-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T15tnMRv90BKbLm1ziNdEwQB1hCPLZyxWXI+S0xk6fJJcYkRekwgrPyms05LS8/P 2Saw7IsmrYGUCZtBKbZnTw== 0000026058-00-000013.txt : 20000516 0000026058-00-000013.hdr.sgml : 20000516 ACCESSION NUMBER: 0000026058-00-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000402 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04639 FILM NUMBER: 630568 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 MAIL ADDRESS: STREET 1: 905 W BLVD NORTH CITY: ELKHART STATE: IN ZIP: 46514 10-Q 1 2000 1ST Q 10 Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _________________ For Quarter Ended Commission File Number April 2, 2000 1-4639 ------------- ------ CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 ------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 905 West Boulevard North Elkhart, IN 46514 - ----------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219)293-7511 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 8, 2000: 27,837,698. Page 1 CTS CORPORATION AND SUBSIDIARIES INDEX Page No. -------- PART 1. -- FINANCIAL INFORMATION Item 1. Financial Statements -------------------- Condensed Consolidated Statements of Earnings - For the Three Months ended April 2, 2000, and April 4, 1999 3 Condensed Consolidated Balance Sheets - As of April 2, 2000, and December 31, 1999 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended April 2, 2000, and April 4, 1999 5 Consolidated Statements of Comprehensive Earnings - For the Three Months Ended April 2, 2000, and April 4, 1999 6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis ------------------------------------ of Financial Condition and Results of ------------------------------------- Operations 13-18 ---------- PART 2. -- OTHER INFORMATION Item 1. Legal Proceedings 18 ----------------- Item 2. Announcements 19 ------------- Item 6. Exhibits and Reports on Form 8-K 19 -------------------------------- SIGNATURES 19 Page 2 Part 1 -- FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements - ----------------------------- CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS-UNAUDITED (In thousands, except per share amounts) Three Months Ended ------------------ April 2, April 4, 2000 1999 -------------------- Net sales $204,466 $120,339 Costs and expenses: Cost of goods sold 141,640 83,152 Selling, general and administrative expenses 23,232 15,861 Research and development expenses 7,867 4,659 Acquired in-process research and development - Note C 0 12,940 Amortization of intangibles 1,045 395 ------ ------ Operating earnings 30,682 3,332 Other(expense)income: Interest expense (3,182) (1,291) Interest income 198 251 Other (231) 936 ------ ----- Total other expense (3,215) (104) ------ ------ Earnings before income taxes 27,467 3,228 Income taxes 7,691 1,065 ------ ----- Earnings from continuing operations 19,776 2,163 Net loss from discontinued operations, net of income tax benefit of $355 - Note D (529) 0 ---- ------ Net earnings $ 19,247 $ 2,163 ======= ====== Earnings(loss)per share - Note I Basic: Continuing operations $ 0.71 $ 0.08 Discontinued operations (0.02) 0 ------ ------ Net earnings per share $ 0.69 $ 0.08 ====== ====== Diluted: Continuing operations $ 0.68 $ 0.07 Discontinued operations (0.02) 0 ------ ------ Net earnings per share $ 0.66 $ 0.07 ===== ====== Cash dividends declared per share $ 0.03 $ 0.03 Average common shares outstanding: Basic 27,730 27,386 Diluted 29,027 28,664 See notes to condensed consolidated financial statements. Page 3 Part 1 -- FINANCIAL INFORMATION - ------------------------------- CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) April 2, December 31, 2000 1999* ---- ----- ASSETS (Unaudited) Current Assets Cash $ 22,526 $ 24,219 Accounts receivable, less allowances (2000--$2,810; 1999--$2,628) 108,787 124,682 Inventories--Note B 74,277 78,942 Other current assets 17,576 4,869 Deferred income taxes 21,585 21,585 ------- ------- Total current assets 244,751 254,297 Property, Plant and Equipment, less accumulated depreciation(2000--$170,085; 1999--$162,192) 149,460 139,692 Other Assets Prepaid pension expense 73,020 68,990 Investment in discontinued operations 0 9,061 Intangible assets --Note C 47,810 47,843 Other 3,498 2,769 ------- ------- Total other assets 124,328 128,663 ------- ------- $518,539 $522,652 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt-Note E $ 6,250 $ 5,000 Accounts payable 57,436 68,315 Accrued liabilities 71,221 81,146 ------- ------- Total current liabilities 134,907 154,461 Long-term Debt--Note E 153,500 162,000 Other Long-term Obligations 9,509 9,846 Deferred Income Taxes 27,263 27,263 Postretirement Benefits 4,333 4,318 Shareholders' Equity Preferred stock-authorized 25,000,000 shares without par value; none issued Common stock-authorized 75,000,000 shares without par value; 48,426,804 shares issued at April 2, 2000, and 48,419,604 shares issued at December 31, 1999 197,721 193,612 Additional contributed capital 12,782 9,005 Retained earnings 263,818 245,414 Cumulative translation adjustment (106) 291 ------ ------- 474,215 448,322 Less cost of common stock held in treasury 2000--20,598,174 shares; 1999--20,957,649 shares 285,188 283,558 ------- ------- Total shareholders' equity 189,027 164,764 ------- ------- $518,539 $522,652 ======= ======= *The balance sheet at December 31, 1999, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. Page 4 Part 1 -- FINANCIAL INFORMATION - ------------------------------- CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (In thousands of dollars) Three Months Ended ------------------ April 2, April 4, 2000 1999 ------ ------ Cash flows from operating activities: Net earnings $19,247 $ 2,163 Depreciation and amortization 10,234 6,347 Prepaid pension asset (4,030) (2,088) Gain on sale of fixed assets (65) (816) Acquired in-process research and development 0 12,940 changes in assets and liabilities net of effects of acquisition: Accounts receivable 15,895 (37,183) Inventories 4,665 23 Other current assets (11,922) 2,154 Deferred income taxes (6,172) (5,172) Accounts payable and accrued liabilities (14,277) 30,755 Other 7,269 1,790 ------- ------ Total adjustments 1,597 8,750 ------- ------ Net cash provided by continuing operations 20,844 10,913 Loss on disposal of discontinued operations 529 0 ------- ------ Net cash provided by operating activities 21,373 10,913 Cash flows from investing activities: Proceeds from sale of property, plant and equipment including discontinued operations, net 4,307 27,267 Purchase of CTS Wireless 0 (96,937) Capital expenditures (20,516) ( 4,214) ------- ------ Net cash used in investing activities (16,209) (73,884) Cash flows from financing activities: Proceeds from issuance of long-term obligations - CTS Wireless acquisition 0 96,937 Payments of long-term obligations, net (7,250) (31,937) Dividend payments (824) (817) Purchases of treasury stock (3,092) (480) Other 4,452 399 ------ ------ Net cash (used in) provided by financing activities (6,714) 64,102 Effect of exchange rate changes on cash (143) (1,035) ------ ------ Net (decrease) increase in cash (1,693) 96 Cash at beginning of year 24,219 16,273 ------ ------ Cash at end of period $22,526 $16,369 ======= ======= Supplemental cash flow information Cash paid during the period for: Interest $ 2,165 $ 1,318 Income taxes--net $ 4,478 $ 3,128 See notes to condensed consolidated financial statements. Page 5 Part 1 -- FINANCIAL INFORMATION - ------------------------------- CTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED (In thousands of dollars) Three Months Ended ------------------ April 2, April 4, 2000 1999 ---- ---- Net earnings $19,247 $2,163 Other comprehensive loss - Translation adjustments (397) (629) ------- ---- Comprehensive earnings $18,850 $1,534 ======= ====== See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION - ------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED April 2, 2000 NOTE A--BASIS OF PRESENTATION The accompanying condensed consolidated interim financial statements have been prepared by CTS Corporation (CTS or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The accompanying unaudited consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions 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 from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications have been made for the years presented in the financial statements to conform to the classifications effective in 2000. NOTE B--INVENTORIES The components of inventory consist of the following: (In thousands) April 2, December 31, 2000 1999 ---- ---- Finished goods $20,646 $19,399 Work-in-process 20,357 20,288 Raw materials 33,274 39,255 ------ ------ $74,277 $78,942 ====== ====== Page 7 NOTE C--ACQUISITION On February 26, 1999, CTS Corporation completed the acquisition of certain assets and liabilities of the Component Products Division of Motorola, Inc., hereafter referred to as "CTS Wireless." CTS Wireless designs and manufactures electronic components and assemblies including ceramic filters, quartz crystals, crystal oscillators, surface acoustic wave components and piezoceramic devices. In 2000, CTS Wireless has grown to seven locations in the USA and Asia, primarily for the wireless communications industry. The 1999 acquisition was accounted for under the purchase method of accounting. As part of the acquisition, the Company paid Motorola, Inc. $94 million at the closing and assumed approximately $49 million of debt (including pension obligation). Under the terms of the acquisition agreement, the Company could be obligated to pay up to an additional $105 million over five years depending upon increased sales and profitability of CTS Wireless, and has estimated the 1999 portion of this obligation, payable in 2000, at $7 million. The Company financed a substantial portion of the purchase price through bank borrowings. CTS incurred approximately $4 million in costs directly associated with the acquisition which were included in the overall consideration. The purchase price was allocated to the assets acquired based on the estimated fair values as follows: (In millions) Inventory $ 19.9 Property, plant and equipment 68.8 Current technology 10.1 Identifiable intangible assets 42.3 In-process research and development (IPR&D) 12.9 ------ Total $154.0 ====== Identifiable intangible assets include trademarks, tradenames, technology rights and customer relationships. These intangibles are being amortized on a straight-line basis over their useful lives which range from four to 30 years. Current technology has been amortized over four years. In-process research and development represents the value assigned to the research and development projects of CTS Wireless that were commenced but not yet completed or had not yet reached technological feasibility at the date of acquisition and which, if unsuccessful, had no alternative future use in research and development activities or otherwise. As of the date of acquisition, the $12.9 million of purchase price allocated to in-process research and development related to technologies being developed for next-generation products and represented products that were then currently in the development cycle that had not yet reached a level of technological feasibility and had no alternative future use. CTS Wireless' in-process research and development projects were initiated to address the rapid technological change associated with the wireless communications industry. The incomplete projects included developing technology for the miniaturization of components such as oscillators, quartz and ceramics. Page 8 NOTE C - ACQUISITION (continued) The calculations of amounts allocated to in-process research and development projects were based on risk-adjusted future cash flows related to the incomplete research and development projects. The resulting cash flows were discounted to their present value using a rate of 18%, which exceeded the overall cost of capital for the Company. Estimated net cash inflows from the acquired in-process technology, related to CTS Wireless, commenced in the latter part of 1999 and are projected to steadily decline through 2004. As of the date of acquisition, approximately $10 million had been expended to develop these research and development projects. The estimated cost to complete the projects of approximately $9 million is expected to be incurred through 2000. Remaining efforts on the projects are significant and include important phases of project design, development and testing. The Company has reviewed the assumptions used in the forecasts and continues to believe that the amount allocated to acquired in-process research and development is reasonable. NOTE D--DISCONTINUED OPERATIONS Businesses acquired in connection with the 1997 acquisition of Dynamics Corporation of America (DCA), not strategic to CTS' core business segments, have been recorded as discontinued operations. During the first fiscal quarter of 2000, the divestiture of all these businesses was completed. NOTE E--LONG-TERM DEBT Interest-bearing debt decreased from $167 million at December 31, 1999, to $160 million at April 2, 2000. The Company had total bank borrowings of $118 million at April 2, 2000. The variable interest rate on these borrowings is based upon LIBOR, with adjustments based on the ratio of CTS' consolidated earnings before interest, taxes, depreciation and amortization (EBITDA). Effective February 1, 2000, the Company amended its bank credit facility to increase the commitment under the revolving credit facility to $200 million from $150 million. The terms of this $50 million supplemental loan commitment require conversion of the outstanding balance on December 31, 2001, to a three-year term loan with variable maturities through December 31, 2005 . The Company pays a commitment fee that varies based on performance under certain financial covenants applicable to the undrawn portion of the revolving credit agreement. Currently, that fee is 0.25 percent per annum. The credit agreement and term loans require, among other things, that the Company maintain a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum leverage ratio. CTS has a total of $265 million of credit facilities which are unsecured. NOTE F--BUSINESS SEGMENT FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to provide certain information about their operating segments. CTS' reportable segments are based upon the nature of products within the Company. The products comprising the reportable segments are managed separately and have differing technology and marketing strategies. CTS has two reportable segments: electronic components and electronic assemblies. Electronic components are products which perform the basic level electronic function for a given product family for use in customer assemblies. Electronic components consist principally of wireless components used in cellular handsets, automotive sensors used in commercial or consumer vehicles, frequency control devices such as crystals and clocks, loudspeakers, resistor networks, switches and variable resistors. Electronic assemblies are assemblies of electronic or electronic and mechanical products which, apart from the assembly, may themselves be marketed as separate stand-alone products. Such assemblies represent a completed, higher-level functional product to be used in customer end products or assemblies. These Page 9 NOTE F--BUSINESS SEGMENT (Continued) products consist principally of interconnect products such as backpanel and connector assemblies used in the telecommunications industry, RF (radio frequency) Integrated Modules used in cellular handsets, hybrid microcircuits used in the healthcare market and cursor controls for computers. Management evaluates performance based upon operating earnings before interest and income taxes. Summarized financial information concerning CTS' reportable business segments is shown in the following table: (In thousands) Electronic Electronic Components Assemblies Total ---------- ---------- ----- First Quarter 2000 Net sales to external customers $139,045 $65,421 $204,466 Operating earnings 24,150 6,532 30,682 Total assets $429,330 $89,209 $518,539 First Quarter 1999 Net sales to external customers $ 91,374 $28,965 $120,339 Operating earnings 16,482 (210) 16,272 Total assets $376,926 $45,447 $422,373 Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: (In thousands) Operating Earnings First Quarter First Quarter - ------------------ ------------- ------------- 2000 1999 ---- ---- Total operating earnings for reportable segments $30,682 $16,272 Acquired in-process research and development charge 0 (12,940) Interest expense (3,182) (1,291) Other (expense) income (33) 1,187 ------ ------ Earnings before income taxes $27,467 $ 3,228 ======= ======= Assets Total assets for reportable segments $518,539 $422,373 Investment in discontinued operations 0 9,061 ------- ------- Total assets $518,539 $431,434 ======= ======= NOTE G--LITIGATION AND CONTINGENCIES Contested claims involving various matters, including environmental claims brought by government agencies, are being litigated by CTS, both in legal and administrative forums. In the opinion of management, based upon currently available information, adequate Page 10 NOTE G--LITIGATION AND CONTINGENCIES (Continued) provision for potential costs has been made, or the costs which could ultimately result from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Under the terms of the sale agreement related to a discontinued business acquired from DCA Corporation, CTS retains liability for performance and warranty obligations under certain customer contracts. The potential liability expires in 2000. Management does not expect that it will incur any significant costs associated with this contingency. NOTE H--RECENT ACCOUNTING PRONOUNCEMENTS In July 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging." SFAS 133 provides guidance for the recognition and measurement of derivatives and hedging activities. It requires an entity to record, at fair value, all derivatives as either assets or liabilities in the balance sheet, and it establishes specific accounting rules for certain types of hedging. This Statement is effective for fiscal years beginning after June 15, 2000, and will be adopted by the Company when required, if not earlier. The impact, if any, of adopting SFAS 133 on CTS' consolidated financial position, results of operations and cash flows, has not been fully determined. Page 11 NOTE I--EARNINGS PER SHARE FASB Statement No. 128, "Earnings per Share," requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the first quarter of 2000 and 1999. The other dilutive securities of approximately 264,000 and 322,000 at April 2, 2000, and April 4, 1999, respectively, consisted of shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their DCA shares. (In thousands, except per share amounts) Net Net Earnings Shares Earnings (Numerator) (Denominator) Per Share ----------- ------------- --------- First Quarter 2000: Basic EPS $19,247 27,730 $0.69 ======= ====== ===== Effect of Dilutive Securities: Stock options 1,033 Other 264 Diluted EPS $19,247 29,027 $0.66 ======= ====== ===== First Quarter 1999: Basic EPS $ 2,163 27,386 $0.08 ======= ====== ===== Effect of Dilutive Securities: Stock options 956 Other 322 Diluted EPS $ 2,163 28,664 $0.07 ======= ====== ===== Page 12 Part 1 -- FINANCIAL INFORMATION - ------------------------------- Item 2. Management's Discussion and Analysis of Financial - ---------------------------------------------------------- Condition and Results of Operations - ----------------------------------- Changes in Financial Condition: Comparison of April 2, 2000 to - --------------------------------------------------------------- December 31, 1999 - ----------------- The following table highlights changes in balance sheet items and ratios and other information related to liquidity and capital resources: (Dollars in thousands) April 2, December 31, Increase 2000 1999 (Decrease) ---- ---- ---------- Cash $ 22,526 $ 24,219 $(1,693) Accounts receivable, net 108,787 124,682 (15,895) Inventories, net 74,277 78,942 (4,665) Current assets 244,751 254,297 (9,546) Accounts payable 57,436 68,315 (10,879) Current liabilities 134,907 154,461 (19,554) Working capital 109,844 99,836 10,008 Current ratio 1.81 1.65 0.16 Interest-bearing debt $160,000 $167,000 $(7,000) Shareholders' equity 189,027 164,764 24,263 Interest-bearing debt as a percent of shareholders' equity 85% 101% (16)% pts. Interest-bearing debt as a percent of capitalization 46% 50% (4)% pts. From December 31, 1999 to April 2, 2000, the working capital of CTS Corporation and its subsidiaries increased $10.0 million. This increase, was principally the result of reductions in accounts payable and accrued liabilities. The accounts payable decrease was a result of timing differences in receipt of certain inventories for major programs. The decrease in other current liabilities was principally related to income taxes payable. Income taxes payable was reduced as the result of recognizing a tax benefit related to certain non- qualified stock options granted in 1997 and exercised in the first quarter of 2000. Under FASB 123, "Accounting for Stock-Based Compensation," this benefit did not reduce the Company's overall tax expense but was recognized as an increase to paid-in capital. Offsetting these decreases in liabilities were reductions in receivables and inventories and increases in other current assets. The reduction in receivables was primarily due to improvement in collections and decreasing payment periods when compared to 1999 year end. The percentage of interest-bearing debt to shareholders' equity decreased due to the decrease in debt and increase in shareholders' equity primarily resulting from increased earnings. Page 13 Changes in Financial Condition: Comparison of April 2, 2000 to - ------------------------------- ------------------------------ December 31, 1999 - Continued - ----------------------------- Capital expenditures were $20.5 million during the first quarter, compared with $4.2 million for first quarter 1999. These capital expenditures were primarily for capacity expansion, technological advances and new products, primarily for wireless communications products. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2000, cash flows provided by operating activities were $21.4 million, with the most significant impact coming from the higher net earnings, and along with the working capital changes discussed previously, increased significantly over the first quarter of 1999. Cash flows used for investing activities totaled $16.2 million through the first quarter of 2000, including $20.5 million of capital expenditures, partially offset by net proceeds received from the sale of property, plant and equipment including discontinued operations of $4.3 million. In the first quarter of 1999, cash flows used for investing activities totaled $73.9 million, consisting of $96.9 million acquisition related costs for the CTS Wireless acquisition, $4.2 million of capital expenditures, partially offset by $27.3 million of net proceeds from the sale of property, plant and equipment, including discontinued operations. Cash flows used in financing activities were $6.7 million in 2000, consisting primarily of a net decrease in debt of $7.3 million and $3.1 million purchases of CTS stock, partially offset by other financing activities of $4.5 million, primarily related to the increase of stock options. In 1999, cash flows provided by financing activities were $64.1 million, which consisted of a net increase in debt of $65.0 million (excluding the $42.0 million of debt assumed with the purchase of CTS Wireless). CTS' capital expenditures for 2000 are presently expected to total approximately $127 million, $20.5 million of which has been spent during the first three months of the year. These capital expenditures are primarily for production capacity expansion, new products and cost reduction programs. In the CTS traditional product lines, significant expenditures are required in the interconnect, automotive and resistor product lines for new product introduction, additional capacity and new technology. Projected capital expenditures in 2000 for Wireless projects include programs for the RF Integrated Modules to increase capacity for the oscillator products and the necessary equipment to reduce product size as a result of customer demands in the wireless handset industry. Also production equipment will be required for the ceramic duplexer products to increase capacity. Expenditures are also planned for new facilities for Wireless, in accordance with the acquisition agreement. Page 14 LIQUIDITY AND CAPITAL RESOURCES (Continued) The Company has historically been able to fund its capital and operating needs through its cash flows from operations and available credit under its bank credit facilities. CTS currently has unsecured bank credit facilities totaling $265.0 million which mature over five years. The Company believes its current cash flow and its ability to obtain additional cash, either through the issuance of additional shares of common stock or other securities and utilization of bank credit facilities, will be adequate to fund its working capital, capital expenditures and debt service requirements. Page 15 Item 2. Management's Discussion and Analysis of Financial - ----------------------------------------------------------- Condition and Results of Operations (Continued) - ----------------------------------------------- Changes in Results of Operations: Comparison of First Quarter 2000 to - ---------------------------------------------------------------------- First Quarter 1999 - ------------------ The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended April 2, 2000, and April 4, 1999. (Dollars in thousands) ---------------------- April 2, April 4, Increase 2000 1999 (Decrease) ---- ---- ---------- Net sales $204,466 $120,339 $84,127 Gross earnings 62,826 37,187 25,639 Gross earnings as a percent of sales 30.7% 30.9% (0.2)% pts. Selling, general and administrative expenses 23,232 15,861 7,371 Selling, general and administrative expenses as a percent of sales 11.4% 13.2% (1.8)% pts. Research and development expenses 7,867 4,659 3,208 Acquired in-process research and development (IPR&D) 0 12,940 (12,940) Operating earnings 30,682 3,332 27,350 Operating earnings, excluding IPR&D charge 30,682 16,272 14,410 Operating earnings, excluding IPR&D charge, as a percent of sales 15.0% 13.5% 1.5 % pts. Interest expense 3,182 1,291 1,891 Earnings from continuing operations before income taxes 27,467 3,228 24,239 Earnings from continuing operations before income taxes, excluding IPR&D charge 27,467 16,168 11,299 Income taxes 7,691 1,065 6,626 Income tax rate 28.0% 33.0% (5.0)% pts. Net loss from discontinued operations, net of income tax benefit of $355 (529) 0 (529) Net earnings $ 19,247 $ 2,163 $ 17,084 Net sales increased by $84.1 million, or 70% from the first quarter of 1999. Sales increases occurred principally as a result of the inclusion of CTS Wireless for a full quarter in 2000, compared to Page 16 Item 2. Management's Discussion and Analysis of Financial - ----------------------------------------------------------- Condition and Results of Operations (Continued) - ----------------------------------------------- Changes in Results of Operations: Comparison of First Quarter 2000 to - ---------------------------------------------------------------------- First Quarter 1999 - ------------------ one month in first quarter 1999, complemented by the overall increase in the electronic assemblies segment. CTS Wireless' operating results are reported primarily as part of CTS' electronic components business segment. As a percentage of total sales, sales of electronic components and electronic assemblies in the first quarter of 2000 were 68% and 32%, respectively. As a percentage of total sales, the first quarter of 1999 sales of electronic components and electronic assemblies were 76% and 24%, respectively. Refer to Note F - Business Segment, for a description of the Company's business segments. The electronic components segment experienced a $47.7 million sales increase, or 52% from the first quarter of 1999, primarily due to the inclusion of CTS Wireless' sales and the growing global demand for wireless telecommunications products. Revenue increases were also realized in automotive and frequency product lines. The electronic assemblies segment experienced a fiscal 2000 sales increase of $36.5 million, or 126% from the first quarter of 1999. The revenue increases were experienced both in the wireless and the interconnect product lines. This is primarily due to the development of the RF Integrated Modules product line and increased demand for boxbuild assemblies for the telecommunications and computer markets. Gross earnings dollars increased primarily due to the inclusion of CTS Wireless, good performance in automotive and frequency product lines, and the overall improved electronic assembly segment products. The lower percent of sales results principally from the inclusion of CTS Wireless and the growing electronic assembly segment, both of which have lower margins than the CTS traditional product lines, particularly within the electronic components segment. Selling, general and administrative expenses increased primarily as a result of the inclusion of CTS Wireless. However, CTS continued to control these expenses while filling key management positions required for planned future growth and development. Research and development expenses increased as a result of the inclusion of CTS Wireless; to support programs directed to improve product performance and miniaturization through advanced technology and integration, and new product development in other product lines, most notably automotive. The increase in operating earnings dollars, was principally due to the acquisition of CTS Wireless, and the inclusion of a full quarter of earnings in 2000 compared to one month in 1999, as well as the continuing growth in volume and earnings in the traditional CTS products. Page 17 Item 2. Management's Discussion and Analysis of Financial - ----------------------------------------------------------- Condition and Results of Operations (Continued) - ----------------------------------------------- Changes in Results of Operations: Comparison of First Quarter 2000 to - ---------------------------------------------------------------------- First Quarter 1999 - ------------------ The effective tax rate decreased by 5.0 percentage points primarily due to higher expected earnings in lower-tax jurisdictions, particularly in CTS Wireless non-U.S. locations. The accounting for discontinued operations was finalized following the completion of sale of the discontinued operations in the first quarter of 2000, resulting in a $0.02 impact on earnings per share. Recently Issued Accounting Pronouncements - ----------------------------------------- In July 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging." SFAS 133 provides guidance for the recognition and measurement of derivatives and hedging activities. It requires an entity to record, at fair value, all derivatives as either assets or liabilities in the balance sheet, and it establishes specific accounting rules for certain types of hedging. This Statement is effective for fiscal years beginning after June 15, 2000, and will be adopted by the Company when required, if not earlier. The impact, if any, of adopting SFAS 133 on CTS' consolidated financial position, results of operations and cash flows, has not been fully determined. Year 2000 Computer Systems Compliance - ------------------------------------- As of the filing date of this report, the impact of the Year 2000 has not had a material adverse impact on CTS' business or results of operations. The total cost of the Company's Year 2000 efforts was approximately $2.0 million as of December 31, 1999. These amounts included the costs of external consultants and for software and hardware applications. CTS did not track the internal costs incurred for all of the hours spent on the project. Part 2 -- OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings - -------------------------- CTS is involved in litigation and in other administrative proceedings with government agencies regarding the protection of the environment, and other matters, the results of which are not yet determinable. In the opinion of management, based upon currently available information, adequate provision for anticipated costs has been made, or the ultimate costs resulting from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Page 18 Item 2. Announcements - ---------------------- On February 18, 2000, CTS Corporation opened a branch sales office in Seoul, South Korea to service CTS' customers, predominately focusing on its complete product line of wireless components. On February 23, 2000, the CTS Board elected Roger R. Hemminghaus, Chairman Emeritus of Ultramar Diamond Shamrock Corporation and Chairman of the Federal Reserve Bank of Dallas, as a member of the CTS Board of Directors. On March 16, 2000, CTS opened a new Interconnect Systems facility in Tianjin, People's Republic of China, to support the growing needs of the communications infrastructure market. Patrick J. Dennis was named as Senior Vice President Finance and Chief Financial Officer as of April 10, 2000. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- Exhibits 27.1 Financial Data Schedule b. Reports on Form 8-K None SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CTS CORPORATION CTS CORPORATION /S/Jeannine M. Davis /S/Patrick J. Dennis Executive Vice President, Senior Vice President Finance Administration, and and Chief Financial Officer Secretary Dated: May 12, 2000 Page 19 EX-27 2
5 0000026058 CTS CORPORATION 3-MOS 3-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 APR-02-2000 APR-04-1999 22,526 16,369 0 0 111,597 84,783 2,810 557 74,277 54,066 244,751 173,734 319,545 287,224 170,085 143,248 518,539 431,434 134,907 109,382 0 0 0 0 0 0 197,721 192,393 (8,694) (67,764) 518,539 431,434 204,466 120,339 204,466 120,339 141,640 83,152 173,784 117,007 33 (1,187) 0 0 3,182 1,291 27,467 3,228 7,691 1,065 19,776 2,163 (529) 0 0 0 0 0 19,247 2,163 0.69 0.08 0.66 0.07
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