foreign currency translation gains due to the depreciation of the U.S. Dollar compared
to the Chinese Renminbi and the Euro. Other expense in the year ended December 31, 2016, was driven by foreign currency
translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro.
Effective tax rate
Years Ended December 31,
2017
2016
64.1%
39.9%
The effective income tax rate in 2017 was 64.1%, which was primarily due to a provisional one-time tax expense of $18,001
resulting from the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. The rate also reflects a decrease in the
valuation allowance on certain non-U.S. losses as a result of changes in the expectation of our ability to utilize those losses and
changes in the mix of earnings by jurisdiction. The effective income tax rate in 2016 was 39.9%, which includes restructuring
charges, one-time items, an increase in valuation allowances recorded against certain state net operating losses and tax credits,
and the revaluation of U.S. deferred taxes as a result of the June 2016 restructuring activities discussed in Note 7, "Costs Associated
with Exit and Restructuring Activities". The rate also reflects an increase in the valuation allowance on certain non-U.S. losses as
a result of changes in the expectation of our ability to utilize those losses, changes in the mix of earnings by jurisdiction, our
decision to no longer permanently reinvest the earnings of our Canadian and U.K. subsidiaries, tax expense for withholding taxes
on earnings in China that are not anticipated to be maintained in China, and various other discrete items.
Net earnings were $14,448 or $0.43 per diluted share for the year ended December 31, 2017, compared to earnings of $34,380 or
$1.03 per diluted share in the comparable period of 2016.
22 Results of Operations: Years Ended December 31, 2016, versus Year Ended December 31, 2015
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years
ended December 31, 2016, and December 31, 2015:
Years Ended December 31,
Percent of Net Sales
Net sales
Cost of goods sold (1)
Gross margin
Selling, general and administrative expenses
Research and development expenses
Non-recurring environmental expense
Restructuring and impairment charges
Gain on sale of assets
Total operating expenses
Operating earnings
Other expense, net
Earnings before income tax
Income tax expense
Net earnings
Diluted earnings per share:
Diluted net earnings per share
2016
2015
Percent
Change
$
396,679 $
256,251
140,428
61,624
24,040
—
3,048
(11,450)
77,262
63,166
(5,921)
57,245
22,865
34,380
382,310
255,201
127,109
59,586
22,461
14,541
14,564
(2,156)
108,996
18,113
(5,852)
12,261
5,307
6,954
3.8
0.4
10.5
3.4
7.0
N/M
(79.1)
431.1
(29.1)
248.7
1.2
366.9
330.8
394.4
$
1.03 $
0.21
2016
2015
100.0
100.0
64.6
35.4
15.5
6.1
—
0.8
(2.9)
19.5
15.9
(1.5)
14.4
5.7
8.7
66.8
33.2
15.6
5.9
—
3.8
(0.6)
28.5
4.7
(1.5)
3.2
1.4
1.8
(1) Cost of goods sold includes restructuring related charges of $0 in 2016 and $631 in 2015.
N/M = not meaningful
Sales of $396,679 for the year ended December 31, 2016, increased $14,369, or 3.8% from 2015. Sales to automotive end-markets
increased $5,198. Higher sensor volumes were partially offset by an unfavorable foreign exchange impact. Sales to other end-
markets increased $9,171 including the addition of sales from our single crystal acquisition. Sales of components for high-density
disk drives ("HDD") declined 30% year-over-year. Changes in foreign exchange rates reduced sales by $2,746 year-over-year as
the U.S. Dollar appreciated compared to the Chinese Renminbi and other currencies.
Gross margin as a percent of sales was 35.4% in 2016 versus 33.2% in 2015. The increase in gross margin resulted from cost
savings from continued efficiency gains, material and labor productivity projects, savings from restructuring projects, favorable
mix, and the addition of sales from our single crystal acquisition. In addition, foreign exchange rates had a favorable impact on
manufacturing costs primarily due to the strengthening of the U.S. Dollar against the Mexican Peso.
Selling, general and administrative expenses were $61,624, or 15.5% of sales for the year ended December 31, 2016, versus $59,586
or 15.6% of sales in the comparable period of 2015. Expenses in 2016 include added costs as a result of our single crystal acquisition,
including amortization of intangibles. In addition, we paid an early termination fee related to a leased facility in Lisle, Illinois in
anticipation of a move in the 2017/2018 time frame to another leased facility in the same area, which will consolidate the Bolingbrook
and Lisle, Illinois sites into one facility and reduce ongoing expenses.
Research and development expenses were $24,040 or 6.1% of sales in 2016 compared to $22,461 or 5.9% of sales in 2015. The
increase was related to continued investment in new products to drive organic growth and expenses from our single crystal
acquisition. Research and development expenses are focused on expanded applications of existing products, new product
development, and enhancements for current products and processes.
A non-recurring environmental charge of $14,541 was recorded in the third quarter of 2015 related to a site in Asheville, North
Carolina. The charge recorded included both the interim remediation costs we proposed, which was accepted by the Environmental
Protection Agency (“EPA”), and anticipated future remediation and monitoring costs.
Restructuring and impairment charges for the year ended December 31, 2016, totaled $3,048 and consisted largely of severance,
production line move and legal costs in connection with the 2016 restructuring plan. Restructuring and impairment charges for
23 the year ended December 31, 2015, totaled $14,564 and consisted largely of a non-cash charge for unamortized losses related to
the windup of our U.K. pension plan in the amount of $8,280 as well as severance and other costs incurred in connection with the
2013 and 2014 restructuring plans.
The 2016 gain on sale of assets of $11,450 is driven principally by a gain on the sale of our former manufacturing facility in Canada
in June 2016.
Operating earnings were $63,166, or 15.9% of sales in 2016, compared to $18,113, or 4.7% of sales in 2015 as a result of the items
discussed above.
Other income and expense items are summarized in the following table:
Interest expense
Interest income
Other expense
Total other expense, net
Years Ended December 31,
2016
2015
$
$
(3,702) $
1,305
(3,524)
(5,921) $
(2,628)
3,073
(6,297)
(5,852)
Interest expense increased in the year ended December 31, 2016, versus the comparable period in 2015 as a result of higher average
debt balances related to our single crystal acquisition, higher interest rates, higher commitment fees as a result of increasing the
revolving credit facility from $200,000 to $300,000, and amortization of a contingent earnout liability associated with our Filter
Sensing Technologies acquisition. Interest income decreased due to lower cash balances in China. Other expense, net in the year
ended December 31, 2016, was driven by foreign currency translation losses, mainly due to the appreciation of the U.S. Dollar
compared to the Chinese Renminbi. Other expense, net in the year ended December 31, 2015, was also driven by foreign currency
translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Renminbi and the Euro.
Effective tax rate
Years Ended December 31,
2016
2015
39.9%
43.3%
The effective income tax rate in 2016 was 39.9%, which includes the impact of restructuring charges and one-time items. The tax
rate in 2016 reflects an increase in valuation allowances recorded against certain state net operating losses and tax credits and the
revaluation of U.S. deferred taxes as a result of the June 2016 restructuring activities discussed in Note 7, "Costs Associated with
Exit and Restructuring Activities", in this Annual Report on Form 10-K. The rate also reflects an increase in the valuation allowance
on certain non-U.S. losses as a result of changes in the expectation of our ability to utilize those losses, changes in the mix of
earnings by jurisdiction, our decision to no longer permanently reinvest the earnings of our Canadian and U.K. subsidiaries, tax
expense for withholding taxes on earnings in China that are not anticipated to be maintained in China, and various other discrete
items. The effective income tax rate in 2015 was 43.3%, which included the impact of restructuring charges and one-time items.
In 2015, we determined that as a result of changes in the business, the foreign earnings of our Canadian and U.K. subsidiaries
were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded.
In addition, although we plan to permanently reinvest the earnings of our Chinese operations outside the U.S., we have determined
that we will not maintain those earnings in China in order to mitigate future currency risk. As a result of these changes, we recorded
a tax expense of $7,461. We recorded a benefit of $16,305 related to a change in the treatment of foreign taxes for U.S. federal
income tax purposes. We also recorded additional discrete tax items in 2015 which increased income tax expense by $10,157
related to uncertain tax positions on certain foreign taxes, valuation allowances, foreign earnings, and other discrete items.
Net earnings were $34,380 or $1.03 per diluted share for the year ended December 31, 2016, compared to earnings of $6,954 or
$0.21 per diluted share in the comparable period of 2015.
24 Liquidity and Capital Resources
(Amounts in thousands, except percentages and per share amounts):
Cash and cash equivalents were $113,572 at December 31, 2017, and $113,805 at December 31, 2016, of which $112,531 and
$112,736, respectively, were held outside the United States. The decrease in cash and cash equivalents of $233 was driven by
cash generated from operating activities of $58,048, which was offset by the payment for the Noliac acquisition of $19,121, capital
expenditures of $18,094, net debt payments of $13,950, dividends paid of $5,260, and other net payments and foreign currency
impacts on cash of $1,856. Total debt as of December 31, 2017, and December 31, 2016, was $76,300 and $90,106, respectively.
Total debt as a percentage of total capitalization, defined as the sum of notes payable and long-term debt as a percentage of total
debt and shareholders’ equity, was 18.2% at December 31, 2017, compared to 22.1% at December 31, 2016.
Working capital increased by $13,619 from December 31, 2016, to December 31, 2017, primarily due to the increase in accounts
receivable and inventory as well as the reduction in accrued expenses, which was partially offset by the increase in accounts
payable.
Cash Flows from Operating Activities
Net cash provided by operating activities was $58,048 during the year ended December 31, 2017. Components of net cash provided
by operating activities included net earnings of $14,448, depreciation and amortization expense of $20,674, deferred income taxes
of $16,710, pension and other post-retirement plan expense of $11,570, stock based compensation of $4,184, and other net non-
cash items totaling $802, which were offset by net changes in assets and liabilities of $10,340.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2017, was $36,674, driven by the net payment for our Noliac
acquisition of $19,121 and capital expenditures of $18,094.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2017, was $20,814. These cash outflows were the result of
net debt payments of $13,950, dividend payments of $5,260, and taxes paid on behalf of equity award participants of $1,604.
Capital Resources
We have an unsecured revolving credit facility; which has a term through January 10, 2020.
Long-term debt was comprised of the following:
Total credit facility
Balance Outstanding
Standby letters of credit
Amount available
Weighted-average interest rate
Commitment fee percentage per annum
$
$
$
$
As of December 31,
2017
2016
300,000
76,300
2,065
221,635
$
$
$
$
2.30%
0.25%
300,000
89,100
2,165
208,735
1.90%
0.25%
On August 10, 2015, we entered into a new five-year credit agreement (“Revolving Credit Facility”) with a group of banks in
order to support our financing needs. The Revolving Credit Facility originally provided for a credit line of $200,000. On May
23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitments under our existing credit
agreement, which increased the credit line from $200,000 to $300,000.
The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum
fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving
Credit Facility. We were in compliance with all debt covenants at December 31, 2017.
We use interest rate swaps to convert the Revolving Credit Facility’s variable rate of interest into a fixed rate on a portion of our
debt balance. In the second quarter of 2012, we entered into four separate one-year interest rate swap agreements to fix interest
rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into
four additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January
25 2013 to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix
interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received
under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
In general, other than in Canada and the U.K., it has been our historical practice to permanently reinvest the earnings of our non-
U.S. subsidiaries in those operations. However, as a result of the Tax Cuts and Jobs Act, we can repatriate our cumulative
undistributed foreign earnings to the U.S. when needed with minimal U.S. income tax consequences other than the one-time
deemed repatriation charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed
foreign earnings based our business needs. We are still evaluating whether to change our indefinite reinvestment assertion in light
of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our
assertion during the measurement period, we will account for the change in assertion as a change in estimate related to the enactment
of the Act.
We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by
available credit under our Revolving Credit Facility. We believe that cash flows from operating activities and available borrowings
under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, and debt service
requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to
provide additional liquidity or to fund acquisitions.
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements under accounting principles generally accepted in the United States
of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments,
and assumptions we used are reasonable, based upon the information available.
Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise
those that we believe are the most critical in understanding and evaluating our reported financial results.
Revenue Recognition
Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exists; (2) delivery
has occurred and title has passed to the customer, which generally happens at the point of shipment, provided that no significant
obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.
Product Warranties
Provisions for estimated warranty expenses related to our automotive products are made at the time products are sold. These
estimates are established using a quoted industry rate. We adjust our warranty reserve for any known or anticipated warranty
claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it
is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have
ranged from 0.5% to 0.8% of total sales. We believe our reserve level is appropriate considering the quality of our products.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer accounts, including:
•
•
•
•
•
•
Credit reviews of all new significant customer accounts,
Ongoing credit evaluations of current customers,
Credit limits and payment terms based on available credit information,
Adjustments to credit limits based upon payment history and the customer's current creditworthiness,
An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and
Limited credit insurance on the majority of our international receivables.
We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three
years, accounts receivable reserves have ranged from 0.2% to 0.5% of total accounts receivable. We believe our reserve level is
appropriate considering the quality of the portfolio. While credit losses have historically been within expectations and the reserves
established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.
26 Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method,
or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based
on forecasts of product demand and production requirements.
Over the last three years, our reserves for excess and obsolete inventories have ranged from 13.7% to 20.1% 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.
Valuation of Goodwill
Goodwill of a reporting unit is tested for impairment annually, or more frequently, if an event occurs or circumstances change that
would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or
circumstances include, but are not limited to, the following:
•
•
•
•
Significant decline in market capitalization relative to net book value,
Significant adverse change in legal factors or in the business climate,
Adverse action or assessment by a regulator,
Unanticipated competition,
• 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. The test
involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting
units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using
two valuation methods: "Income Approach — Discounted Cash Flow Method" and "Market Approach — Guideline Public
Company Method". The approach defined below is based upon our last impairment test conducted as of October 1, 2017.
Under the "Income Approach — Discounted Cash Flow Method", the key assumptions include sales, cost of sales, and operating
expense projections through the year 2022. These assumptions were determined by management utilizing our internal operating
plan and assuming growth rates for revenues, operating expenses, and gross margin assumptions. The fourth key assumption under
this approach is the discount rate, which is determined by looking at current risk-free rates, current market interest rates and the
evaluation of risk premium relevant to the business segment. If any of our assumptions were to change or were incorrect, our fair
value calculation may change, which could result in impairment.
Under the "Market Approach — Guideline Public Company Method", we identified eight publicly traded companies which we
believe have significant relevant similarities to CTS. For these eight companies, we calculated a range of EBITDA multiples
derived from the ratio of enterprise value to EBITDA and compared these multiples to the corresponding multiples for each of our
reporting units. Similar to the income approach discussed above, sales, cost of sales, operating expenses and growth rates were
key assumptions utilized in developing projected EBITDA levels for each of our reporting units. The market prices of CTS and
the other guideline company's shares are also key assumptions as they are used to calculate enterprise value.
27 The results of these two methods are weighted based upon management's determination. The Market approach is based upon
historical and current economic conditions, which might not reflect the long-term prospects or opportunities for our reporting units
being evaluated.
If the carrying amount of a reporting unit exceeds the reporting unit's fair value, we perform the second step of the goodwill
impairment test to determine the amount of impairment loss, if any. This involves comparing the implied fair value of the affected
reporting unit's goodwill with the carrying value of that goodwill.
There have not been any significant changes to our impairment testing methodology other than updates to the assumptions to
reflect the current market environment. Based upon our latest assessment, we determined that our goodwill was not impaired as
of October 1, 2017. We will monitor future results and will perform a test if indicators trigger an impairment review.
Valuation of Other Intangible and Long-Lived Assets
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but
are not limited to, the following:
•
•
•
•
Significant decline in market capitalization relative to net book value,
Significant underperformance relative to expected historical or projected future operating results,
Significant changes in the manner of use of the acquired assets or the strategy for the overall business,
Significant negative industry or economic trends.
If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying
amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual
disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value. No indicators of impairment were identified as
of December 31, 2017.
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 of a liability as well as
the amount to be recorded. 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. ASC 740 states that a tax benefit from an uncertain tax position may be
recognized when it is more-likely-than-not that the position will be sustained upon examination, including 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.
28 Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense.
We earn a significant amount of our operating income outside of the U.S., which is generally deemed to be permanently reinvested
in foreign jurisdictions except in Canada and the U.K. In 2015, as a result of changes in the business, the foreign earnings of these
two subsidiaries were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those
earnings was recorded. However, as a result of the Tax Cuts and Jobs Act, we can repatriate our cumulative undistributed foreign
earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation
charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings based
on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite reinvestment assertion
in light of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change
our assertion during the measurement period, we will account for the change in assertion as a change in estimate related to enactment
of the Act.
Contractual Obligations
Our contractual obligations as of December 31, 2017, were:
Long-term debt, including interest
Operating lease payments
Retirement obligations
Total
Payments due by period
Total
2018
2019-2020
2021-2022
2023-beyond
$
$
80,513 $
1,712 $
78,801 $
— $
21,351
7,140
3,631
855
4,609
1,603
1,950
1,472
109,004 $
6,198 $
85,013 $
3,422 $
—
11,161
3,210
14,371
We have no off-balance sheet arrangements, except for operating leases, that have a material current effect or are reasonably likely
to have a material future effect on our financial condition or changes in our financial condition.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated
capital requirements.
29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(in thousands)
Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates and interest
rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed
appropriate, through the use of derivative financial instruments. Our policies do not allow speculation in derivative instruments
for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial
instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk
exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
Interest Rate Risk
We are exposed to risk of changes in interest rates on our revolving credit facility. There was $76,300 and $89,100 outstanding
under our revolving credit facility at December 31, 2017, and 2016, respectively. As of December 31, 2017, we had interest rate
swaps that fix interest costs on $50,000 of our long-term debt. The remaining portion of $26,300 is exposed to interest risk and
at December 31, 2017, a one percentage point increase in interest rates would increase interest expense by approximately $300.
Foreign Currency Risk
We are exposed to foreign currency exchange rate risks. Our significant foreign subsidiaries are located in China, Czech Republic,
Mexico, and Taiwan. As of December 31, 2017, we had $33.2 million outstanding foreign currency forward exchange contracts
to hedge our exposure against the Mexican Peso and Euro.
Commodity Price Risk
Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or
are available from only a limited number of suppliers. Our results of operations may be materially and adversely affected if we
have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price
increases for these raw materials. For periods in which the prices of these raw materials are rising, we may be unable to pass on
the increased cost to our customers, which would result in decreased margins for the products in which they are used. For periods
in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we
record our inventory at the lower of cost or net realizable value.
30 Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CTS Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CTS Corporation (an Indiana corporation) and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the related consolidated statements of earnings, comprehensive earnings,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and
schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of CTS Corporation as of December 31, 2017 and 2016, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated February 23, 2018, expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as CTS Corporation’s auditor since 2005.
/s/ GRANT THORNTON LLP
Chicago, Illinois
February 23, 2018
31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CTS Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of CTS Corporation (an Indiana corporation) and subsidiaries (the
“Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established
in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report
dated February 23, 2018, expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Chicago, Illinois
February 23, 2018
32 CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands)
Net sales
Cost of goods sold
Gross Margin
Selling, general and administrative expenses
Research and development expenses
Non-recurring environmental expense
Restructuring and impairment charges
Loss (gain) on sale of assets
Operating earnings
Other (expense) income:
Interest expense
Interest income
Other income (expense)
Total other income (expense), net
Earnings before taxes
Income tax expense
Net earnings
Net earnings per share:
Basic
Diluted
Basic weighted-average common shares outstanding
Effect of dilutive securities
Diluted weighted-average common shares outstanding
Years Ended December 31,
2016
2015
2017
$
422,993 $
396,679 $
282,562
140,431
71,943
25,146
—
4,139
708
38,495
(3,343)
1,284
3,817
1,758
40,253
25,805
256,251
140,428
61,624
24,040
—
3,048
(11,450)
63,166
(3,702)
1,305
(3,524)
(5,921)
57,245
22,865
$
14,448 $
34,380 $
0.44
0.43
32,892
528
33,420
1.05
1.03
32,728
523
33,251
382,310
255,201
127,109
59,586
22,461
14,541
14,564
(2,156)
18,113
(2,628)
3,073
(6,297)
(5,852)
12,261
5,307
6,954
0.21
0.21
32,959
525
33,484
0.16
Cash dividends declared per share
$
0.16 $
0.16 $
The accompanying notes are an integral part of the consolidated financial statements.
33 CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(in thousands)
Years Ended December 31,
2016
2015
2017
Net earnings
Other comprehensive earnings (loss):
Changes in fair market value of hedges, net of tax
Changes in unrealized pension cost, net of tax
Cumulative translation adjustment, net of tax
Other comprehensive earnings
Comprehensive earnings
The accompanying notes are an integral part of the consolidated financial statements.
$
14,448 $
34,380 $
6,954
110
13,687
437
14,234 $
553
6,412
(1,154)
5,811 $
157
6,809
(1,738)
5,228
28,682 $
40,191 $
12,182
$
$
34 CTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Other Assets
Prepaid pension asset
Goodwill
Other intangible assets, net
Deferred income taxes
Other assets
Total other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term notes payable
Accounts payable
Accrued payroll and benefits
Accrued expenses and other liabilities
Total current liabilities
Long-term debt
Long-term pension obligations
Deferred income taxes
Other long-term obligations
Total Liabilities
Commitments and Contingencies (Note 9)
Shareholders' Equity
Common stock
Additional contributed capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity before treasury stock
Treasury stock
Total shareholders' equity
December 31,
2017
2016
$
113,572 $
113,805
70,584
36,596
12,857
233,609
88,247
57,050
71,057
66,943
20,694
2,096
62,612
28,652
10,638
215,707
82,111
46,183
61,744
64,370
45,839
1,743
217,840
219,879
$
539,696 $
517,697
$
— $
49,201
11,867
41,344
102,412
76,300
7,201
3,802
6,176
1,006
40,046
11,369
45,708
98,129
89,100
7,006
2,367
3,213
195,891
199,815
304,777
41,084
420,160
(78,960)
687,061
(343,256)
343,805
302,832
40,521
410,979
(93,194)
661,138
(343,256)
317,882
Total Liabilities and Shareholders' Equity
$
539,696 $
517,697
The accompanying notes are an integral part of the consolidated financial statements.
35 CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating
Depreciation and amortization
Stock-based compensation
Restructuring loss on pension settlement
Pension and other post-retirement plan expense (income)
Non-recurring environmental expense
Deferred income taxes
Loss (gain) on sale of assets
Loss (gain) on foreign currency hedges, net of cash received
Changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable
Inventories
Other assets
Accounts payable
Accrued payroll and benefits
Accrued expenses
Income taxes payable
Other liabilities
Pension and other post-retirement plans
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of assets
Payment for acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Payments of long-term debt
Proceeds from borrowings of long-term debt
Payments of short-term notes payable
Proceeds from borrowings of short-term notes payable
Purchase of treasury stock
Dividends paid
Exercise of stock options
Excess tax benefit on stock-based compensation
Taxes paid on behalf of equity award participants
Net cash used in financing activities
Effect of exchange rate on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes, net
Non-Cash Investing and Financing Activities
Purchase of assets with short-term notes payable
Capital expenditures incurred not paid
The accompanying notes are an integral part of the consolidated financial statements.
Years Ended December 31,
2016
2015
2017
$
14,448 $
34,380 $
6,954
20,674
4,184
—
11,570
—
16,710
708
94
(5,198)
(5,404)
(1,531)
5,387
(1,666)
28
(4,555)
2,918
(319)
43,600
58,048
(18,094)
541
(19,121)
(36,674)
18,992
2,738
—
(1,599)
—
10,297
(11,450)
(36)
(7,120)
(2,290)
(289)
537
1,876
451
966
52
(303)
12,822
47,202
(20,500)
12,296
(73,063)
(81,267)
16,254
3,195
8,280
(2,451)
14,541
(8,920)
(2,156)
—
1,036
2,225
4,090
(5,126)
(3,012)
1,184
5,264
(2,502)
295
32,197
39,151
(9,723)
1,878
(1,285)
(9,130)
(1,518,200)
1,505,400
(1,150)
—
—
(5,260)
—
—
(1,604)
(20,814)
(793)
(233)
113,805
113,572 $
(2,458,400)
2,456,800
—
—
—
(5,234)
—
—
(1,809)
(8,643)
(415)
(43,123)
156,928
113,805 $
(1,343,500)
1,359,200
(164)
164
(18,088)
(5,291)
64
313
(527)
(7,829)
228
22,420
134,508
156,928
2,130 $
10,884 $
2,939 $
10,471 $
— $
5,914 $
1,006 $
3,214 $
2,415
6,779
—
2,813
$
$
$
$
$
36 CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
Balances at January 1, 2015
Net earnings
Changes in fair market value of hedges, net of tax
Changes in unrealized pension cost, net of tax
Cumulative translation adjustment, net of tax
Cash dividends of $0.16 per share
Acquired 984,342 shares for treasury stock
Issued shares on exercise of options — net
Issued shares on vesting of restricted stock units
Tax benefit on vesting of restricted stock units
Stock compensation
Balances at December 31, 2015
Net earnings
Changes in fair market value of hedges, net of tax
Changes in unrealized pension cost, net of tax
Cumulative translation adjustment, net of tax
Cash dividends of $0.16 per share
Issued shares on vesting of restricted stock units
Stock compensation
Balances at December 31, 2016
Net earnings
Changes in fair market value of hedges, net of tax
Changes in unrealized pension cost, net of tax
Cumulative translation adjustment, net of tax
Cash dividends of $0.16 per share
Issued shares on vesting of restricted stock units
Stock compensation
Balances at December 31, 2017
The accompanying notes are an integral part of the consolidated financial statements.
Common
Stock
Additional
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Earnings/(Loss)
Treasury
Stock
Total
$
299,892 $
39,153 $
380,145 $
(104,233) $
(325,168) $
289,789
—
—
—
—
—
—
64
953
—
—
—
—
—
—
—
—
—
(1,495)
313
3,195
6,954
—
—
—
(5,259)
—
—
—
—
—
$
300,909 $
41,166 $
381,840 $
—
—
—
—
—
1,923
—
—
—
—
—
—
(3,307)
2,662
34,380
—
—
—
(5,241)
—
—
$
302,832 $
40,521 $
410,979 $
—
—
—
—
—
1,945
—
$
304,777 $
—
—
—
—
—
(3,549)
4,112
41,084 $
14,448
—
—
—
(5,267)
—
—
420,160 $
—
157
6,809
(1,738)
—
—
—
—
—
—
(99,005) $
—
553
6,412
(1,154)
—
—
—
(93,194) $
—
110
13,687
437
—
—
—
(78,960) $
—
—
—
—
—
(18,088)
—
—
—
—
(343,256) $
—
—
—
—
—
—
—
(343,256) $
—
—
—
—
—
—
—
(343,256) $
6,954
157
6,809
(1,738)
(5,259)
(18,088)
64
(542)
313
3,195
281,654
34,380
553
6,412
(1,154)
(5,241)
(1,384)
2,662
317,882
14,448
110
13,687
437
(5,267)
(1,604)
4,112
343,805
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 1 — Summary of Significant Accounting Policies
Description of Business: CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors,
electronic components, and actuators. We operate manufacturing facilities located throughout North America, Asia and Europe
and service major markets globally.
CTS consists of one reportable business segment.
Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Fiscal Calendar: We began using a calendar period end in 2016. Prior to that, we operated on a 4 week/ 4 week/ 5 week fiscal
quarter, and each fiscal quarter ended on a Sunday. The fiscal year always began on January 1 and ended on December 31. Our
fiscal calendar resulted in some fiscal quarters being either longer or shorter than 13 weeks, depending on the days of the week
on which those dates fell.
Use of Estimates: The preparation of financial statements in conformity with the accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents: All highly liquid investments with maturities of three months or less at the date of purchase are
considered to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable consists primarily of amounts due from normal
business activities. We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable. Our reserves
for estimated credit losses are based upon historical experience and specific customer collection issues. Accounts are written off
against the allowance account when they are determined to no longer be collectible.
Concentration of Credit Risk: Financial instruments that potentially subject us to concentrations of credit risk consist of cash
and cash equivalents. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents
are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We
believe we are not exposed to any significant credit risk on cash and cash equivalents.
Trade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally
in the transportation, industrial, medical, defense and aerospace, information technology, and communications markets, primarily
in North America, Europe, and Asia. We perform ongoing credit evaluations of our customers to minimize credit risk. We do not
require collateral. The allowance for doubtful accounts is based on management's estimates of the collectability of its accounts
receivable after analyzing historical bad debts, customer concentrations, customer creditworthiness, and current economic trends.
Uncollectible trade receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the
amounts due have been exhausted.
Our net sales to significant customers as a percentage of total net sales were as follows:
Cummins Inc.
Honda Motor Co.
Toyota Motor Corporation
Years Ended December 31,
2017
13.4%
11.2%
10.2%
2016
9.9%
10.7%
10.4%
2015
9.3%
10.7%
10.1%
We sell automotive parts to these three customers for certain vehicle platforms under purchase agreements that have no volume
commitments and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
Inventories: We value our inventories at the lower of the actual cost to purchase or manufacture or the net realizable value using
the first-in, first-out ("FIFO") method. We review inventory quantities on hand and record a provision for excess and obsolete
inventory based on forecasts of product demand and production requirements.
38 Retirement Plans: We have various defined benefit and defined contribution retirement plans. Our policy is to annually fund the
defined benefit pension plans at or above the minimum required by law. We: 1) recognize the funded status of a benefit plan
(measured as the difference between plan assets at fair value and the benefit obligation) in our Consolidated Balance Sheets; 2)
recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components
of net periodic benefit/cost as a component of other comprehensive earnings; and 3) measure defined benefit plan assets and
obligations as of the date of our fiscal year-end. See NOTE 5, "Retirement Plans" for further information.
Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation and amortization is computed
primarily over the estimated useful lives of the various classes of assets using the straight-line method. Useful lives for buildings
and improvements range from 10 to 45 years. Machinery and equipment useful lives range from 3 to 15 years. Depreciation on
leasehold improvements is computed over the lesser of the lease term or estimated useful lives of the assets. Amounts expended
for maintenance and repairs are charged to expense as incurred. Upon disposition, any related gains or losses are included in
operating earnings.
Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under
this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and
tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the
enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more-likely-than-not to be realized. In making
such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine
that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an
adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. In 2016, we elected
to early adopt ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on a retrospective basis
allowing for all deferred tax items to be classified as non-current. Certain non-current deferred tax assets and non-current deferred
tax liabilities were not netted since these items relate to different tax jurisdictions.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether
it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for
those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that
is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying
Consolidated Statements of Operations. Accrued interest and penalties are included on the related tax liability line in the
Consolidated Balance Sheets.
See NOTE 17, "Income Taxes" for further information.
Goodwill and Indefinite-lived Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of
the net assets acquired in a business combination. We test the impairment of goodwill at least annually, or more frequently if
events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment evaluation utilizes
a two-step test. The first step compares the fair value of each reporting unit to its carrying value, including goodwill. If the fair
value of the reporting unit is equal to or greater than its carrying value, goodwill is not impaired and no further testing is required.
If the carrying value exceeds fair value, then the second step of the impairment test is performed in order to determine if the implied
fair value of the goodwill of the reporting unit exceeds the carrying value of that goodwill. Goodwill is impaired when the carrying
value of the goodwill exceeds its implied fair value. Impaired goodwill is written down to its implied fair value through a non-
cash expense recorded in results of operations in the period the impairment is identified.
In 2015, we changed the date of our annual impairment test from the last day of our fiscal year to the first day of our fourth quarter.
This change did not have a material effect on the results of our impairment test. We completed our annual impairment test during
2017 and determined that our goodwill was not impaired as of the measurement date.
No goodwill impairment was recorded for the years ended December 31, 2017, 2016 and 2015.
We also have acquired in-process research and development ("IPR&D") intangible assets that are treated as indefinite-lived
intangible assets and therefore not subject to amortization until the completion or abandonment of the associated research and
development efforts. If these efforts are abandoned in the future, the carrying value of the IPR&D asset will be expensed. If the
research and development efforts are successfully completed, the IPR&D will be reclassified as a finite-lived asset and amortized
over its useful life.
39 No significant impairments were recorded in the years ended December 31, 2017, 2016 and 2015.
Other Intangible Assets and Long-lived Assets: We account for long-lived assets (excluding indefinite-lived intangible assets)
in accordance with the provisions of ASC 360. This statement requires that long-lived assets, which includes fixed assets and
finite-lived intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If an impairment test is warranted, recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from
the use and the eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to sell.
Intangible assets (excluding indefinite-lived intangible assets) consist primarily of technology, customer lists and relationships,
patents, and trade names. These assets are recorded at cost and usually amortized on a straight-line basis over their estimated lives.
We assess useful lives based on the period over which the asset is expected to contribute to cash flows.
Revenue Recognition: Product revenue is recognized once four criteria are met: 1) we have persuasive evidence that an arrangement
exists; 2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment provided
that no significant obligations remain; 3) the price is fixed and determinable; and 4) collectability is reasonably assured.
Research and Development: Research and development ("R&D") costs include expenditures for planned search and investigation
aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products
or production processes. R&D costs also include the implementation of new knowledge through design, testing of product
alternatives, or construction of prototypes. We expense all R&D costs as incurred, net of customer reimbursements for sales of
prototypes and non-recurring engineering charges.
We create prototypes and tools related to R&D projects. A prototype is defined as a constructed product not intended for production
resulting in a commercial sale. We also incur engineering costs related to R&D activities. Such costs are incurred to support such
activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative
products that meet customer requirements for new applications. Furthermore, we may engage in activities that develop tooling
machinery and equipment for our customers.
Costs of molds, dies and other tools used to make products sold for which we have a contractual guarantee for lump sum
reimbursement from the customer are included in other current assets on the Consolidated Balance Sheets until reimbursement is
received from the customer. A summary of amounts to be received from customers is as follows:
December 31,
2017
2016
Cost of molds, dies and other tools included in other current assets
$
3,382 $
2,837
Reimbursements received from customers are netted against such costs and included in our Consolidated Statements of Earnings
if the amount received is in excess of the costs that we incur. A summary of amounts received from customers is as follows:
Years Ended December 31,
2017
2016
2015
Reimbursements received from customers
$
4,299 $
2,036 $
1,861
Financial Instruments: We use forward contracts to mitigate currency risk related to forecasted foreign currency revenue and
costs. These forward contracts are designed as cash flow hedges. At least quarterly, we assess the effectiveness of these hedging
relationships based on the total change in their fair value using regression analysis. In addition, we use interest rate swaps to
convert a portion of our revolving credit facility's variable rate of interest into a fixed rate. As a result of the use of these derivative
instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual
obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully
selected major financial institutions based upon their credit ratings and other factors and by using netting agreements. Our
established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits
for credit exposure and continually assessing the creditworthiness of counterparties.
40 We estimate the fair value of our financial instruments as follows:
Instrument
Method for determining fair value
Cash, cash equivalents, accounts receivable and
accounts payable
Revolving credit facility
Interest rate swaps and forward contracts
Cost, approximates fair value due to the short-term nature of these instruments.
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 credit facility.
The fair value of our interest rate swaps and forward contracts are measured using a market
approach which uses current industry information.
Debt Issuance Costs: 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.
Stock-Based Compensation: We recognize expense related to the fair value of stock-based compensation awards, consisting of
restricted stock units ("RSUs"), cash-settled restricted stock units, and stock options, in the Consolidated Statements of Earnings.
We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model. A number
of assumptions are used by the Black-Scholes option pricing model to compute the grant date fair value of an award, including
expected price volatility, option term, risk-free interest rate, and dividend yield. These assumptions are established at each grant
date based upon current information at that time. Expected volatilities are based on historical volatilities of CTS' common stock.
The expected option term is derived from historical data of exercise behavior. Actual option terms can differ from the expected
option terms as a result of different groups of employees exhibiting different exercise behavior. The dividend yield is based on
historical dividend payments. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury
yield curve at the time of grant. The fair value of awards that are ultimately expected to vest is recognized as expense over the
requisite service periods of the awards in the Consolidated Statements of Earnings.
The grant date fair values of our service-based and performance-based RSUs are the closing price of our common stock on the
date of grant. The grant date fair value of our market-based RSUs is determined by using a simulation, or Monte Carlo, approach.
Under this approach, stock returns from a comparative group of companies are simulated over the performance period, considering
both stock price volatility and the correlation of returns. The simulated results are then used to estimate the future payout based
on the performance and payout relationship established by the conditions of the award. The future payout is discounted to the
measurement date using the risk-free interest rate.
Both our stock option and RSU awards primarily have a graded vesting schedule. 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.
See NOTE 15, "Stock-Based Compensation" for further information.
In 2016, we elected to early adopt the provisions of ASU 2016-09 "Compensation-Stock Compensation (Topic 718): Improvement
to Employee Share based Payment Accounting". Pursuant to this adoption, we recorded excess tax benefits within income tax
expense for the year ended December 31, 2016, where previously these were recorded as increases or decreases to additional
contributed capital. In addition, we have elected to account for forfeitures of awards as they occur. Both of these changes have
been applied prospectively, and therefore no adjustments were made to prior periods. In accordance with the guidance, we
retrospectively reported cash paid on behalf of employees for withholding shares for tax-withholding purposes as a financing
activity in the Consolidated Statements of Cash Flows. Additionally, excess tax benefits were classified as an operating activity,
applied prospectively. Adoption of this ASU did not result in a material change in our earnings, cash flows, or financial position.
Earnings Per Share: Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common
shareholders by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if dilutive securities, such as stock options and unvested
restricted stock units, were exercised or resulted in the issuance of common stock. Diluted earnings per share is calculated by
adding all potentially dilutive shares to the weighted average number of common shares outstanding for the numerator. If the
common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share.
Our antidilutive stock options and RSUs consist of the following:
(units)
Antidilutive stock options and RSUs
Years Ended December 31,
2017
2016
2015
22,110
35,189
13,979
41 Foreign Currencies: The financial statements of our non-U.S. subsidiaries, except the United Kingdom ("U.K.") subsidiary, are
remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the
determination of net earnings.
Foreign currency gains (losses) recorded in the Consolidated Statement of Earnings includes the following:
Years Ended December 31,
2017
2016
2015
Foreign currency gains (losses)
$
3,052 $
(3,714) $
(6,299)
The assets and liabilities of our U.K. subsidiary are translated into U.S. dollars at the current exchange rate at period end, with the
resulting translation adjustments made directly to the "accumulated other comprehensive loss" component of shareholders' equity.
Consolidated Statement of Earnings accounts are translated at the average rates during the period.
Shipping and Handling: All fees billed to the customer for shipping and handling is classified as a component of net sales. All
costs associated with shipping and handling is classified as a component of cost of goods sold.
Sales Taxes: We classify sales taxes on a net basis in our consolidated financial statements.
Change in Estimate: Beginning in January 2017, we changed the method we use to calculate the service and interest cost
components of net periodic benefit cost for our U.S. pension and other post-retirement benefit plans. Previously, we calculated
the service and interest cost components using a single weighted-average discount rate derived from the yield curve to measure
the benefit obligation at the beginning of the period. In 2017, we began using a full yield curve approach in the estimation of these
components of benefit cost by applying the specific spot-rates along the yield curve to the relevant projected cash flows. This
approach better aligns each of the projected benefit cash flows to the corresponding spot rates on the yield curve, resulting in a
more precise measurement of service and interest costs. The change in method resulted in a decrease in the service and interest
components of pension costs in 2017. Any decrease to these components as a result of adoption of this approach is equally offset
by a decrease in the actuarial losses included in our accumulated other comprehensive loss, with no impact on the measurement
of the benefit obligation. This change is accounted for prospectively as a change in accounting estimate.
Reclassifications: 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.
Recently Issued Accounting Pronouncements
ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accountings Standards Update ("ASU") No 2017-12
"Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities". This ASU is meant to better
align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation
and measurement guidance for qualifying hedging relationships and presentation of the effects of the hedging instrument and the
hedged item in the financial statements. This ASU is effective for annual periods beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption is permitted in any interim period after issuance. Any changes should be applied
to all hedging relationships that exist at the date of adoption by applying a cumulative-effect adjustment related to eliminating the
separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the
opening balance of retained earnings as of the beginning of the fiscal year of adoption. Presentation and disclosure guidance is
to be applied prospectively. We are still evaluating the impact this ASU may have on our financial statements.
ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Post-retirement Benefit Cost"
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and net Periodic Post-
retirement Benefit Cost". This ASU is meant to improve the presentation of net periodic pension and net periodic post-retirement
benefits costs. Currently, pension and post-retirement benefit costs are comprised of several components reflecting the different
aspects of an employer's financial arrangements and cost of providing benefits to employees. These components are aggregated
for reporting, but prior guidance does not prescribe where the net cost should be presented in the income statement or capitalized
in assets. This ASU requires disaggregation of the service cost component from other components of net benefit cost and provides
explicit guidance on how to present the service cost and other components in the income statement, allowing only the service cost
component of net benefit costs to be eligible for capitalization. This ASU is effective for annual periods beginning after December
15, 2017, including interim periods within those periods. Early adoption is permitted as of the beginning of an annual period for
42 which financial statements have not been issued or made available for issuance. These amendments should be applied
retrospectively for the presentation of the service cost and other components of net periodic pension and net post-retirement benefit
cost in the income statement and prospectively for the capitalization of the service cost and net periodic pension cost and periodic
post-retirement benefit in assets. This ASU is not expected to have a material impact on our financial statements because the
service cost component of our pension cost is expected to be immaterial to our financial results on a prospective basis.
ASU 2017-04 "Intangibles -Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other (Topic 305): Simplifying the Test for
Goodwill Impairment". This ASU is meant to simplify the subsequent measurement of goodwill for impairment by eliminating
the current Step 2 analysis in computing the implied fair value of goodwill. In addition, this ASU requires an entity to consider
income tax effects on any tax deductible goodwill on the carrying amount of the reporting unit when measuring an impairment
loss, if applicable. Under this ASU, impairment is determined by comparing the reporting unit's fair value to the carrying value.
This amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have an
impact on our financial statements.
ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business".
This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should
be accounted for as a sale or purchase of assets or a business. This ASU provides a more robust framework to use in determining
when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset
acquisitions. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those periods. The ASU will be applied prospectively and it is not expected to have an impact on our financial
statements.
ASU 2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-16,
"Intra-Entity Transfers of Assets Other Than Inventory". This ASU is meant to improve the accounting for the income tax effect
of intra-entity transfers of assets other than inventory. Currently, U.S. GAAP prohibits the recognition of current and deferred
income taxes for intra-entity asset transfers until the asset is sold to a third party. This ASU will now require companies to recognize
the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs. This ASU is effective,
for public companies for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods.
Early adoption is permitted and is to be applied on a modified retrospective bases through a cumulative-effect adjustment to retained
earnings as of the beginning of the period of adoption. This guidance is not expected to have a material impact on our consolidated
financial statements.
ASU 2016-15 "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU
reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist.
The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities.
This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early
adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects
early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance is
not expected to have a material impact on our consolidated financial statements.
ASU 2016-02 "Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting
standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve
comparability between entities. The ASU requires companies to record an asset and liability on the balance sheet for leases that
were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU
predominately change the recognition of leases for lessees; the provisions do not substantially change the accounting for lessors.
This ASU will supersede the provisions of Topic 840 Leases.
The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for
the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be
based on the present value of the lease payments. If a lease term is less than twelve months, a company is allowed to elect not to
record the asset and liability. Expense related to these leases are to be amortized straight-line over the term of the lease.
43 Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type
of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.
Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.
These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented.
The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to
account for leases under the previous guidance for leases that commenced prior to the effective date.
The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those
periods. Early adoption is allowed. The provisions of this guidance are still being evaluated and the impact on our financial
statements has not yet been determined.
ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)"
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)", which supersedes the
revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition effective January 1,
2018. Several additional ASUs have subsequently been issued amending and clarifying the standard. The core principle of ASU
2014-09 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.
We adopted this standard on January 1, 2018 using the modified retrospective approach, which requires a cumulative effect
adjustment to the opening balance of retained earnings on the date of adoption. We have completed our review of customer
contracts and agreements for revenue recognized in 2017. We have assessed the impact of the new standard on our existing revenue
recognition policies and have concluded that the standard will not have a material impact on our financial position or results of
operations. We will include the additional required disclosures beginning with our Form 10-Q for the first quarter of 2018.
Subsequent Events: We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial
statements through the date the financial statements are issued.
NOTE 2 — Accounts Receivable
The components of accounts receivable are as follows:
Accounts receivable, gross
Less: Allowance for doubtful accounts
Accounts receivable, net
NOTE 3 — Inventories
Inventories consist of the following:
Finished goods
Work-in-process
Raw materials
Less: Inventory reserves
Inventories, net
As of December 31,
2017
2016
70,941 $
(357)
70,584 $
62,782
(170)
62,612
As of December 31,
2017
2016
9,203 $
12,065
21,150
(5,822)
36,596 $
7,513
9,596
17,680
(6,137)
28,652
$
$
$
$
44 NOTE 4 — Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
Land
Buildings and improvements
Machinery and equipment
Less: Accumulated depreciation
Property, plant and equipment, net
As of December 31,
2017
2016
1,130 $
64,201
223,650
(200,734)
88,247 $
2,330
63,621
213,198
(197,038)
82,111
$
$
Depreciation expense recorded in the Consolidated Statements of Earnings includes the following:
Depreciation expense
NOTE 5 — Retirement Plans
For the Years Ended
2017
2016
2015
$
14,071 $
13,177 $
12,219
We have a number of noncontributory defined benefit pension plans ("pension plans") covering approximately 5% of our active
employees. Pension plans covering salaried employees provide pension benefits that are based on the employees´ years of service
and compensation prior to retirement. Pension plans covering hourly employees generally provide benefits of stated amounts for
each year of service.
We also provide post-retirement life insurance benefits for certain retired employees. Domestic employees who were hired prior
to 1982 and certain domestic union employees are eligible for life insurance benefits upon retirement. We fund life insurance
benefits through term life insurance policies and intend to continue funding all of the premiums on a pay-as-you-go basis.
We recognize the funded status of a benefit plan in our consolidated balance sheets. The funded status is measured as the difference
between plan assets at fair value and the projected benefit obligation. We also recognize, as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as
components of net periodic benefit/cost.
The measurement dates for the pension plans for our U.S. and non-U.S. locations were December 31, 2017, and 2016.
During 2017, we offered certain former vested employees in our U.S. pension plan a one-time option to receive a lump sum
distribution of their benefits from pension plan assets. The pension plan made approximately $23,912 in lump sum payments to
settle its obligation to these participants. These settlement payments decreased the projected benefit obligation and plan assets by
$23,912, and resulted in a non-cash settlement charge of $13,476 related to unrecognized net actuarial losses that were previously
included in accumulated other comprehensive loss. The measurement date of this settlement was December 31, 2017.
During 2014, we approved a plan to terminate the U.K. Limited Retirement Benefits Scheme ("the U.K. Plan"). The pension
liability was settled in a purchased annuity. We completed the termination of the pension plan by the end of 2015, and a loss on
settlement of this pension in the amount of $8,280 was recorded in restructuring and impairment charges in 2015.
45 The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the pension plans for U.S.
and non-U.S. locations at the measurement dates.
Accumulated benefit obligation
Change in projected benefit obligation:
Projected benefit obligation at January 1
Service cost
Interest cost
Benefits paid
Actuarial loss (gain)
Foreign exchange impact
Projected benefit obligation at December 31
Change in plan assets:
Assets at fair value at January 1
Actual return on assets
Company contributions
Benefits paid
Foreign exchange impact
Assets at fair value at December 31
Funded status (plan assets less projected benefit obligations)
U.S.
Pension Plans
Non-U.S.
Pension Plans
2017
2016
2017
2016
$
$
$
$
$
$
$
$
$
$
228,934 $
247,276
247,276 $
256,924
—
8,273
(39,177)
12,562
—
87
11,024
(20,537)
(222)
—
228,934 $
247,276
292,044 $
31,559
336
(39,177)
—
289,315
23,163
103
(20,537)
—
284,762 $
55,828 $
292,044
44,768
$
$
2,535 $
2,295
2,866 $
2,796
48
34
(210)
164
238
3,140 $
1,523 $
17
319
(210)
128
1,777 $
(1,363) $
51
46
(289)
229
33
2,866
1,480
11
303
(289)
18
1,523
(1,343)
The measurement dates for the post-retirement life insurance plan were December 31, 2017, and 2016. The following table provides
a reconciliation of benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those
measurement dates.
Accumulated benefit obligation
Change in projected benefit obligation:
Projected benefit obligation at January 1
Service cost
Interest cost
Benefits paid
Actuarial loss
Projected benefit obligation at December 31
Change in plan assets:
Assets at fair value at January 1
Actual return on assets
Company contributions
Benefits paid
Other
Assets at fair value at December 31
Funded status (plan assets less projected benefit obligations)
Post-Retirement
Life Insurance Plan
2017
2016
5,134 $
4,952
4,952 $
2
161
(165)
184
5,134 $
— $
—
165
(165)
—
— $
(5,134) $
4,886
3
207
(165)
21
4,952
—
—
165
(165)
—
—
(4,952)
$
$
$
$
$
$
The components of the prepaid (accrued) cost of the domestic and foreign pension plans are classified in the following lines in
the Consolidated Balance Sheets at December 31:
Prepaid pension asset
Accrued expenses and other liabilities
Long-term pension obligations
Net prepaid (accrued) cost
U.S.Pension Plans
2017
2016
Non-U.S. Pension Plans
2017
2016
$
$
57,050 $
46,183
$
(100)
(1,122)
(317)
(1,098)
55,828 $
44,768
$
— $
—
(1,363)
(1,363) $
—
—
(1,343)
(1,343)
46 The components of the accrued cost of the post-retirement life insurance plan are classified in the following lines in the Consolidated
Balance Sheets at December 31:
Accrued expenses and other liabilities
Long-term pension obligations
Total accrued cost
Post-Retirement
Life Insurance Plan
2017
2016
$
$
(418) $
(4,716)
(5,134) $
(387)
(4,565)
(4,952)
We have also recorded the following amounts to accumulated other comprehensive loss for the U.S. and non-U.S. pension plans,
net of tax:
Balance at January 1, 2016
Amortization of retirement benefits, net of tax
Net actuarial (loss) gain
Foreign exchange impact
Balance at January 1, 2017
Amortization of retirement benefits, net of tax
Settlements
Net actuarial (loss) gain
Foreign exchange impact
Balance at December 31, 2017
U.S.Pension Plans
Unrecognized
Loss
Prior
Service
Cost
Non-U.S. Pension
Plans
Total
Unrecognized
Loss
$
$
$
96,388 $
— $
96,388
$
1,639
(3,817)
(2,808)
—
—
—
—
(3,817)
(2,808)
—
85
12
7
89,763 $
— $
89,763
$
1,743
(3,685)
(8,585)
(1,753)
—
—
—
—
—
(3,685)
(8,585)
(1,753)
—
75,740 $
— $
75,740
$
10
—
2
143
1,898
We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net
of tax:
Balance at January 1, 2016
Amortization of retirement benefits, net of tax
Net actuarial gain
Balance at January 1, 2017
Amortization of retirement benefits, net of tax
Net actuarial gain
Balance at December 31, 2017
Unrecognized
Gain
$
$
$
(669)
95
14
(560)
64
117
(379)
The accumulated actuarial gains and losses and prior service costs and credits included in other comprehensive income are amortized
in the following manner:
The component of unamortized net gains or losses related to our qualified pension plans is amortized based on the expected future
life expectancy of the plan participants (estimated to be approximately 18 years at December 31, 2017), because substantially all
of the participants in those plans are inactive. The component of unamortized net gains or losses related to our post-retirement
life insurance plan is amortized based on the estimated remaining future service period of the plan participants (estimated to be
approximately 3 years at December 31, 2017). The Company uses a market-related approach to value plan assets, reflecting
changes in the fair value of plan assets over a five-year period. The variance resulting from the difference between the expected
and actual return on plan assets is included in the amortization calculation upon reflection in the market-related value of plan
assets.
In 2018, we expect to recognize approximately $5,888 of pre-tax losses included in accumulated other comprehensive loss related
to our Pension Plans. We do not expect to recognize any significant such amounts related to the post-retirement life insurance
plan in 2018.
47 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with
accumulated benefit obligation in excess of fair value of plan assets is shown below:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Net pension (income) expense includes the following components:
As of December 31,
2017
2016
$
4,361 $
3,757
1,776
4,281
3,710
1,523
Years Ended
December 31,
U.S. Pension Plans
Years Ended
December 31,
Non-U.S. Pension Plans
2017
2016
2015
2017
2016
2015
Service cost
Interest cost
Expected return on plan assets(1)
Amortization of unrecognized loss
Additional cost due to early retirement
Settlement loss
$
— $
87
$
171
$
8,273
(16,243)
5,785
—
13,476
11,024
(18,976)
5,994
—
—
11,258
(20,272)
6,339
—
—
$
48
34
(20)
155
—
—
$
51
46
(26)
140
—
—
Net expense (income)
$
11,291
$
(1,871) $
(2,504)
$
217
$
211
$
Weighted-average actuarial
assumptions(2)
Benefit obligation assumptions:
Discount rate
Rate of compensation increase
Pension income/expense assumptions:
Discount rate
Expected return on plan assets(1)
Rate of compensation increase
3.63%
0.00%
4.16%
5.61%
0.00%
4.16%
0.00%
4.43%
6.63%
0.00%
4.43%
0.00%
4.07%
7.00%
0.00%
1.38%
2.00%
1.13%
1.13%
2.00%
1.13%
2.00%
1.63%
1.63%
2.00%
63
465
(446)
7,492
651
—
8,225
1.63%
2.00%
3.13%
2.00%
0.48%
(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
(2) 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.
Net post-retirement expense includes the following components:
Service cost
Interest cost
Amortization of unrecognized gain
Net expense
Weighted-average actuarial assumptions (1)
Benefit obligation assumptions:
Discount rate
Rate of compensation increase
Pension income/post-retirement expense assumptions:
Discount rate
Rate of compensation increase
Post-Retirement
Life Insurance Plan
Years Ended December 31,
2017
2016
2015
$
$
2
$
3
$
161
(101)
207
(149)
62
$
61
$
3.59%
0%
4.10%
0%
4.10%
0%
4.43%
0%
5
204
(101)
108
4.43%
0%
4.07%
0%
(1) 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.
The discount rate utilized to estimate our pension and post-retirement obligations is based on market conditions at December 31,
2017, and is determined using a model consisting of high quality bond portfolios that match cash flows of the plans' projected
benefit payments based on the plan participants' service to date and their expected future compensation. Use of the rate produced
48 by this model generates a projected benefit obligation that equals the current market value of a portfolio of high quality bonds
whose maturity dates match the timing and amount of expected future benefit payments.
The discount rate used to determine 2017 pension income and post-retirement expense for our pension and post-retirement plans
is based on market conditions at December 31, 2016, and is the interest rate used to estimate interest incurred on the outstanding
projected benefit obligations during the period.
We utilize a building block approach in determining the long-term rate of return for plan assets. Historical markets are reviewed
and long-term relationships between equities and fixed-income are preserved consistent with the generally accepted capital market
principle that assets with higher volatility generate a greater return over the long term. Current market factors such as inflation
and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is
established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical
returns are reviewed to ensure for reasonableness and appropriateness.
Our pension plan asset allocation at December 31, 2017, and 2016, and target allocation for 2018 by asset category are as follows:
Asset Category
Equity securities (1)
Debt securities
Other
Total
Target
Allocations
Percentage of Plan Assets
at December 31,
2018
13%
83%
4%
100%
2017
11%
82%
7%
100%
2016
25%
59%
16%
100%
(1) Equity securities include CTS common stock in the amount of $0 at December 31, 2017 and approximately $17,700 (6% of total plan assets) at December 31,
2016.
We employ a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-
risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches
or exceeds the growth in projected pension plan liabilities. Risk tolerance is established through careful consideration of plan
liabilities and funded status. The investment portfolio primarily contains a diversified mix of equity and fixed-income investments.
Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification.
Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability
measurements, and asset/liability studies at regular intervals.
The following table summarizes the fair values of our pension plan assets:
Equity securities - U.S. holdings(1)
Equity securities - non-U.S. holdings(1)
Equity funds - U.S. holdings(1)
Bond funds - government(5)
Bond funds - other(6)
Real estate(7)
Cash and cash equivalents(2)
Partnerships(4)
International hedge funds(3)
Total fair value of plan assets
As of December 31,
2017
2016
$
19,487 $
1,131
1,314
3,126
231,710
1,235
11,145
10,787
6,604
43,708
819
28,052
22,237
150,712
3,812
7,823
12,862
23,542
$
286,539 $
293,567
49 The fair values at December 31, 2017, are classified within the following categories in the fair value hierarchy:
Equity securities - U.S. holdings(1)
Equity securities - non-U.S. holdings(1)
Equity funds - U.S. holdings(1)
Bond funds - government(5)
Bond funds - other(6)
Real estate(7) (8)
Cash and cash equivalents(2)
Partnerships(4)
International hedge funds(3) (8)
Total
Quoted Prices
in Active
Markets
(Level 1)
$
19,487 $
1,131
—
—
—
—
11,145
—
—
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Not Leveled
Total
— $
—
1,314
3,126
231,710
—
—
—
—
— $
— $
19,487
—
—
—
—
—
—
10,787
—
—
—
—
—
1,235
—
—
6,604
1,131
1,314
3,126
231,710
1,235
11,145
10,787
6,604
$
31,763 $
236,150 $
10,787 $
7,839 $
286,539
The fair values at December 31, 2016, are classified within the following categories in the fair value hierarchy:
Equity securities - U.S. holdings(1)
Equity securities - non-U.S. holdings(1)
Equity funds - U.S.holdings(1)
Bond funds - government(5)
Bond funds - other(6)
Real estate(7) (8)
Cash and cash equivalents(2)
Partnerships(4)
International hedge funds(3) (8)
Total
Quoted Prices
in Active
Markets
(Level 1)
$
43,708 $
819
—
—
—
—
7,823
—
—
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Not Leveled
Total
— $
—
28,052
22,237
150,712
—
—
—
—
— $
— $
—
—
—
—
—
—
12,862
—
—
—
—
—
3,812
—
—
23,542
43,708
819
28,052
22,237
150,712
3,812
7,823
12,862
23,542
$
52,350 $
201,001 $
12,862 $
27,354 $
293,567
(1) Comprised of common stocks of companies in various industries. The Pension Plan fund manager may shift investments from value to growth strategies or
vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan's investment objectives, which are to provide for a reasonable
amount of long-term growth of capital without undue exposure to volatility, and protect the assets from erosion of purchasing power.
(2) Comprised of investment grade short-term investment and money-market funds.
(3) This fund allocates its capital across several direct hedge-fund organizations. This fund invests with hedge funds that employ "non-directional" strategies.
These strategies do not require the direction of the markets to generate returns. The majority of these hedge funds generate returns by the occurrence of key
events such as bankruptcies, mergers, spin-offs, etc. Investments can be redeemed at the Share Net Asset Value ("NAV") as of the last business day of each
calendar quarter with at least a sixty-five day prior written notice to the administrator.
(4) Comprised of partnerships that invest in various U.S. and international industries.
(5) Comprised of long-term government bonds with a minimum maturity of 10 years and zero-coupon Treasury securities ("Treasury Strips") with maturities
greater than 20 years.
(6) Comprised predominately of investment grade U.S. corporate bonds with maturities greater than 10 years and U.S. high-yield corporate bonds; emerging
market debt (local currency sovereign bonds, U.S. dollar-denominated sovereign bonds and U.S. dollar-denominated corporate bonds); and U.S. bank loans.
(7) Comprised of investments in securities of U.S. and non-U.S. real estate investment trusts (REITs), real estate operating companies and other companies that
are principally engaged in the real estate industry and of investments in global private direct commercial real estate. Investments can be redeemed immediately
following the valuation date with a notice of at least fifteen business days before valuation.
(8) Comprised of investments that are measured at fair value using the NAV per share practical expedient. In accordance with the provisions of ASC 820-10,
these investments have not been classified in the fair value hierarchy. The fair value amount not leveled is presented to allow reconciliation of the fair value
hierarchy to total fund pension plan assets.
The pension plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three
levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below:
•
•
Level 1: Fair value measurements that are based on quoted prices (unadjusted) in active markets that the pension plan
trustees have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange
or dealer markets.
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for
the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active or inactive markets,
50 and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are
observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable.
The table below reconciles the Level 3 partnership assets within the fair value hierarchy:
Fair value of Level 3 partnership assets at January 1, 2016
Capital contributions
Realized and unrealized gain
Capital distributions
Fair value of Level 3 partnership assets at December 31, 2016
Capital contributions
Realized and unrealized gain
Capital distributions
Fair value of Level 3 partnership assets at December 31, 2017
Amount
13,360
1,419
584
(2,501)
12,862
343
2,107
(4,525)
10,787
$
$
The partnership fund manager uses a market approach in estimating the fair value of the plan's Level 3 asset. The market approach
estimates fair value by first determining the entity's earnings before interest, taxes, depreciation and amortization and then
multiplying that value by an estimated multiple. When establishing an appropriate multiple, the fund manager considers recent
comparable private company transactions and multiples paid. The entity's net debt is then subtracted from the calculated amount
to arrive at an estimated fair value for the entity.
We expect to make $101 of contributions to the U.S. plans and $331 of contributions to the non-U.S. plans during 2018.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
2018
2019
2020
2021
2022
2023-2026
Total
Defined Contribution Plans
U.S.
Pension
Plans
Non-U.S.
Pension
Plans
Post-Retirement
Life Insurance
Plan
$
15,693 $
67 $
15,705
15,673
15,548
15,361
72,669
72
242
63
69
532
$
150,649 $
1,045 $
418
405
392
378
363
1,610
3,566
We sponsor a 401(k) plan that covers substantially all of our U.S. employees. Contributions and costs are generally determined
as a percentage of the covered employee's annual salary.
Expenses related to defined contribution plans include the following:
401(k) and other plan expense
$
3,141 $
2,841 $
3,352
Years Ended December 31,
2017
2016
2015
51 NOTE 6 — Goodwill and Other Intangible Assets
We evaluate finite-lived intangible assets for impairment if indicators of impairment exist. No indicators were identified for the
years ended December 31, 2017, or December 31, 2016.
Other intangible assets consist of the following:
Other intangible assets:
Customer lists / relationships
Patents
Technology and other intangibles
In process research and development
Other intangible assets, net
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Weighted
Average
Remaining
Amortization
Period (in
years)
$
64,323 $
(33,685) $
30,638
10,319
44,460
2,200
(10,319)
(10,355)
—
$
121,302 $
(54,359) $
—
34,105
2,200
66,943
10.5
—
8.3
—
10.5
Amortization expense for the year ended December 31, 2017
$
6,603
Amortization expense remaining for other intangible assets is as follows:
2018
2019
2020
2021
2022
Thereafter
Total future amortization expense
Other intangible assets:
Customer lists / relationships
Patents
Technology and other intangibles
In process research and development
Other intangible assets, net
Amortization expense for the year ended December 31, 2016
Amortization expense for the year ended December 31, 2015
Amortization
expense
$
$
6,763
6,754
6,624
6,467
6,230
34,105
66,943
As of December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
$
$
63,386 $
(30,318) $
10,319
36,715
2,200
(10,319)
(7,613)
—
112,620 $
(48,250) $
$
$
5,815
4,035
33,068
—
29,102
2,200
64,370
In 2017, a goodwill impairment test was performed by management with the assistance of a third-party valuation firm. As of
December 31, 2017, it was concluded that the fair value of each of our reporting units exceeded their carrying values, and
accordingly, no goodwill impairment was required.
52 Changes in the net carrying value amount of goodwill were as follows:
Goodwill as of December 31, 2015
Increase from acquisitions
Goodwill as of December 31, 2016
Increase from acquisition
Goodwill as of December 31, 2017
Total
33,865
27,879
61,744
9,313
71,057
$
$
NOTE 7 — Costs Associated with Exit and Restructuring Activities
Restructuring and impairment charges are reported as a separate line within operating earnings in the Consolidated Statements of
Earnings. Restructuring-related charges are recorded as a component of cost of goods sold. Total restructuring, impairment and
restructuring-related charges were:
Restructuring-related charges
Restructuring and impairment charges
Total restructuring, impairment, and restructuring-related charges
Years Ended December 31,
2017
2016
2015
$
$
— $
— $
4,139
3,048
4,139 $
3,048 $
631
14,564
15,195
In June 2016, we announced plans to restructure operations by phasing out production at the Elkhart facility by mid-2018 and
transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional
organizational changes will also occur in various other locations. In 2017, we amended this plan to include costs related to the
relocation of our corporate headquarters and Bolingbrook, Illinois manufacturing operations. The cost of the plan is expected to
be approximately $13,400 including severance and other one-time benefit arrangements. We have recorded $2,927 of termination
and other one-time benefit charges impacting approximately 230 employees as of December 31, 2017. Additional costs related
to line movements, equipment charges, and other costs will be expensed as incurred. The total restructuring liability related to the
June 2016 Plan was $1,460 at December 31, 2017.
The following table displays the planned restructuring and impairment charges associated with the June 2016 Plan as well as a
summary of the actual costs incurred through December 31, 2017:
June 2016 Plan
Workforce reduction
Building and equipment relocation
Other charges
Restructuring and impairment charges
Total restructuring and impairment charges for the June 2016 Plan were as follows:
Restructuring and impairment charges
Planned
Costs
Actual costs
incurred through
December 31,
2017
3,075
$
9,025
1,300
13,400
$
2,927
3,574
686
7,187
Years Ended December 31,
2017
2016
4,139
$
3,048
$
$
$
Not included in restructuring and impairment charges, but directly attributable to the June 2016 Plan, is an increase in tax expense
of $2,316 relating to increases in valuation allowances on deferred tax assets for state net operating losses and tax credits and the
revaluation of U.S. deferred taxes as a result of a change in our expected future tax rate as discussed in Note 17 "Income Taxes"
in 2016.
During 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 ("April 2014 Plan"). These
restructuring actions, which were substantially completed during 2015, resulted in the elimination of approximately 120 positions.
53 The following table displays the planned restructuring and restructuring-related charges associated with the April 2014 Plan, as
well as a summary of the actual costs incurred through December 31, 2017:
April 2014 Plan
Inventory write-down
Equipment relocation
Other charges
Restructuring-related charges, included in cost of goods sold
Workforce reduction
Other charges, including pension termination costs
Restructuring and impairment charges
Total restructuring, impairment and restructuring-related charges
Planned
Costs
Actual costs
incurred through
December 31,
2017
$
$
850 $
1,800
1,400
4,050
4,200
1,700
5,900
9,950 $
—
444
113
557
4,423
3,413
7,836
8,393
Under the April 2014 Plan, there were no restructuring, impairment, and restructuring-related charges for the years ended
December 31, 2017 and December 31, 2016. Restructuring, impairment, and restructuring-related charges were $4,923 for the
year ended December 31, 2015. The total restructuring liability related to the April 2014 Plan was $453 at December 31, 2017.
During June 2013, we announced a restructuring plan to simplify our global footprint by consolidating manufacturing facilities
into existing locations. This Plan included (1) the consolidation of operations from the U.K. manufacturing facility into the Czech
Republic facility, (2) the consolidation of operations from the Carol Stream, Illinois manufacturing facility into the Juarez, Mexico
facility, and (3) the discontinuation of manufacturing at the Singapore facility. Certain corporate functions were consolidated or
eliminated as a result of the June 2013 Plan and also as a result of the sale of our EMS business. These restructuring actions called
for the elimination of approximately 480 positions.
The following table displays the planned restructuring and restructuring-related charges associated with the June 2013 Plan, as
well as a summary of the actual costs incurred through completion of the plan as of December 31, 2015:
June 2013 Plan
Inventory write-down
Equipment relocation
Other charges
Restructuring-related charges, included in cost of goods sold
Workforce reduction
Asset impairment charge
Other charges, including pension termination costs
Restructuring and impairment charges
Total restructuring and restructuring-related charges
Planned
Costs
$
800 $
900
100
1,800
10,150
3,000
7,650
20,800
$
22,600 $
Actual costs
incurred through
December 31,
2015
1,143
1,792
702
3,637
9,615
4,139
10,205
23,959
27,596
Under the June 2013 Plan, restructuring, impairment and restructuring-related charges were $10,272 for the year ended
December 31, 2015.
Actions under this plan were complete by the end of 2015 and no liability remains related to the June 2013 Plan as of December 31,
2017.
The following table displays the restructuring liability activity for the year ended December 31, 2017:
June 2013 Plan and April 2014 Plan and June 2016 Plan
Restructuring liability at January 1, 2017
Restructuring charges
Cost paid
Other activities (1)
Restructuring liability at December 31, 2017
(1) Other activities includes currency translation adjustments not recorded through restructuring expense.
Restructuring
Liability
$
$
2,162
4,139
(4,445)
57
1,913
54 Total restructuring liability included in Other long-term obligations is $187 at December 31, 2017. The remaining liability of
$1,726 is included in Accrued expenses and other liabilities at December 31, 2017.
NOTE 8 — Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
As of December 31,
2017
2016
Accrued product-related costs
Accrued income taxes
Accrued property and other taxes
Dividends payable
Remediation reserves
Other accrued liabilities
$
5,297 $
5,475
997
1,318
17,067
11,190
Total accrued expenses and other liabilities
$
41,344 $
5,556
9,826
1,917
1,309
18,176
8,924
45,708
NOTE 9 — 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 are potentially liable for environmental contamination at several sites currently and formerly owned
or operated by CTS. Some sites, such as Asheville, North Carolina and Mountain View, California, are designated National
Priorities List Superfund sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable
remediation activities at these sites and for claims and proceedings against CTS with respect to other environmental matters. We
record reserves on an undiscounted basis. In the opinion of management, based upon presently available information relating to
such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental
obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any
amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature
of environmental obligations, we cannot provide assurance that our ultimate environmental liability will not materially exceed the
amount of our current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available
in the future.
A roll forward of remediation reserves on the balance sheet is comprised of the following:
Balance at beginning of period
Remediation expense
Remediation payments
Balance at end of the period
Years Ended December 31,
2017
2016
2015
$
$
18,176 $
20,603 $
307
(1,416)
556
(2,983)
17,067 $
18,176 $
3,918
18,591
(1,906)
20,603
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. Although the ultimate outcome of any potential litigation resulting from these
claims cannot be predicted with certainty, and some may be disposed of unfavorably to CTS, management believes that adequate
provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we
do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on
our consolidated financial position, results of operations or cash flows.
55 NOTE 10 — Leases
Minimum future obligations under all non-cancelable operating leases as of December 31, 2017, are as follows:
2018
2019
2020
2021
2022
Thereafter
Total minimum lease obligations
Rent expense for operating leases charged to operations was as follows:
Operating
Leases
3,631
2,887
1,722
996
954
11,161
21,351
$
$
Rent expense
Years Ended December 31,
2017
2016
2015
$
4,762 $
5,694 $
3,550
Operating leases include a variety of properties around the world. These properties are used as manufacturing facilities, distribution
centers and sales offices. Lease expirations range from 2018 to 2033 with breaking periods specified in the lease agreements.
Sublease income was $445 in 2017. Future sublease income is $500 in 2018, $487 in 2019, and $1,404 thereafter. Some of our
operating leases include renewal options and escalation clauses.
In the fourth quarter of 2012, one of our foreign locations entered into a sale-leaseback transaction. As a result of this transaction,
a deferred gain of approximately $4,500 was being amortized over the 6 year expected lease term. During 2015, we terminated
the lease and recognized the remaining unamortized deferred gain into income. A gain of $2,108 was included in the Consolidated
Statements of Earnings for the year ended December 31, 2015.
NOTE 11 — Debt
Long-term debt was comprised of the following:
Total credit facility
Balance outstanding
Standby letters of credit
Amount available
Weighted-average interest rate
Commitment fee percentage per annum
$
$
$
$
As of December 31
2017
2016
300,000
76,300
2,065
221,635
$
$
$
$
2.30%
0.25%
300,000
89,100
2,165
208,735
1.90%
0.25%
The revolving credit facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum
fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the revolving
credit facility. We were in compliance with all debt covenants as of December 31, 2017. The revolving credit facility requires us
to deliver quarterly financial statements, annual financial statements, auditors certifications and compliance certificates within a
specified number of days after the end of a quarter and year. Additionally, the revolving credit facility contains restrictions limiting
our ability to dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens
on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain
transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the revolving
credit facility fluctuate based upon the London Interbank Offered Rate and the Company's quarterly total leverage ratio. We pay
a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly
leverage ratio.
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 was approximately $185 in 2017, $163 in 2016, and $175 in 2015, and was recognized as interest
expense.
56 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 12. These swaps are treated as cash flow hedges and consequently, the changes in fair value were
recorded in other comprehensive earnings.
Interest rate swaps activity recorded in other comprehensive earnings before tax included the following:
Unrealized (loss) gain
Realized gain reclassified to interest expense
NOTE 12 — Derivatives
Years Ended December 31,
2017
2016
2015
$
$
(255) $
37 $
593 $
928 $
(516)
768
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We
selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage
our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a
counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated
financial institutions and by using netting agreements.
Foreign Currency Hedges
In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign Euro
denominated revenues and Mexican Peso denominated expenses. The currency forward contracts are designed as cash flow hedges
and are recorded in the Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging
relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and
losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at
which time they are reclassified to net sales and cost of goods sold. Ineffectiveness is recorded in other income (expense) in our
Consolidated Statements of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the
end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other
comprehensive loss to other income (expense).
As of December 31, 2017, we were hedging a portion of our forecasted Peso expenses and Euro denominated revenue for the
following twelve months. We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges
in the future. At December 31, 2017, we had a net unrealized loss of $683 in accumulated other comprehensive loss, of which
$567 is expected to be reclassified to income within the next 12 months. The notional amount of foreign currency forward contracts
outstanding was $33.2 million at December 31, 2017.
Interest Rate Swaps
We use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate on a portion of our
debt balance. In the second quarter of 2012, we entered into four separate one-year interest rate swap agreements to fix interest
rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four
additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013
to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix interest
rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the
terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive
income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive
income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately $278.
57 The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as
of December 31, 2017, are shown in the following table:
Foreign currency hedges reported in Accrued expenses and other liabilities
Interest rate swaps reported in Other current assets
Interest rate swaps reported in Other assets
As of December 31,
2017
2016
$
$
$
742
278
693
$
$
$
601
2
751
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with
ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were $97 foreign currency derivative assets and foreign
currency derivative liabilities were $839.
The effect of derivative instruments on the Consolidated Statements of Earnings is as follows:
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings
Net sales
Cost of goods sold
Selling, general and administrative
Total amounts reclassified from AOCI to earnings
Loss recognized in other expense for hedge ineffectiveness
Loss recognized in other expense for derivatives not designated as cash flow hedges
Total derivative gain (loss) on foreign exchange contracts recognized in earnings
Interest Rate Swaps:
Interest Expense
Total income (loss) on derivatives recognized in earnings
NOTE 13 — Accumulated Other Comprehensive Loss
Years Ended December 31,
2017
2016
2015
$
(488) $
(124) $
497
45
54
(1)
(15)
38
111
1
(12)
(1)
(5)
(18)
—
—
—
—
—
—
—
$
$
(37) $
1
$
(928) $
(946) $
(768)
(768)
Shareholders' equity includes certain items classified as accumulated other comprehensive loss ("AOCI") in the Consolidated
Balance Sheets, including:
•
•
•
Unrealized gains (losses) on hedges relate to interest rate swaps to convert the revolving credit facility's variable rate
of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange
rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow
hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction is settled.
Amounts reclassified to income from AOCI for hedges are included in interest expense. Further information related to
our interest rate swaps is included in NOTE 12, "Derivatives".
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 expense. Further
information related to our pension obligations is included in NOTE 5, "Retirement Plans".
Cumulative translation adjustment relates to our non-U.S. subsidiaries 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. Transfer of foreign currency translation
gains and losses from AOCI to income are included in other income (expense) in our Consolidated Statements of Earnings.
58 The components of AOCI for 2017 are as follows:
As of December
31, 2016
Gain (Loss)
Recognized
in OCI
Gain (Loss)
reclassified
from AOCI
to income
As of December
31, 2017
Changes in fair market value of hedges:
Gross
Income tax expense (benefit)
Net
Changes in unrealized pension cost:
Gross
Income tax expense (benefit)
Net
Cumulative translation adjustment:
Gross
Income tax expense (benefit)
Net
$
116 $
(42)
74
(151,618)
60,672
(90,946)
(2,414)
92
(2,322)
264 $
(96)
168
—
—
—
429
8
437
(91) $
33
(58)
21,522
(7,835)
13,687
—
—
—
Total accumulated other comprehensive (loss) income
$
(93,194) $
605 $
13,629 $
The components of AOCI for 2016 are as follows:
289
(105)
184
(130,096)
52,837
(77,259)
(1,985)
100
(1,885)
(78,960)
As of December
31, 2015
(Loss) Gain
recognized
in OCI
Gain (Loss)
reclassified
from AOCI
to income
As of December
31, 2016
Changes in fair market value of hedges:
Gross
Income tax expense (benefit)
Net
Changes in unrealized pension cost:
Gross
Income tax expense (benefit)
Net
Cumulative translation adjustment:
Gross
Income tax expense (benefit)
Net
$
(768) $
289
(479)
(161,719)
64,361
(97,358)
(1,279)
111
(1,168)
(56) $
20
(36)
—
—
—
(1,135)
(19)
(1,154)
940 $
(351)
589
10,101
(3,689)
6,412
—
—
—
Total accumulated other comprehensive (loss) income
$
(99,005) $
(1,190) $
7,001 $
116
(42)
74
(151,618)
60,672
(90,946)
(2,414)
92
(2,322)
(93,194)
59 NOTE 14 — Shareholders' Equity
Share count and par value data related to shareholders' equity are as follows:
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock
Par value per share
Shares authorized
Shares issued
Shares outstanding
Treasury stock
Shares held
As of December 31,
2017
2016
No par value
No par value
25,000,000
25,000,000
—
—
No par value
No par value
75,000,000
56,632,488
32,938,466
75,000,000
56,456,516
32,762,494
23,694,022
23,694,022
We use the cost method to account for our common stock purchases. During the years ended December 31, 2017, and December 31,
2016, we did not purchase any shares of common stock under our board-authorized share repurchase program. Approximately
$17,554 is available for future purchases.
A roll forward of common shares outstanding is as follows:
Balance at beginning of the year
Restricted stock unit issuances
Balance at end of period
NOTE 15 — Stock-Based Compensation
As of December 31,
2017
2016
32,762,494
32,548,477
175,972
214,017
32,938,466
32,762,494
At December 31, 2017, we had four 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"), and the 2014 Performance & Incentive Plan ("2014 Plan"). Future grants can only be made under
the 2014 Plan.
The 2009 Plan, and previously the 2004 Plan, provided for grants of incentive stock options or nonqualified stock options to
officers, key employees, and non-employee members of the Board of Directors. In addition, the 2014 Plan, the 2009 Plan, and
the 2004 Plan allow for grants of stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares,
performance-based restricted stock units, and other stock awards.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the
Consolidated Statements of Earnings related to stock-based compensation plans:
Service-Based RSUs
Performance-Based RSUs
Cash-settled awards
Total
Income tax benefit
Net
Years Ended December 31,
2017
2016
2015
1,762 $
1,997 $
2,350
72
4,184 $
1,573
2,611 $
665
76
2,738 $
1,029
1,709 $
1,944
1,235
16
3,195
1,201
1,994
$
$
$
The fair value of all equity awards that vested during the periods ended December 31, 2017, 2016, and 2015 were $5,471, $4,959,
and $2,803, respectively. We recorded a tax deduction related to equity awards that vested during the year ended December 31,
2017, in the amount of $1,927.
60 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:
Service-Based RSUs
Performance-Based RSUs
Total
Unrecognized
compensation
expense at
December 31,
2017
$
$
1,079
2,313
3,392
Weighted-
average
period
1.11 years
1.62 years
1.46 years
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 December 31, 2017:
2014 Plan
2009 Plan
2004 Plan
Directors' Plan
Awards originally available to be granted
1,500,000
3,400,000
6,500,000
Performance stock options outstanding
Maximum potential RSU and cash settled awards outstanding
Maximum potential awards outstanding
RSUs and cash settled awards vested and released
Awards available to be granted
295,000
725,759
1,020,759
176,221
303,020
—
122,600
122,600
—
—
—
57,391
57,391
—
—
N/A
—
9,620
9,620
—
—
Stock Options
Stock options are exercisable in cumulative annual installments over a maximum 10-year period, commencing at least one year
from the date of grant. Stock options are generally granted with an exercise price equal to the market price of our stock on the
date of grant. The stock options generally vest over four years and have a 10-year contractual life. The awards generally contain
provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age
requirements are met. The awards also provide for accelerated vesting if there is a change in control event.
We estimate the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for
expected price volatility, option term, risk-free interest rate, and dividend yield. Expected price volatilities are based on historical
volatilities of our common stock. The expected option term was derived from historical data of exercise behavior. The dividend
yield was based on historical dividend payments. The risk-free rate for periods within the contractual life of the option was based
on the U.S. Treasury yield curve in effect at the time of grant.
There were no outstanding stock options at December 31, 2017, or 2016 other than the performance-based stock options described
below.
Performance-Based Stock Options
During 2015 and 2016, the Compensation committee of the Board of Directors (the "Committee") granted a total of 295,000
performance-based stock options (including forfeitures). The Performance-Based Option Awards have an exercise price of $18.37,
a term of five years and generally will become exercisable (provided the optionee remains employed by the Company or an affiliate)
upon our attainment of at least $600,000 in revenues during any of our four-fiscal-quarter trailing periods (as determined by the
Committee) during the term. We have not recognized any expense on these Performance-Based Option Awards for the years ended
December 31, 2017 and 2016, since the revenue target is not deemed likely to be attained based on our current forecast.
Service-Based Restricted Stock Units
Service-based RSUs entitle the holder to receive one share of common stock for each unit when the unit vests. RSUs are issued
to officers, key employees and non-employee directors as compensation. Generally, the RSUs vest over a three-year period. RSUs
granted to non-employee directors have historically vested one month after being granted, except beginning in 2016 they vest one
year after being granted. Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU
immediately, or defer receipt of the stock to a future date. The fair value of the RSUs is equivalent to the trading value of our
common stock on the grant date.
61 A summary of RSUs for all Plans is presented below:
Outstanding at January 1, 2017
Granted
Released
Forfeited
Outstanding at December 31, 2017
Releasable at December 31, 2017
Weighted-average grant date fair value
Intrinsic value of RSUs released
A summary of nonvested RSUs is presented below:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
13.37
24.32
13.85
17.11
14.60
12.48
24.58
33.88
$
$
10,283
6,690
Units
554,478 $
57,740
(201,918)
(10,953)
399,347 $
259,811 $
Years Ended December 31,
2017
2016
2015
$
$
24.32 $
4,485 $
15.07 $
1,520 $
17.31
2,933
Weighted
Average
Grant Date
Fair Value
15.81
24.32
16.40
17.11
18.56
RSUs
251,245 $
57,740 $
(158,496) $
(10,953) $
139,536 $
Performance-Based Restricted Stock Units
We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees. Units are usually
awarded in the range from zero percent to 200% of a targeted number of shares. The award rate for the 2015-2017, 2016-2018,
and 2017-2019 PSUs is dependent upon our achievement of sales growth targets, cash flow targets, and relative total shareholder
return ("RTSR") using a matrix based on the percentile ranking of our stock price performance compared to a peer group over a
three-year period. These awards are weighted 35% for achievement of the sales growth metric, 30% for achievement of the cash
flow metric, and 35% for achievement of the RTSR metric. Other PSUs are granted from time to time based on other performance
criteria.
A summary of PSUs for all Plans is presented below:
Outstanding at January 1, 2016
Granted
Released
Forfeited
Added by performance factor
Outstanding at December 31, 2017
Releasable at December 31, 2017
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
16.48
23.83
21.66
22.56
21.66
18.77
—
1.62
—
$
$
6,986
—
Units
201,900 $
123,919 $
(43,275) $
(26,524) $
15,285 $
271,305 $
— $
62 The following table summarizes each grant of performance awards outstanding at December 31, 2017:
Description
Grant Date
Vesting
Year
Vesting
Dependency
Target
Units
Outstanding
Maximum
Number of Units
to be Granted
2015-2017 Performance RSUs
February 5, 2015
2018
2016-2018 Performance RSUs
February 16, 2016
2019
2017-2019 Performance RSUs
February 9, 2017
2017-2019 Performance RSUs
February 9, 2017
Single Crystal Performance RSUs
March 31, 2016
2020
2018-
2020
2019
Total
35% RTSR, 35% sales growth, 30%
cash flow
35% RTSR, 35% sales growth, 30%
cash flow
35% RTSR, 35% sales growth, 30%
cash flow
Operating Income
Various
62,000
92,840
71,796
40,669
4,000
271,305
124,000
185,680
143,592
40,669
8,000
501,941
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
December 31, 2017, and 2016, we had 14,082 and 12,074 cash-settled RSUs outstanding, respectively. At December 31, 2017,
and 2016, liabilities of $241 and $170, respectively were included in Accrued expenses and other liabilities on our Consolidated
Balance Sheets.
NOTE 16 — Fair Value Measurements
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of
December 31, 2017 and the (gain) loss recorded during the year ended December 31, 2017:
Asset (Liability)
Carrying
Value at
December 31,
2017
Quoted Prices
in Active
Markets for
Identical
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Gain) loss for
Year Ended
December 31,
2017
Interest rate swap — cash flow hedge
Foreign currency hedges
$
$
971 $
(742) $
— $
— $
971 $
(742) $
— $
— $
37
(38)
The table below summarizes the financial liability that was measured at fair value on a recurring basis as of December 31, 2016
and the (gain) loss recorded during the year ended December 31, 2016:
Asset (Liability)
Carrying
Value at
December 31,
2016
Quoted Prices
in Active
Markets for
Identical
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Gain) loss for
Year Ended
December 31,
2016
Interest rate swap — cash flow hedge
Foreign currency hedges
$
$
753 $
(601)
— $
$
753 $
(601)
— $
$
(928)
18
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 the market is not active and therefore they are classified within level 2 of the fair value
hierarchy.
63 The table below provides a reconciliation of the recurring financial assets and liabilities related to interest rate swaps and foreign
currency hedges:
Balance at January 1, 2016
Settled in cash
Total gains (losses) for the period:
Included in earnings
Included in other comprehensive earnings (loss)
Balance at January 1, 2017
Settled in cash
Total gains (losses) for the period:
Included in earnings
Included in other comprehensive earnings (loss)
Balance at December 31, 2017
Interest Rate
Swaps
Foreign
Currency
Hedges
$
$
$
(768) $
—
928
593
753 $
—
—
218
971 $
—
54
(18)
(637)
(601)
(132)
38
(47)
(742)
Our long-term debt consists of a revolving debt facility which is recorded at its carrying value. There is a readily determinable
market for our revolving credit debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to
be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical
coupon bond and attributing that value to our credit facility.
NOTE 17 — Income Taxes
Earnings before income taxes consist of the following:
U.S.
Non-U.S.
Total
Significant components of income tax provision/(benefit) are as follows:
Current:
U.S.
Non-U.S.
Total Current
Deferred:
U.S.
Non-U.S.
Total Deferred
Total provision for income taxes
$
$
$
Years Ended December 31,
2017
2016
2015
9,315 $
30,938
40,253 $
25,746 $
31,499
57,245 $
(141)
12,402
12,261
Years Ended December 31,
2017
2016
2015
1,635 $
(1,312) $
7,150
8,785
17,597
(577)
17,020
13,729
12,417
13,245
(2,797)
10,448
$
25,805 $
22,865 $
329
12,482
12,811
(15,795)
8,291
(7,504)
5,307
64 Significant components of our deferred tax assets and liabilities are as follows:
Post-retirement benefits
Inventory reserves
Loss carry-forwards
Credit carry-forwards
Nondeductible accruals
Research expenditures
Stock compensation
Foreign exchange loss
Other
Gross deferred tax assets
Depreciation and amortization
Pensions
Subsidiaries' unremitted earnings
Gross deferred tax liabilities
Net deferred tax assets
Deferred tax asset valuation allowance
Total net deferred tax assets
The long-term deferred tax assets and long-term deferred tax liabilities are as follows below:
Non-current deferred tax assets
Non-current deferred tax liabilities
Total net deferred tax assets
As of December 31,
2017
2016
$
1,160 $
1,128
5,401
10,793
7,062
20,002
1,803
1,373
220
48,942
9,819
12,387
1,662
23,868
25,074
1,798
1,834
7,279
22,743
11,629
31,380
2,681
1,780
648
81,772
9,960
16,024
1,292
27,276
54,496
(8,182)
16,892 $
(11,024)
43,472
$
As of December 31,
2017
2016
20,694
(3,802)
16,892
45,839
(2,367)
43,472
In 2016, we elected to early adopt ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on
a retrospective basis allowing for all deferred tax items to be classified as non-current. Certain non-current deferred tax assets
and non-current deferred tax liabilities were not netted since these items relate to different tax jurisdictions.
At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the
Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the
various jurisdictions in which it operates, will be realized. As of December 31, 2017, and 2016, we recorded deferred tax assets
related to certain U.S. state and non-U.S. income tax loss carryforwards of $5,401 and $7,279, respectively, and U.S. and non-
U.S. tax credits of $10,793 and $22,743, respectively. The deferred tax assets expire in various years primarily between 2022 and
2035.
The Company remeasured its U.S. deferred tax assets and liabilities at the applicable federal tax rate of 21% in accordance with
the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total decrease in these assets of $6,267.
Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward
periods. As a result, we have determined that valuation allowances of $8,182 and $11,024 should be provided for certain deferred
tax assets at December 31, 2017, and 2016, respectively. As of December 31, 2017, the valuation allowances relate to certain U.S.
state and non-U.S. loss carry-forwards and certain U.S. state tax credits that management does not anticipate will be utilized. The
increase in the valuation allowance from December 31, 2015, to December 31, 2016, is primarily due to the June 2016 restructuring
activities and changes in management's judgment regarding realizability of the related assets.
No valuation allowance was recorded in 2017 against the U.S. federal foreign tax credit carryforwards of $3,711, which expire
in 2024 and 2025 as well as the research and development tax credits of $7,249. which expire in varying amounts between 2022
and 2037. We assessed the anticipated realization of those tax credits utilizing future taxable income projections. Based on those
projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.
65 The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate:
Taxes at the U.S. statutory rate
State income taxes, net of federal income tax benefit
Non-U.S. income taxed at rates different than the U.S. statutory rate
Foreign source income, net of associated foreign tax credits
Benefit of tax credits
Non-deductible expenses
Stock compensation - excess tax benefits
Adjustment to valuation allowances
Benefit from prior period foreign tax credits
Change in unrecognized tax benefits
Impacts of unremitted foreign earnings
Impacts related to the 2017 Tax Cuts and Jobs Act
Other
Effective income tax rate
Years Ended December 31,
2017
2016
2015
35.0 %
1.1 %
(9.0)%
0.1 %
(1.4)%
1.5 %
(1.5)%
(4.4)%
— %
2.0 %
0.9 %
44.7 %
(4.9)%
64.1 %
35.0 %
1.4 %
(7.5)%
5.3 %
(1.0)%
0.7 %
(0.8)%
3.8 %
— %
3.3 %
0.6 %
— %
(0.9)%
39.9 %
35.0 %
(0.1)%
(16.7)%
6.9 %
(4.6)%
1.3 %
— %
37.8 %
(133.0)%
59.5 %
60.8 %
— %
(3.6)%
43.3 %
During 2015, we changed our position regarding the U.S. federal tax treatment of foreign taxes paid. We claimed a foreign tax
credit on our 2014 and 2015 U.S. federal income tax returns and filed amended tax returns for 2006 through 2013 in order to claim
non-U.S. taxes paid as a credit against income tax, rather than as a deduction. The filing of the amended returns reduced the
deferred tax asset for federal loss carryforwards by $8,214, and increased our available foreign tax credit carryforward by $24,519,
resulting in a net tax benefit of $16,305, recorded in 2015.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the
Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax
years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31,
2017. The Company has calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance
with its understanding of the Act and guidance available as of the date of this filing, and as a result has recorded $18,001 as an
additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional
amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to
reverse in the future was $6,267. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation
of foreign earnings was $11,734.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in
situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company
has determined that the $6,267 of deferred tax expense recorded in connection with the remeasurement of certain deferred tax
assets and liabilities and the $11,734 of current tax expense recorded in connection with the transition tax on the mandatory deemed
repatriation of foreign earnings are provisional amounts and reasonable estimates at December 31, 2017. Additional work is
necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent
adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
In general, outside of Canada and the United Kingdom, it is our historical practice to permanently reinvest the earnings of our
non-U.S. subsidiaries in those operations. Although we plan to permanently reinvest the earnings of our Chinese facilities outside
the U.S., we have determined that we will not maintain those earnings in China in order to mitigate future currency risk. Therefore,
as of December 31, 2017, a provision for the expected tax expense on repatriation of those earnings of $370 was recorded. However,
as a result of the Act, we can repatriate our cumulative undistributed foreign earnings to the U.S. when needed with minimal U.S.
income tax consequences other than the one-time deemed repatriation charge. We will continue to evaluate whether to repatriate
all or a portion of the cumulative undisributed foreign earnings based on expansion needs and as circumstances change. We are
still evaluating whether to change our indefinite reinvestment assertion in light of the Act and consider that conclusion to be
incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will
account for the change in assertion as a change in estimate related to the enactment of the Act.
The Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed
in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5%
66 tax rate. Because of the complexity of these provisions, we have not completed our analysis of their potential impact to our deferred
tax assets and liabilities, or whether to (i) account for GILTI as a component of tax expense in the period in which the company
is subject to the rules (the “period cost method”), or (ii) account for GILTI in the company’s measurement of deferred taxes (the
“deferred method”). We continue to evaluate the impacts of GILTI as we further understand its implications as well as related,
and yet to be issued, regulatory rules, regulations and interpretations.
We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that
the position will be sustained upon examination. A tax position that meets the more-likely-than-not threshold is then measured to
determine the amount of benefit recognized in the financial statements. As of December 31, 2017, we have approximately $7,306
of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes
in our unrecognized tax benefits within the next 12 months.
A reconciliation of the beginning and ending unrecognized tax benefits is provided below:
Balance at January 1
Increase related to current year tax positions
Increase related to prior year tax positions
Decrease related to settlements with taxing authorities
Balance at December 31
2017
2016
12,347 $
—
1,290
(6,331)
11,008
1,088
251
—
7,306 $
12,347
$
$
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As
of December 31, 2017, and 2016, $2,596 and $1,772, respectively, of interest and penalties were accrued.
We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily
subject to examination from 2013 through 2016; however, U.S. tax authorities also have the ability to review prior tax years to
the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from
2008 through 2016 based on local statutes.
NOTE 18 - Business Acquisitions
On May 15, 2017, we acquired 100% of the equity interests in Noliac A/S, a privately-held company, for $19.3 million in cash.
Noliac A/S is a designer and manufacturer of tape cast and bulk piezoelectric material as well as transducers for use in the
telecommunications, industrial, medical, and defense industries. This acquisition will enable us to increase our product base within
our ceramics product lines as well as expand our presence in the European market.
The purchase price of $19,121, net of cash acquired of $199, has been allocated to the assets acquired and liabilities assumed on
the acquisition date based on their fair values.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
Current assets
Property, plant and equipment
Other assets
Goodwill
Intangible assets
Fair value of assets acquired
Less fair value of liabilities acquired
Net cash paid
Fair Values at May 15,
2017
$
$
2,836
580
395
9,313
9,142
22,266
(3,145)
19,121
Goodwill recorded in connection with this acquisition represents the value we expect to be created by combining the operations
of the acquired business with our existing operations, including the expansion into markets within our existing business, access
to new customers, and potential cost savings and synergies. Goodwill related to this acquisition is expected to be deductible for
tax purposes.
67 The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
Developed technology
Customer relationships
Other
Total
Carrying Value
Weighted Average
Amortization Period
(in years)
$
$
7,581
937
624
9,142
15.0
10.0
3.0
13.7
We incurred $291 in transaction related costs during the year ended December 31, 2017. These costs are included in selling,
general, and administrative costs in our Consolidated Statements of Earnings.
On March 11, 2016, we acquired all of the outstanding membership interests in CTG Advanced Materials, LLC (“CTG-AM”), a
privately-held company, for $73 million in cash plus a working capital adjustment. CTG-AM, formerly operated as H.C. Materials,
is the market leading designer and manufacturer of single crystal piezoelectric materials, serving major original equipment
manufacturers throughout the medical marketplace. These materials enable high definition ultrasound imaging (3D and 4D), as
well as intravascular ultrasound applications. Other applications for these materials include wireless pacemakers, implantable
hearing aids, and defense technologies.
With the CTG-AM acquisition, we gained technology and proprietary manufacturing methods that expand our offering of
piezoelectric materials. This allows us to become the leading large-scale commercial producer of both single crystal materials
and traditional piezoelectric ceramics.
The purchase price of $73,063, net of cash acquired of $4, has been allocated to the fair values of assets and liabilities acquired
as of March 11, 2016.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
Current assets
Property, plant and equipment
Other assets
Goodwill
Intangible assets
Fair value of assets acquired
Less fair value of liabilities acquired
Net cash paid
Fair Values at March
11, 2016
$
$
4,215
6,173
37
27,879
35,427
73,731
(668)
73,063
Goodwill recorded in connection with this acquisition represents the value we expect to be created by combining the operations
of the acquired business with our existing operations, including the expansion into markets within our existing business, access
to new customers, and potential cost savings and synergies. Goodwill related to this acquisition is expected to be deductible for
tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
Developed technology
Customer relationships and contracts
Other
Total
Carrying Value
Weighted Average
Amortization Period
(in years)
$
$
23,730
11,502
195
35,427
15.0
14.6
0.8
14.8
We incurred $804 in transaction related costs during the year ended December 31, 2016. These costs are included in selling,
general, and administrative costs in our Consolidated Statements of Earnings.
68 NOTE 19 — Geographic Data
Financial information relating to our operations by geographic area were as follows:
Net Sales
United States
Singapore
China
Canada
Czech Republic
Other non-U.S.
Years Ended December 31,
2017
2016
2015
$
287,092 $
276,033 $
238,796
5,596
66,510
—
34,476
29,319
6,668
59,506
—
34,767
19,705
8,379
55,825
24,519
36,348
18,443
Consolidated net sales
$
422,993 $
396,679 $
382,310
Sales are attributed to countries based upon the origin of the sale.
Long-Lived Assets
United States
China
United Kingdom
Taiwan
Czech Republic
Other non-U.S
Years Ended December 31,
2017
2016
$
45,354 $
32,464
590
3,540
5,518
781
42,488
33,013
569
2,755
2,634
652
Consolidated long-lived assets
$
88,247 $
82,111
69 NOTE 20 — Quarterly Financial Data
Quarterly Results of Operations
(Unaudited)
2017
Net sales
Gross margin
Operating earnings (loss)
Net earnings (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
2016
Net sales
Gross margin
Operating earnings
Net earnings
Basic earnings per share
Diluted earnings per share
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
$
$
$
$
100,154 $
105,686 $
106,243 $
34,224 $
12,196 $
8,484 $
0.26 $
0.25 $
96,705 $
33,468 $
12,433 $
7,863 $
0.24 $
0.24 $
35,794 $
13,208 $
9,966 $
0.30 $
0.30 $
98,693 $
34,457 $
24,097 $
14,487 $
0.44 $
0.44 $
37,538 $
13,111 $
9,619 $
0.29 $
0.29 $
99,697 $
36,641 $
12,490 $
3,720 $
0.11 $
0.11 $
110,910
32,875
(19)
(13,621)
(0.41)
(0.41)
101,584
35,861
14,146
8,310
0.25
0.25
70 CTS CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Year ended December 31, 2017
Allowance for doubtful accounts
Year ended December 31, 2016
Allowance for doubtful accounts
Year ended December 31, 2015
Allowance for doubtful accounts
Balance at
Beginning
of Period
Charged to
Expense
Charged
to Other
Accounts
(Write-offs) /
Recoveries
Balance
at End
of Period
$
$
$
170 $
248 $
133 $
100 $
44 $
33 $
9 $
— $
— $
(70) $
(7) $
— $
357
170
133
71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, management, under the direction of our Chief Executive Officer
and Chief Financial Officer, evaluated our disclosure controls and procedures as of the end of the period covered by this annual
report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of December 31, 2017.
The report from Grant Thornton LLP on its audit of the effectiveness of our internal control over financial reporting as of
December 31, 2017, is included in Part II, Item 8 of this Annual Report on Form 10-K under the heading "Report of Independent
Registered Public Accounting Firm" and is incorporated herein by reference. The Report of Management on Internal Control over
Financial Reporting, which can be found following the signature page of this Annual Report on Form 10-K, is incorporated herein
by reference.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended December 31, 2017 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
72 PART III
Item 10. Directors, Executive Officers and Corporate Governance
Please see Part I, Item 1 of this Annual Report on Form 10-K for information about our executive officers, which is incorporated
by reference herein. Information with respect to Directors and Corporate Governance may be found in our definitive proxy
statement to be delivered to shareholders in connection with our 2018 Annual Meeting of Shareholders. Such information is
incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection
with our 2018 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about shares of CTS common stock that could be issued under all of our equity
compensation plans as of December 31, 2017:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders(1)
Total
(a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options, RSUs,
Warrants
and Rights (2)
(b)
Weighted-Average
Grant Date Fair
Value of
Outstanding
Options, RSUs,
Warrants
and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
1,186,668 $
9,620
1,196,288 $
16.92
—
16.92
303,020
—
303,020
(1) In 1990, we adopted the Stock Retirement Plan for Non-Employee Directors. Prior to December 1, 2004, we annually credited an account for each non-
employee director with 800 CTS common stock units. We also annually credited each deferred stock account with an additional number of CTS common stock
units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the
preceding calendar year. As of December 1, 2004, this plan was amended to preclude crediting any additional CTS common stock units under the plan. Upon
retirement, a participating non-employee director is entitled to receive one share of CTS common stock for each CTS common stock unit in his deferred stock
account. On December 31, 2017, the deferred stock accounts contained a total of 9,620 CTS common stock units.
(2) Based on achievement of the maximum targets for performance-based equity grants.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection
with our 2018 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection
with our 2018 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection
with our 2018 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
73 PART IV
Item 15. Exhibits and Financial Statements Schedules
(a) (1) Financial Statements
The following Consolidated Financial Statements of CTS Corporation and Subsidiaries are included herein:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Statements of Earnings: Years ended December 31, 2017, December 31, 2016, and December 31, 2015
Consolidated Statements of Comprehensive Earnings: Years ended December 31, 2017, December 31, 2016, and December 31,
2015
Consolidated Balance Sheets: December 31, 2017, and December 31, 2016
Consolidated Statements of Cash Flows: Years ended December 31, 2017, December 31, 2016, and December 31, 2015
Consolidated Statements of Shareholders' Equity: Years Ended December 31, 2017, December 31, 2016, and December 31,
2015
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule:
Schedule II: Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are not applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(a) (3) Exhibits
All references to documents filed pursuant to the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, were
filed by CTS, File No. 1-4639.
(3)(i)
(3)(ii)
(10)(a)
(10)(b)
(10)(c)
(10)(d)
(10)(e)
(10)(f)
(10)(g)
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 5 to the
Current Report on Form 8-K, filed with the SEC on September 1, 1998).
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3 to the Form 8-K, filed
with the SEC on February 8, 2010).
CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990, as
amended (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the
quarter ended March 30, 2003, filed with the SEC on April 23, 2003).*
Amendment to the CTS Corporation Stock Retirement Plan for Non-Employee Directors, dated as of
December 1, 2004 (incorporated by reference to Exhibit (10)(j) to the Annual Report on Form 10-K for
the year ended December 31, 2004, filed with the SEC on March 4, 2005).
CTS Corporation 2004 Omnibus Long-term Incentive Plan and Incentive Stock Option Agreement
(incorporated by reference to the Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter
ended September 26, 2004, filed with the SEC on October 19, 2004).*
Credit Agreement Between CTS Corporation and BMO Harris Bank N.A. dated August 10, 2015
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 12, 2015).
Amendment to Credit Agreement between CTS Corporation and BMO Harris Bank N.A. (incorporated
by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 25, 2016).
Amendment No. 1 to the CTS Corporation 2004 Omnibus Long-term Incentive Plan (incorporated by
reference to Exhibit 10(aa) to the Annual Report on Form 10-K filed with the SEC on May 15, 2007.
Prototype Individual Excess Benefit Retirement Plan (incorporated by reference to Exhibit 10(d) to
the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on
October 24, 2007).*
(10)(h)
CTS Corporation 2009 Omnibus Equity and Performance Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on May 28, 2009).*
74 (10)(i)
(10)(j)
(10)(k)
(10)(l)
Form Restricted Stock Unit Agreement (Shares) (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K, filed with the SEC on May 28, 2009).*
Form Restricted Stock Unit Agreement (Cash) (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K, filed with the SEC on May 28, 2009).*
CTS Corporation Executive Severance Policy, effective as of September 10, 2009 (incorporated by
reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended September 27,
2009, filed with the SEC on October 28, 2009).*
Letter Agreement dated February 19, 2010 by and among CTS Corporation, Toyota Motor Sales,
U.S.A. Inc., Toyota Canada Inc. and Toyota Motor Engineering & Manufacturing North America, Inc.
(incorporated by reference to Exhibit 10(a) to the Quarterly Report on form 10-Q for the quarter ended
October 3, 2010, filed with the SEC October 27, 2010).
(10)(m)
Prototype Change in Control Agreement (incorporated by reference to Exhibit 10(x) to the Annual
Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24,
2012).*
(10)(n)
(10)(o)
(10)(p)
(10)(q)
(10)(r)
(10)(s)
(10)(t)
(10)(u)
(10)(v)
(21)
(23)
CTS Corporation Management Incentive Plan, approved by the shareholders on May 23, 2012
(incorporated by reference to Appendix A to the Proxy Statement for the 2012 Annual Meeting of
Shareholders, filed with the SEC on April 17, 2012).*
CTS Corporation 2013-2015 CEO Performance Restricted Stock Unit Plan dated February 8, 2013
(incorporated by reference to Exhibit 10(cc) to the Annual Report on Form 10-K for the year ended
December 31, 2012, filed with the SEC on February 25, 2013).*
First Amendment to the CTS Corporation Executive Severance Policy (incorporated by reference to
Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with
the SEC on April 25, 2013).*
CTS Corporation 2014 Performance and Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Form 8-K, filed with the SEC on May 22, 2014).*
Transition Agreement dated June 26, 2015, by and between CTS Corporation and Anthony Urban
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 1, 2015).
CTS Corporation Pension Plan Exhibit (Amended and Restated Effective As of July 1, 2015) as filed
herewith.
Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1,
2015) as of October 6, 2016, as filed herewith.
Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1,
2015) as of June 26, 2017, as filed herewith.
Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1,
2015) as of September 22, 2017, as filed herewith.
Subsidiaries.
Consent of Grant Thornton LLP.
(31)(a)
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31)(b)
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)(a)
(32)(b)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
75 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
______________________________
*
Management contract or compensatory plan or arrangement.
76 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.
SIGNATURES
Date: February 23, 2018
CTS Corporation
By:
/s/ Ashish Agrawal
Ashish Agrawal
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: February 23, 2018
By:
/s/ William Cahill
William Cahill
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 23, 2018
By:
/s/ Kieran O'Sullivan
Kieran O'Sullivan
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
Date: February 23, 2018
By:
/s/ Robert A. Profusek
Date: February 23, 2018
Date: February 23, 2018
Date: February 23, 2018
Date: February 23, 2018
Date: February 23, 2018
By:
By:
By:
By:
By:
Robert A. Profusek
Lead Director
/s/ Walter S. Catlow
Walter S. Catlow
Director
/s/ Patricia K. Collawn
Patricia K. Collawn
Director
/s/ Gordon Hunter
Gordon Hunter
Director
/s/ William S. Johnson
William S. Johnson
Director
/s/ Diana M. Murphy
Diana M. Murphy
Director
77 Management's Report on Internal Control Over Financial Reporting
CTS' management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including CTS' Chief
Executive Officer and Chief Financial Officer, CTS conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control—Integrated Framework (2013 framework) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2017, management determined
that its internal control over financial reporting was effective as of December 31, 2017. Grant Thornton LLP, an independent
registered public accounting firm, has audited CTS' internal control over financial reporting as of December 31, 2017, as stated
in their report which is included herein.
CTS Corporation
Lisle, IL
February 23, 2018
/s/ Kieran O'Sullivan
Kieran O'Sullivan
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ashish Agrawal
Ashish Agrawal
Vice President and Chief Financial Officer
(Principal Financial Officer)
78 CTS Corporation
Form 10-K 2017
CTS CORPORATION AND SUBSIDIARIES
As of December 31, 2017
CTS Corporation (Registrant), an Indiana corporation
Exhibit (21)
Subsidiary:
CTS Corporation
CTS Automotive Holdings, L.L.C.
CTS Advanced Materials, L.L.C.
CTS Electronics Components, Inc.
LTB Investment Corporation
Filter Sensing Technologies, Inc.
Tusonix, Inc.
CTS Electronic Components (California), Inc.
CTS Printex, Inc.
CTS Automotive, L.L.C.
CTS Automotive Holdings 2, L.L.C.
CTS SRL-CV Holdings 1, L.L.C.
CTS Valpey Corporation
Dynamics Corporation of America
CTS Czech Republic S.R.O.
CTS Europe GmbH
CTS Electronics Hong Kong Ltd.
CTS India Private Limited
CTS Japan, Inc.
CTS Electro de Mexico, S. DE R.L. DE C.V.
CTS International B.V.
CTS Overseas Holdings, B.V.
CTS (Tianjin) Electronics Company Ltd.
CTS (Zhongshan) Technology Co. Ltd.
CTS of Canada Co.
CTS of Canada Holding Company
CTS of Canada G.P., Ltd.
CTS of Canada L.P.
CTS Components Taiwan, Ltd.
CTS Electro de Matamoros, S.A
Technologia Mexicana S.A. de C.V.
CTS of Panama, S de R.L.
CTS Singapore Pte., Ltd.
CTS Corporation U.K., Ltd.
CTS Electronic Components Ltd. in Liquidation
Noliac A/S
Noliac Ceramics s.r.o.
Noliac Systems s.r.o.
Noliac North America, Inc.
Jurisdiction
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Arizona
California
California
Illinois
Illinois
Illinois
Maryland
New York
Czech Republic
Germany
Hong Kong Special Administrative Region of the
People's Republic of China
India
Japan
Republic of Mexico
The Netherlands
The Netherlands
Peoples' Republic of China
People's Republic of China
Province of Nova Scotia (Canada)
Province of Nova Scotia (Canada)
Province of Ontario (Canada)
Province of Ontario (Canada)
Republic of China
Republic of Mexico
Republic of Mexico
Republic of Panama
Republic of Singapore
Scotland
Switzerland
Denmark
Czech Republic
Czech Republic
Georgia
Exhibit (21)
Exhibit (23)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 23, 2018, with respect to the consolidated financial statements, schedule, and
internal control over financial reporting included in the Annual Report of CTS Corporation and subsidiaries on Form 10-K for
the year ended December 31, 2017. We consent to the incorporation by reference of said reports in the Registration Statements
of CTS Corporation on Forms S-8 (File No. 333-198235, File No. 333-159542, File No. 333-116287, File No. 333-106614, and
File No. 333-62202).
/s/ GRANT THORNTON LLP
Chicago, Illinois
February 23, 2018
EXHIBIT (23)
CERTIFICATION
EXHIBIT (31)(a)
I, Kieran O'Sullivan, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of CTS Corporation:
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared; and
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statement for external purposes in accordance with
generally accepted accounting principles; and
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 23, 2018
/s/ Kieran O'Sullivan
Kieran O'Sullivan
Chairman, President and Chief Executive Officer
EXHIBIT (31)(a)
EXHIBIT (31)(b)
I, Ashish Agrawal, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of CTS Corporation:
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared; and
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statement for external purposes in accordance with
generally accepted accounting principles; and
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 23, 2018
/s/ Ashish Agrawal
Ashish Agrawal
Vice President and Chief Financial Officer
EXHIBIT (31)(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT (32)(a)
In connection with the annual report of CTS Corporation (the Company) on Form 10-K for the year ended December 31, 2017,
as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company
certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 23, 2018
/s/ Kieran O'Sullivan
Kieran O'Sullivan
Chairman, President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained
by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT (32)(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT (32)(b)
In connection with the annual report of CTS Corporation (the Company) on Form 10-K for the year ended December 31, 2017,
as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company
certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 23, 2018
/s/ Ashish Agrawal
Ashish Agrawal
Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained
by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT (32)(b)
Transfer Agent and Registrar
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
800-468-9716
Common Stock Listed (CTS)
New York Stock Exchange
CTS submitted a Section 12 (a) CEO
Certification to the New York Stock
Exchange Corporate Governance
Listing Standards. CTS filed the CEO/
CFO certifications required under
Section 302 of the Sarbanes-Oxley
Act as an exhibit to its Annual Report
on Form 10-K for the year ended
December 31, 2017.
Shareholder Information
Annual Meeting of
Shareholders
The 2018 annual meeting of
shareholders is scheduled to be
held on Thursday, May 17, 2018,
in Naperville, Illinois. Shareholders
of record at the close of business
on March 19, 2018 will receive
a formal notice of the annual
meeting and a proxy statement.
Form 10-K Annual Report
A copy of CTS Corporation’s
Annual Report on Form 10-K filed
with the Securities and Exchange
Commission is available to
shareholders upon written request
to the Corporate Secretary of the
Company, or by visiting our website:
www.ctscorp.com.
Manufacturing Facilities
Albuquerque, New Mexico
Juarez, Mexico
Nogales, Mexico
Bolingbrook, Illinois
Elkhart, Indiana
Kaohsiung, Taiwan
Ostrava, Czech Republic
Kvistgård, Denmark
Prague, Czech Republic
Hopkinton, Massachusetts
Manesar, Haryana, India
Tianjin, China
Hradec Králové, Czech Republic
Matamoros, Mexico
Zhongshan, China
From left to right: William S. Johnson, Gordon Hunter, Diana M. Murphy, Kieran M. O’Sullivan, Robert A. Profusek, Patricia K. Collawn, Walter S. Catlow
2017 Board of Directors
Kieran M. O’Sullivan
Chairman, President and
Chief Executive Officer,
CTS Corporation
Robert A. Profusek
Lead Director and Partner,
Jones Day
Walter S. Catlow
Retired President, Ameritech
Cellular Services and Retired
Dean, College of Business,
Concordia University, Chicago
Patricia K. Collawn
Chairman, President and
Chief Executive Officer, PNM
Resources, Inc.
William S. Johnson
Senior Advisor and Former
Executive Vice President and
Chief Financial Officer of Cabot
Microelectronics Corporation
Diana M. Murphy
Managing Director,
Rocksolid Holdings, LLC.
Corporate Officers
Kieran M. O’Sullivan
Chairman, President and Chief
Executive Officer
Ashish Agrawal
Vice President and Chief
Financial Officer
Gordon Hunter
Chairman of the Board
of Littelfuse, Inc.
Luis F. Machado
Vice President, General
Counsel and Secretary
2017 Committees of the Board
Audit Committee
William S. Johnson (Chairperson)
Walter S. Catlow
Gordon Hunter
Compensation Committee
Patricia K. Collawn (Chairperson)
Walter S. Catlow
Gordon Hunter
Diana M. Murphy
Nominating and Governance
Committee
Diana M. Murphy (Chairperson)
Patricia K. Collawn
William S. Johnson
Technology and Transactions
Committee
Gordon Hunter (Chairperson)
Walter S. Catlow
Kieran M. O’Sullivan
Robert A. Profusek
www.ctscorp.com