CTS US Equity☆

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Overview

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

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

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

Impact of COVID-19

The COVID-19 pandemic has resulted in a significant disruption to the global economy that has and is likely to have continued adverse impact on our business. We have experienced reductions in customer demand in several of our end markets. We expect that social distancing measures, higher employee absenteeism, and reductions in production due to mandated labor capacity restrictions at some of our plants in Asia, Europe, and North America, as well as the reduced operational capacity of our customers and suppliers, could continue to impact our business into 2021. As a result of these economic headwinds, we implemented cost savings measures throughout 2020, some of which were temporary in nature. We continue to evaluate market conditions and the impact on our operations to determine the extent and duration of any future cost measures. The pandemic could lead to additional extended disruptions of economic activity and the impact on our consolidated results of operations, financial position and cash flows could be material. We remain cautious about the financial impact into 2021.

Results of Operations: Year Ended December 31, 2020 versus Year Ended December 31, 2019

(Amounts in thousands, except percentages and per share amounts):

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The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years ended December 31, 2020, and December 31, 2019:

Years Ended December 31, Percent of Net Sales

Gain on sale of assets — (63) — — —

Diluted earnings per share:

Diluted net earnings per share $ 1.06 $ 1.09

Net sales were $424,066 for the year ended December 31, 2020, a decrease of $44,933, or 9.6% from 2019. Net sales for 2020 were adversely impacted by lower volumes as a result of the COVID-19 pandemic and government activities to control its spread. Specifically, mandated or selective plant closures due to the pandemic and related government activities drove weak demand in some end markets. In addition, the activities had a significant impact on our supply chain. We remain cautious about possible future disruptions on our supply chain, operations, and future demand.

Net sales to transportation markets decreased $57,559 or 19.3%. Net sales to other markets increased $12,626 or 7.4%. The QTI acquisition, which was completed in July 2019, added sales of $24,508 in 2020 compared to $9,252 in 2019. Changes in foreign exchange rates increased net sales by $1,706 year-over-year primarily due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of sales was 32.8% in 2020 versus 33.6% in 2019. The decrease in gross margin was driven primarily by lower sales volumes, which was partially offset by various cost reduction measures.

Selling, general and administrative ("SG&A") expenses were $67,787, or 16.0% of sales for the year ended December 31, 2020, versus $70,408 or 15.0% of sales in the comparable period of 2019. The 2020 SG&A costs include savings from cost reduction measures we implemented during the year, partially offset by a full year of amortization of intangibles and other operating costs associated with the QTI acquisition.

Research and development expenses were $24,317 or 5.7% of sales in 2020 compared to $25,967 or 5.5% of sales in 2019.

Restructuring charges were $1,830 for year ended December 31, 2020 and were primarily as a result of certain initiatives initiated in the third quarter of 2020. The restructuring actions are focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities. Restructuring charges were $7,448 in 2019.

Operating earnings were $45,129, or 10.6% of sales in 2020, compared to $53,815, or 11.5% of sales in 2019 as a result of the items discussed above.

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

Years Ended December 31,

Total other income (expense), net $ 350 $ (3,549)

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Interest expense increased mainly due to a higher average debt balance during 2020 related to the QTI acquisition and additional borrowings at the end of the first quarter to ensure adequate liquidity for the next several quarters in light of COVID-19 concerns. Interest income declined as a result of lower interest rates on foreign cash balances. The Other income, net for the twelve months ended December 31, 2020 was principally driven by foreign currency translation gains, mainly due to the depreciation of the U.S. Dollar compared to the Chinese Renminbi and Euro, which were partially offset by pension expense.

Years Ended December 31,

The effective income tax rate in 2020 was 23.7% compared to 28.1% in the prior year. This decrease is primarily attributed to the change in the mix of earnings by jurisdiction, decreases in uncertain tax position and offset by the company's decision to no longer reinvest the earnings of its Taiwan subsidiary. The tax rate in 2020 was higher than the U.S. statutory federal tax rate primarily due to foreign earnings that are taxed at higher rates and unfavorable impacts to reserves. The tax rate in 2019 was higher than the U.S. statutory federal tax rate primarily due to foreign earnings that are taxed at higher rates, the impact of taxes on unremitted earnings and unfavorable increases to reserves.

Net earnings were $34,686 or $1.06 per diluted share for the year ended December 31, 2020 compared to earnings of $36,146 or $1.09 per diluted share in the comparable period of 2019.

Liquidity and Capital Resources

Cash and cash equivalents were $91,773 at December 31, 2020, and $100,241 at December 31, 2019, of which $90,051 and $98,309 respectively, were held outside the United States. The decrease in cash and cash equivalents of $8,468 was primarily driven by net payments of long-term debt of $45,100, capital expenditures of $14,858, payments for the SSI acquisition of $8,309, treasury stock purchases of $8,080, and dividends paid of $5,179, which were partially offset by cash generated from operating activities of $76,783. Total debt as of December 31, 2020, and December 31, 2019, was $54,600 and $99,700, respectively. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders’ equity, was 11.4% at December 31, 2020, compared to 19.7% at December 31, 2019.

Working capital decreased by $12,231 from December 31, 2019, to December 31, 2020, driven mainly by the decrease in cash and cash equivalents related to the items noted above.

Cash Flows from Operating Activities

Net cash provided by operating activities was $76,783 during the year ended December 31, 2020. Components of net cash provided by operating activities included net earnings of $34,686, depreciation and amortization expense of $26,670, stock-based compensation of $3,417, other net non-cash items totaling $930, and a net cash inflow from changes in assets and liabilities of $10,064.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2020 was $23,167, driven by capital expenditures of $14,858 and the payment for the Sensor Scientific, Inc. (“SSI”) acquisition of $8,309. See Note 3 "Business Acquisitions" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2020, was $61,333. The net cash outflow was the result of net payments of long-term debt of $45,100, treasury stock purchases of $8,080, dividend payments of $5,179, taxes paid on behalf of equity award participants of $1,917, and a contingent consideration payment of $1,057.

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Capital Resources

Long-term debt was comprised of the following:

As of December 31,

Standby letters of credit $ 1,740 $ 1,800

Amount available, subject to covenant restrictions $ 243,660 $ 198,500

Weighted-average interest rate 1.92% 3.25%

Commitment fee percentage per annum 0.23% 0.23%

On February 12, 2019, we entered into an amended and restated five-year Credit Agreement with a group of banks (the "Credit Agreement") to extend the term of the facility. The Credit Agreement provides for a revolving credit facility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval. This new unsecured credit facility replaces the prior $300,000 unsecured credit facility, which would have expired August 10, 2020. Borrowings of $50,000 under the prior credit agreement were refinanced into the Credit Agreement. The prior agreement was terminated as of February 12, 2019.

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

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

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility. We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, 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 when the transfer of promised goods to a customer occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation.

Product Warranties

Provisions for estimated warranty expenses primarily related to our automotive products are made at the time products are sold. These estimates are established either using a quoted industry rate or based on customer specific circumstances. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have ranged from 0.5% to 2.4% of total sales. We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.

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

Inventories

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

Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 13.9% 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.

In February 2020, the CTS Board of Directors authorized management to explore termination of our U.S. Pension Plan (“Plan”) at management's discretion, subject to certain conditions. On June 1, 2020, we amended the Plan whereby we set an effective termination date of July 31, 2020. In February 2021, we received the determination letter from the Internal Revenue Service that allows us to proceed with the termination process. The completion of the Plan termination process, including offering lump sum settlements and the final purchases of annuities, is expected to occur in 2021. Since the amount of the settlement depends on a number of factors determined as of the liquidation date, including lump sum payout estimates, the annuity pricing interest rate environment and asset experience, we are currently unable to determine the ultimate cost of the settlement. However, we expect non-cash settlement charges of approximately $10,000 to $20,000 to be recognized in the second or third quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized by the end of 2021. We do not expect any cash contributions from the Company to the Plan as a result of this termination because plan assets significantly exceed estimated liabilities.

Impairment of Goodwill

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

• Significant decline in market capitalization relative to net book value,

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

• Unanticipated competition,

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

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

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

If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

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

We typically perform a quantitative assessment at least every three years, or as conditions require. Our previous quantitative test was in 2017, therefore, we performed the current year assessment using a quantitative approach. Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2020.We will monitor future results and will perform a test if indicators trigger an impairment review.

Impairment of Other Intangible and Long-Lived Assets

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

• Significant decline in market capitalization relative to net book value,

• Significant underperformance relative to expected historical or projected future operating results,

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

• Significant negative industry or economic trends.

If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. We recorded a charge of $1,016 during the first quarter due to the impairment of a specific asset group. In addition, we recorded a charge of $2,200 during the third quarter of 2020 due to the impairment of a specific asset group as a result of the restructuring actions being taken. No other indicators of impairment were identified during the year ended December 31, 2020.

Environmental and Legal Contingencies

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

Income Taxes

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

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

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

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

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

Contractual Obligations

Our contractual obligations as of December 31, 2020, were:

Payments due by period

We have no off-balance sheet arrangements 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.

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 $54,600 and $99,700 outstanding under our revolving credit facility at December 31, 2020, and 2019, respectively. As of December 31, 2020, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through February 2024.

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, 2020, we had foreign currency forward contracts outstanding with a notional value of $14,958 to hedge our exposure against the Mexican Peso.

Commodity Price Risk

Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or are available from only a limited number of suppliers. Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price increases for

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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.

Public Health Risk

The COVID-19 outbreak is adversely affecting our business. We and some of our suppliers and customers have facilities that were required to remain closed for a period of time, and when permitted to reopen, employees have been limited in their ability to return to work due to governmental restrictions. The consequences of the outbreak, and the actions taken to limit its spread, have adversely affected our sales and results of operations in 2020 and could impact our results in 2021, and possibly longer if coronavirus consequences continue.

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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, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021 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.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill impairment assessment

The Company’s consolidated goodwill balance was $109.5 million as of December 31, 2020. As described in Note 1 and Note 8 to the consolidated financial statements, the Company evaluates goodwill for impairment at the reporting unit level annually and performed a quantitative impairment assessment as of October 1, 2020 for each of its three reporting units. The quantitative impairment assessment involves the comparison of the fair value of a reporting unit to its carrying amount. The Company determines the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies, which requires significant management judgment. We have identified the quantitative goodwill impairment assessment as a critical audit matter.

The principal consideration for our determination that the quantitative impairment assessment is a critical matter was the significant auditor judgment required to evaluate the reporting units’ forecasted revenues, forecasted cash flows over a multi-year period, discount rates, and estimated valuation multiples.

Our audit procedures related to the critical audit matter included the following, among others:

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Specialists were involved in evaluating the valuation methodology and significant assumptions such as discount rates and estimated valuation multiples.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

Chicago, Illinois

February 25, 2021

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CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings

(in thousands, except per share amounts)

Years Ended December 31,

Gain on sale of assets — (63) —

Other (expense) income:

Net earnings per share:

Cash dividends declared per share $ 0.16 $ 0.16 $ 0.16

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

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CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Earnings

(in thousands)

Years Ended December 31,

Other comprehensive (loss) earnings:

Changes in fair market value of derivatives, net of tax (1,307) (509) 795

Changes in unrealized pension cost, net of tax (2,965) 6,439 (1,830)

Cumulative translation adjustment, net of tax 77 83 (311)

Other comprehensive (loss) earnings $ (4,195) $ 6,013 $ (1,346)

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

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CTS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

December 31,

ASSETS

Current Assets

Other assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accrued expenses and other liabilities 38,171 36,378

Long-term operating lease obligations 23,163 24,926

Long-term pension obligations 7,466 6,632

Commitments and Contingencies (Note 11)

Shareholders' Equity

Accumulated other comprehensive loss (95,921) (91,726)

Total shareholders' equity before treasury stock 796,204 769,661

Total Liabilities and Shareholders' Equity $ 626,049 $ 643,354

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

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CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Pensions and other post-retirement plan expense 2,698 1,009 422

Asset impairment charges 1,016 — —

Restructuring non-cash charges 300 1,704 —

Gain on sales of fixed assets — (63) —

(Gain) loss on foreign current hedges, net of tax (20) 97 (82)

Changes in assets and liabilities, net of acquisitions:

Operating lease liabilities (1,257) 2,921 —

Pension and other post-retirement plans (256) (287) (382)

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sale of assets — 137 3

Payments for acquisitions, net of cash acquired (8,309) (73,906) —

CASH FLOWS FROM FINANCING ACTVITIES:

Taxes paid on behalf of equity award participants (1,917) (2,657) (1,468)

Contingent consideration payment (1,057) — —

Net cash (used in) provided by financing activities (61,333) 30,059 (42,493)

Effect of exchange rate on cash and cash equivalents (751) 346 187

Net decrease in cash and cash equivalents (8,468) (692) (12,639)

Supplemental cash flow information:

Non-cash financing and investing activities:

Capital expenditures incurred not paid $ 729 $ 4,077 $ 4,312

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

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CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(in thousands)

Changes in fair market value of derivatives, net of tax — — — 795 — 795

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

Cumulative translation adjustment, net of tax — — — (311) — (311)

Cash dividends of $0.16 per share — — (5,278) — — (5,278)

Issued shares on vesting of restricted stock units 1,920 (3,389) — — — (1,469)

Changes in fair market value of derivatives, net of tax — — — (509) — (509)

Changes in unrealized pension cost, net of tax — — — 6,439 — 6,439

Cumulative translation adjustment, net of tax — — — 83 — 83

Cash dividends of $0.16 per share — — (5,227) — — (5,227)

Issued shares on vesting of restricted stock units 1,235 (3,891) — — — (2,656)

Changes in fair market value of derivatives, net of tax — — — (1,307) — (1,307)

Changes in unrealized pension cost, net of tax — — — (2,965) — (2,965)

Cumulative translation adjustment, net of tax — — — 77 — 77

Cash dividends of $0.16 per share — — (5,171) — — (5,171)

Issued shares on vesting of restricted stock units 3,258 (5,175) — — — (1,917)

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

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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, connectivity components, and actuators operating as a single reportable business segment. We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.

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.

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 Credit Losses: Accounts receivable consists primarily of amounts due from normal business activities. We maintain an allowance for credit losses for estimated uncollectible accounts receivable. Our reserves for estimated credit losses are based upon historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cashflows over the contractual terms of our receivables and other financial assets. Accounts are written off against the allowance account when they are determined to no longer be collectible.

Concentration of Credit Risk: Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade receivables. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash and cash equivalents.

Trade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets, primarily in North America, Europe, and Asia. We perform ongoing credit evaluations of our customers to minimize credit risk. We do not require collateral. The allowance for credit losses is based on management's estimates of the collectability of its accounts receivable after analyzing historical credit losses, customer concentrations, customer creditworthiness, current economic trends, specific customer collection issues, and reasonable and supportable forecasts that affect the collectability of the remaining cashflows over the contractual terms of our receivables. Uncollectible trade receivables are charged against the allowance for credit losses 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:

Years Ended December 31,

We sell parts to these three transportation customers for certain vehicle platforms under purchase agreements that have no volume commitments and are subject to purchase orders issued on a periodic basis.

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.

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 projected 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

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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.

During 2020, the Company commenced the termination process on our primary U.S. Pension Plan (“U.S. Plan”) and expects to offer employees a lump sum settlement and then complete the transfer of any remaining U.S. Plan assets to a third-party administrator, which the Company expects to complete by the end of 2021. See Note 7, "Retirement Plans" for further information.

Property, Plant and Equipment: Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation 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 from 3 to 15 years, and software from 2 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. Major overhauls that extend the useful lives of existing assets are capitalized. 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.

We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 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 Earnings. Accrued interest and penalties are included in the related tax liability line in the Consolidated Balance Sheets.

See Note 19, "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. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is not amortized, but instead is tested for impairment annually or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of its fourth fiscal quarter of each year.

We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances, we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

We typically perform a quantitative assessment at least every three years, or as conditions require. Our previous quantitative test was in 2017, therefore, we performed the current year assessment using a quantitative approach. Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2020.

In addition to goodwill, 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. In the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we identified a triggering event associated with a specific asset group including IPR&D due to executed restructuring actions. This resulted in the

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recognition of $2,200 of impairment charges, and a revaluation of associated contingent liabilities totaling $1,900. The net impact of $300 was recorded as restructuring charges in the Consolidated Statements of Earnings.

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, Property, Plant, and Equipment. 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. We recorded a charge of $1,016 during the first quarter due to the impairment of a specific asset group that was recorded in selling, general and administrative expenses in the Consolidated Statements of Earnings.

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

Research and Development: Research and development ("R&D") costs include expenditures for 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.

We occasionally enter into agreements with our customers whereby we receive a contractual guarantee based on achieving milestones to be reimbursed the costs we incur in the product development process or to construct molds, dies, and other tools that are used to make many of the products we sell. The costs we incur are included in other current assets on the Consolidated Balance Sheets until reimbursement is received from the customer. 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. The following is a summary of amounts to be received from customers as of December 31, 2020, and 2019:

As of December 31,

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.

We estimate the fair value of our financial instruments as follows:

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Instrument Method for determining fair value

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, performance share units ("PSU's"), 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. Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest. The amount of compensation expense recognized for PSUs is dependent upon a quarterly assessment of the likelihood of achieving the performance conditions and is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria. Forfeitures are recorded as they occur.

See Note 17, "Stock-Based Compensation" for further information.

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 is calculated by dividing net earnings by the weighted average shares outstanding assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock units were settled for common shares during the period. In addition, dilutive shares include any shares issuable related to performance share units for which the performance conditions would have been met as of the end of the period and therefore would be considered contingently issuable. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share.

Our antidilutive securities consist of the following:

Years Ended December 31,

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.

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Foreign currency gains (losses) recorded in the Consolidated Statement of Earnings includes the following:

Years Ended December 31,

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. Our 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 are classified as a component of net sales. All costs associated with shipping and handling are classified as a component of cost of goods sold or operating expenses, depending on the nature of the underlying purchase.

Sales Taxes: When applicable, we classify sales taxes on a net basis in our consolidated financial statements.

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

Accounting Pronouncements Recently Adopted

ASU No. 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General"

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General." This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. We have applied the requirements of this ASU to the financial statements.

ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement"

In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement". This ASU modified the disclosures related to recurring and nonrecurring fair value measurements. Disclosures related to the transfer of assets between Level 1 and Level 2 hierarchies have been eliminated and various additional disclosures related to Level 3 fair value measurements have been added, modified or removed. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted upon issuance of the standard for disclosures modified or removed with a delay of adoption of the additional disclosures until their effective date. We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

ASU No. 2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory". This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, 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 basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, loans, and other financial

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instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The standard will become effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

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

ASU No. 2019-12 "Simplifying the Accounting for Income Taxes"

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our financial statements or results.

NOTE 2 – Revenue Recognition

The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:

• Identify the contract(s) with a customer

• Identify the performance obligations

• Determine the transaction price

• Allocate the transaction price

• Recognize revenue when the performance obligations are met

We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of December 31, 2020 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

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

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Disaggregated Revenue

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

Twelve Months Ended December 31,

NOTE 3 - Business Acquisitions

Sensor Scientific, Inc.

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

The purchase price, which includes assumed changes in working capital, of $10,309 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020. The allocation of purchase price is preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates. The final purchase price allocation may result in a materially different allocation than that recorded as of December 31, 2020.

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

Consideration Paid

Cash paid, net of cash acquired of $470 $ 8,309

Contingent consideration 2,000

Fair Values at December 30, 2020

Current assets $ 2,618

Property, plant and equipment 129

Other assets 12

Intangible assets 5,161

Fair value of assets acquired 11,361

Less fair value of liabilities acquired (1,052)

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

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022. The Company recorded $2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the probability of achieving the performance targets. This represents the maximum amount of contingent consideration payable. This amount is also reflected as an addition to purchase price and will be evaluated quarterly. The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value

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estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.

Intangible assets acquired have been assigned a provisional value of $5,161 and an estimated weighted average amortization period of 10 years. They are included as customer lists/relationships in our Consolidated Balance Sheets. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used historical experience and projections to estimate the potential value at December 31, 2020. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

No revenues or earnings from SSI are included in our Consolidated Statements of Earnings.

Quality Thermistor, Inc.

On July 31, 2019, we acquired 100% of the outstanding shares of Quality Thermistor, Inc. (QTI) for $75 million plus a contingent earn out of up to $5 million based on sales performance objectives. The purchase price includes adjustments for debt assumed and changes in working capital. QTI, doing business as QTI Sensing Solutions, is a leading designer and manufacturer of high-quality temperature sensors serving original equipment manufacturers with mission-critical applications in the industrial, aerospace, defense and medical markets. This acquisition provides us with a new core temperature sensing technology that expands our sensing product portfolio, while increasing our presence in the industrial and medical markets.

The final purchase price of $73,906 has been allocated to the fair values of assets and liabilities acquired as of July 31, 2019.

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

Consideration Paid

Cash paid, net of cash acquired of $567 $ 72,850

Contingent consideration 1,056

Current assets $ 6,221

Property, plant and equipment 2,567

Other assets 29

Fair value of assets acquired 76,616

Less fair value of liabilities acquired (2,710)

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

The contingent earn-out was payable in cash upon the achievement of a revenue performance target for the year ending December 31, 2019. The Company recorded contingent consideration for the earn out of $1,056 as of December 31, 2019 based on the achievement performance target for the full year 2019 results and the balance was paid out in Q1 2020. This amount was reflected as an addition to purchase price and was settled in Q1 2021.

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

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Carrying Value Weighted Average Amortization Period

Customer lists/relationships $ 31,000 15.0

Trademarks, tradenames, and other intangibles 1,800 5.0

Results of operations for QTI are included in our consolidated financial statements beginning on July 31, 2019. The amount of net sales and net loss from QTI since the acquisition date that have been included in the Consolidated Statements of Earnings are as follows:

Net loss $ (465)

NOTE 4 — Accounts Receivable, net

The components of accounts receivable, net are as follows:

As of December 31,

Less: Allowance for credit losses (764) (261)

NOTE 5 — Inventories, net

Inventories, net consist of the following:

As of December 31,

NOTE 6 — Property, Plant and Equipment, net

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

As of December 31,

Land and land improvements $ 1,095 $ 1,095

Depreciation expense recorded in the Consolidated Statements of Earnings includes the following:

For the Years Ended

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NOTE 7 — Retirement Plans

We have a number of noncontributory defined benefit pension plans ("pension plans") covering approximately 2% 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. All benefits for the U.S. based pension plan were frozen in 2017 and 2013 for union and non-union employees, respectively.

We also provide post-retirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain former 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 earnings, 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, 2020, and 2019.

In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S. Pension Plan (“Plan”) at management's discretion, subject to certain conditions. On June 1, 2020, we amended the Plan whereby we set an effective termination date of July 31, 2020. In February 2021, we received the determination letter from the Internal Revenue Service that allows us to proceed with the termination process. The completion of the Plan termination process, including offering lump sum settlements and the final purchases of annuities, is expected to occur in 2021. We do not expect any cash contributions from the Company to the Plan as a result of this termination because plan assets significantly exceed estimated liabilities.

In connection with the decision to terminate the Plan, we remeasured the projected benefit obligation in the fourth quarter of 2020 based on the expected Plan termination costs. Upon settlement of the pension liability, we will reclassify the related pension losses, currently recorded to accumulated other comprehensive loss, to the consolidated statements of earnings. As of December 31, 2020, we had gross unrecognized losses related to the Plan of $125,005 in accumulated other comprehensive loss that are expected to be recognized in the income statement in 2021. Since the amount of the settlement depends on a number of factors determined as of the liquidation date, including lump sum payout estimates, the annuity pricing interest rate environment and asset experience, we are currently unable to determine the ultimate cost of the settlement. However, we estimate that non-cash settlement charges of approximately $10,000 to $20,000 to be recognized in the second or third quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized by the end of 2021.

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. In connection with the Plan termination process, we remeasured the projected benefit obligation based on the expected Plan termination costs including estimates for the anticipated amount of lump sum payments as well as estimates for insurance company pricing on the portion of the obligation not distributed through lump sum payments. These changes as well as a reduction in the discount rate used to determine the benefit obligation were the primary drivers in the increase to the obligation.

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U.S. Pension Plans Non-U.S. Pension Plans

Change in projected benefit obligation:

Service cost — — 31 37

Foreign exchange impact — — 184 64

Change in plan assets:

Foreign exchange impact — — 98 34

The measurement dates for the post-retirement life insurance plan were December 31, 2020, and 2019. 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.

Post-Retirement Life Insurance Plan

Accumulated benefit obligation $ 5,376 $ 4,766

Change in projected benefit obligation:

Projected benefit obligation at January 1 $ 4,766 $ 4,595

Service cost 1 1

Projected benefit obligation at December 31 $ 5,376 $ 4,766

Change in plan assets:

Assets at fair value at January 1 $ — $ —

Actual return on assets — —

Other — —

Assets at fair value at December 31 $ — $ —

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:

U.S. Pension Plans Non-U.S. Pension Plans

Accrued expenses and other liabilities (100) (100) — —

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:

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Post-Retirement Life Insurance Plan

Accrued expenses and other liabilities $ (451) $ (393)

Long-term pension obligations (4,924) (4,373)

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:

U.S. Pension Plans Non-U.S. Pension Plans

Unrecognized Loss Unrecognized Loss

Amortization of retirement benefits, net of tax (4,060) (138)

Net actuarial (loss) gain (2,604) 78

Foreign exchange impact — 44

Amortization of retirement benefits, net of tax (4,995) (146)

Net actuarial gain (loss) 7,402 14

Foreign exchange impact — 133

We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax:

Unrecognized Gain

Amortization of retirement benefits, net of tax 129

Net actuarial gain 112

Amortization of retirement benefits, net of tax 64

Net actuarial gain 493

The accumulated actuarial gains and losses included in other comprehensive earnings 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 16 years at December 31, 2020), 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, 2020). 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 2021, we expect to recognize approximately $125,214 of pre-tax losses included in accumulated other comprehensive loss related to our pension plans and post-retirement life insurance plan. This includes approximately $125,005 in pre-tax non-cash settlement charges expected from the U.S. Plan termination. The pre-tax non-cash settlement charge is an estimate and could be in the range of $110,000 and $135,000 based on changes in market conditions.

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:

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As of December 31,

Projected benefit obligation $ 3,859 $ 3,778

Accumulated benefit obligation $ 3,155 $ 2,999

Fair value of plan assets $ 1,595 $ 1,419

Net pension expense (income) includes the following components:

Years Ended December 31, Years Ended December 31,

U.S. Pension Plans Non-U.S. Pension Plans

Service cost $ — $ — $ — $ 31 $ 37 $ 43

Weighted-average actuarial assumptions(2)

Benefit obligation assumptions:

Rate of compensation increase N/A N/A N/A 3.00% 3.00% 3.00%

Pension income/expense assumptions:

Rate of compensation increase N/A N/A N/A 3.00% 3.00% 2.00%

Net post-retirement expense includes the following components:

Post-Retirement Life Insurance Plan

Years Ended December 31,

Service cost $ 1 $ 1 $ 2

Amortization of unrecognized gain (84) (166) (46)

Weighted-average actuarial assumptions(1)

Benefit obligation assumptions:

Rate of compensation increase N/A N/A N/A

Pension income/post-retirement expense assumptions:

Rate of compensation increase N/A N/A N/A

Our pension plan asset allocation at December 31, 2020, and 2019, and target allocation for 2021 by asset category are as follows:

Target Allocations Percentage of Plan Assets at December 31,

Equity securities 0% 13% 13%

Fixed income/Debt securities 100% 83% 83%

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Historically, we employed 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 contained 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.

As part of the planned termination of the U.S. pension plan, a new investment allocation strategy was put in place to protect the funded status of the U.S. plan assets subsequent to Board approval of U.S. pension plan termination. The target allocation for U.S. plan assets for 2021 is 100% fixed income investments including cash and cash equivalents.

The following table summarizes the fair values of our pension plan assets:

As of December 31,

Equity securities - U.S. holdings(1) $ 7 $ 24,586

The fair values at December 31, 2020, are classified within the following categories in the fair value hierarchy:

Equity securities - U.S. holdings(1) $ 7 $ — $ — $ — $ 7

The fair values at December 31, 2019, are classified within the following categories in the fair value hierarchy:

Equity securities - U.S. holdings(1) $ 24,586 $ — $ — $ — $ 24,586

Cash and cash equivalents(2) 5,700 — — — 5,700

(2) Comprised of investment grade short-term investment and money-market funds.

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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:

The table below reconciles the Level 3 partnership assets within the fair value hierarchy:

Amount

Fair value of Level 3 partnership assets at January 1, 2019 $ 9,172

Capital contributions 120

Realized and unrealized gain (139)

Capital distributions (1,614)

Fair value of Level 3 partnership assets at December 31, 2019 $ 7,539

Capital contributions 44

Realized and unrealized gain (269)

Capital distributions (522)

Fair value of Level 3 partnership assets at December 31, 2020 $ 6,792

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 $551 of contributions to the U.S. plans and $253 of contributions to the non-U.S. plans during 2021.

Expected benefit payments under the defined benefit pension plans and the postretirement benefit plan, excluding the impact of the Plan termination process, for the next five years subsequent to 2020 and in the aggregate for the following five years are as follows:

U.S. Pension Plans Non-U.S. Pension Plans Post- Retirement Life Insurance Plan

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Defined Contribution Plans

We sponsor a 401(k) plan that covers substantially all of our U.S. employees as well as offer similar defined contribution plans at certain foreign locations. Contributions and costs are generally determined as a percentage of the covered employee's annual salary. We ceased matching employee contributions in Q2 2020 in light of COVID-19 concerns, and we have reimplemented the match in February 2021.

Expenses related to defined contribution plans include the following:

Years Ended December 31,

NOTE 8 — Goodwill and Other Intangible Assets

Other Intangible Assets

The following is a summary of the Company’s other intangible assets as of December 31:

Other intangible assets:

In process research and development 2,200 (2,200) — —

Amortization expense for the year ended December 31, 2020 $ 9,055

In the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we performed an interim impairment assessment. This resulted in the recognition of $2,200 of impairment charges related to in process research and development, and a revaluation of associated contingent liabilities totaling $1,900. The net impact of $300 was recorded as restructuring expense in the Consolidated Statements of Earnings.

Gross Carrying Amount Accumulated Amortization Net Amount

Other intangible assets:

In process research and development 2,200 — 2,200

Amortization expense for the year ended December 31, 2019 $ 7,770

Amortization expense for the year ended December 31, 2018 $ 6,817

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The estimated amortization expense for the next five years and thereafter is as follows:

Amortization expense

Total future amortization expense $ 79,121

Goodwill

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

Total

Increase from acquisition 34,999

Increase from acquisition 3,441

See Note 3 for further information on the increase due to acquisition.

We performed our impairment test as of October 1, 2020, our measurement date, and concluded there was no impairment in any of our reporting units. The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company's fair value estimates for the purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.

NOTE 9 — Costs Associated with Exit and Restructuring Activities

Restructuring charges are reported as a separate line within operating earnings in the Consolidated Statements of Earnings. Total restructuring charges were:

Years Ended December 31,

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities. This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions ("September 2020 Plan"). The restructuring cost of the plan is estimated to be in the range of $4,600 and $6,000, including workforce reduction charges, building and equipment relocation charges, other contract and asset related costs. In addition to these charges, we expect an additional $4,000 to $5,100 of other costs to be incurred related to the initiatives that would not qualify as restructuring charges. These costs would include certain employee overlap and training costs as well as additional capital expenditures. Restructuring charges under this plan were $1,422 during the year ended December 31, 2020, consisting of $812 of workforce reduction costs, $300 of asset impairment charges (see Note 8) and $310 of other contract termination and facility closure costs. The total restructuring liability related to the September 2020 Plan was $512 at December 31, 2020.

June 2016 Plan

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, IN facility and transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional organizational changes were also implemented in various other locations. In 2017, we revised this plan to include an additional $1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, IL and our plant in Bolingbrook, IL, both of which have now been consolidated into a single facility. Restructuring charges under this plan, which is substantially complete, were $(32), $4,284, and $4,559 during the

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years ended December 31, 2020, 2019, and 2018, respectively. The total restructuring liability related to the June 2016 Plan was $3 and $233 at December 31, 2020 and 2019, respectively. Any additional costs related to product line movements, equipment charges, and other costs will be expensed as incurred.

The following table displays the restructuring charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through December 31, 2020:

June 2016 Plan Planned Costs Actual costs incurred through December 31, 2020

Building and equipment relocation 9,025 10,530

Asset impairment charge — 1,168

April 2014 Plan

In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint ("April 2014 Plan"). These restructuring actions were substantially completed during 2015. Restructuring charges under this plan were $0, $(248), and $503 during the years ended December 31, 2020, 2019, and 2018, respectively. The total restructuring liability related to the April 2014 Plan was $839 and $703 at December 31, 2020 and 2019, respectively. The remaining liability is expected to be settled in the first half of 2021.

Other Restructuring Activities

From time to time we incur other restructuring activities that are not part of a formal plan. During the years ended December 31, 2020 and 2019, we incurred restructuring charges of $442 and $3,412, respectively, for exit and disposal activities at three sites and workforce reduction costs across the company. The remaining restructuring liability associated with these actions was $9 and $1,057 at December 31, 2020 and December 31, 2019, respectively.

The following table displays the restructuring liability activity for all plans the year ended December 31, 2020:

Restructuring liability at January 1, 2020 $ 1,993

Restructuring charges 1,830

Other activities(1) (637)

Restructuring liability at December 31, 2020 $ 1,363

The total liability of $1,363 is included in Accrued expenses and other liabilities at December 31, 2020.

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NOTE 10 — Accrued Expenses and Other Liabilities

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

As of December 31,

Accrued product-related costs $ 4,470 $ 2,950

Accrued property and other taxes 2,478 1,574

Accrued customer-related liabilities 3,815 4,391

Derivative liabilities 671 —

Total accrued expenses and other liabilities $ 38,171 $ 36,378

NOTE 11 — Contingencies

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

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

Years Ended December 31,

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

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

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

NOTE 12 — Leases

We lease certain land, buildings and equipment under non-cancellable operating leases used in our operations. Operating lease assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate because none of our leases contain a rate implicit in the lease arrangement.

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The operating lease assets and liabilities are adjusted to include the impact of any lease incentives and non-lease components. We have elected not to separate lease and non-lease components, which include taxes and common area maintenance in some of our leases. Variable lease payments that depend on an index or a rate are included in lease payments using the prevailing index or rate in effect at lease commencement.

Options to extend or terminate a lease are included in the lease term when it is reasonably likely that we will exercise that option. We occasionally enter into short term operating leases with an initial term of twelve months or less. These leases are not recorded in the Consolidated Balance Sheets.

We determine if an arrangement is a lease or contains a lease at its inception, which normally does not require significant estimates or judgments. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we currently have no material sublease agreements.

In accordance with FASB Staff Q&A - Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we have elected to account for any lease concessions resulting directly from COVID-19 as if the enforceable rights and obligations for the concessions existed in the respective contracts at lease inception and as such we will not account for any concession as a lease modification. Guidance from the FASB Staff Q&A provided methods to account for rent deferrals which include the option to treat the lease as if no changes to the lease contract were made or to treat deferred payments as variable lease payments. The FASB Staff Q&A allows entities to select the most practical approach and does not require the same approach be applied consistently to all leases. As a result, we have accounted for lease deferrals as if no changes to the lease contract were made and will continue to recognize lease expense, on a straight-line basis, during the deferral periods. During the twelve months ended December 31, 2020, these rent concessions related to COVID-19 were not material.

Components of lease expense for the twelve months ended December 31, 2020 and December 31, 2019 were as follows:

Years Ended December 31,

Rent expense prior to adoption of ASC 842 was $5,726 for the year ended December 31, 2018.

Supplemental cash flow information related to leases was as follows:

Years Ended December 31,

Supplemental balance sheet information related to leases was as follows:

As of December 31

Operating lease obligations $ 3,294 $ 2,787

Long-term operating lease obligations 23,163 24,926

Weighted-average remaining lease terms (years) 7.88 9.04

Weighted-average discount rate 6.40% 6.54%

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Remaining maturity of our existing lease liabilities as of December 31, 2020 is as follows:

Operating Leases(1)

Less: interest (8,434)

Present value of lease payments $ 26,457

NOTE 13 — Debt

Long-term debt was comprised of the following:

As of December 31