-----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, G44SGL9UuvtOguKBGgdkoVVck0RJX53tEkc10hzo/t3beOzYTUjtEr5qLZ+yea+z HKSiLLqwE2UqyrdIJ7TMSw== /in/edgar/work/20000814/0000026058-00-000017/0000026058-00-000017.txt : 20000921 0000026058-00-000017.hdr.sgml : 20000921 ACCESSION NUMBER: 0000026058-00-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000702 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: [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: 700098 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 0001.txt 2000 2ND 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 July 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 July 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 August 8, 2000: 27,733,538. 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 and Six Months ended July 2, 2000, and July 4, 1999 3 Condensed Consolidated Balance Sheets - As of July 2, 2000, and December 31, 1999 4 Condensed Consolidated Statements of Cash Flows - For the Six Months Ended July 2, 2000, and July 4, 1999 5 Consolidated Statements of Comprehensive Earnings - For the Three Months and Six Months Ended July 2, 2000, and July 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 13-20 PART 2. -- OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Announcements 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 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 Six Months Ended ------------------ ---------------- July 2, July 4, July 2, July 4, 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $206,611 $177,825 $411,077 $298,164 Costs and expenses: Cost of goods sold 142,096 125,139 283,736 208,291 Selling, general and administrative expenses 24,060 21,600 47,292 37,461 Research and development expenses 7,955 6,579 15,822 11,238 Acquired in-process research and development-Note C 0 0 0 12,940 Amortization of intangibles 1,245 906 2,290 1,301 ------- ------- ------- ------- Operating earnings 31,255 23,601 61,937 26,933 Other(expense)income: Interest expense (3,085) (2,930) (6,267) (4,221) Interest income 248 229 446 480 Other 0 7 (231) 943 ------- ------- ------- ------- Total other expense (2,837) (2,694) (6,052) (2,798) ------- ------- ------- ------- Earnings before income taxes 28,418 20,907 55,885 24,135 Income taxes 7,957 6,417 15,648 7,482 ------- ------- ------- ------- Earnings from continuing operations 20,461 14,490 40,237 16,653 Net loss from discontinued operations, net of income tax benefit of $355 - Note D 0 0 (529) 0 -------- -------- ------- ------- Net earnings $ 20,461 $ 14,490 $ 39,708 $ 16,653 ======== ======== ======== ======== Earnings (loss) per share-Note I Basic: Continuing operations $ 0.74 $ 0.53 $ 1.45 $ 0.61 Discontinued operations 0 0 (0.02) 0 -------- -------- -------- -------- Net earnings per share $ 0.74 $ 0.53 $ 1.43 $ 0.61 ======== ======== ======== ======== Diluted: Continuing operations $ 0.71 $ 0.51 $ 1.39 $ 0.58 Discontinued operations 0 0 (0.02) 0 -------- -------- -------- -------- Net earnings per share $ 0.71 $ 0.51 $ 1.37 $ 0.58 ======== ======== ======== ======== Cash dividends declared per share $ 0.03 $ 0.03 $ 0.06 $ 0.06 ======== ======== ======== ======== Average common shares outstanding: Basic 27,786 27,536 27,771 27,460 Diluted 28,725 28,515 28,888 28,588 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) July 2, December 31, 2000 1999* ---- ---- ASSETS (Unaudited) - ------ Current Assets Cash $ 21,111 $ 24,219 Accounts receivable, less allowances (2000--$2,397; 1999--$2,628) 116,078 124,682 Inventories--Note B 80,224 78,942 Other current assets 13,605 4,869 Deferred income taxes 21,585 21,585 -------- -------- Total current assets 252,603 254,297 Property, Plant and Equipment, less accumulated depreciation(2000--$176,706; 1999--$162,192) 168,415 139,692 Other Assets Prepaid pension expense 76,787 68,990 Investment in discontinued operations 0 9,061 Intangible assets--Note C 49,220 47,843 Other 3,369 2,769 -------- -------- Total other assets 129,376 128,663 -------- -------- $550,394 $522,652 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 69,803 $ 68,315 Accrued liabilities 79,135 81,146 Current maturities of long-term debt-Note E 7,500 5,000 -------- -------- Total current liabilities 156,438 154,461 Long-term Debt--Note E 148,000 162,000 Other Long-term Obligations 7,237 9,846 Deferred Income Taxes 27,263 27,263 Postretirement Benefits 4,349 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; 48,431,850 shares issued at July 2, 2000, and 48,419,604 shares issued at December 31, 1999 198,505 193,612 Additional contributed capital 12,895 9,005 Retained earnings 283,438 245,414 Cumulative translation adjustment (1,319) 291 -------- -------- 493,519 448,322 Less cost of common stock held in treasury 2000--20,646,074 shares; 1999--20,957,649 shares 286,412 283,558 -------- -------- Total shareholders' equity 207,107 164,764 -------- -------- $550,394 $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) Six Months Ended ---------------- July 2, July 4, 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $ 39,708 $ 16,653 Depreciation and amortization 21,342 17,302 Prepaid pension asset (7,797) (3,748) Gain on sale of fixed assets (316) (897) Acquired in-process research and development 0 12,940 Changes in assets and liabilities, net of effects of acquisition: Accounts receivable 8,604 (55,610) Inventories (2,186) (4,652) Other current assets (7,951) 1,699 Deferred income taxes (1,393) (5,176) Accounts payable and accrued liabilities (2,975) 39,672 Other 5,609 (2,895) -------- -------- Total adjustments 12,937 (1,365) -------- -------- Net cash provided by continuing operations 52,645 15,288 Loss on disposal of discontinued operations 529 0 -------- -------- Net cash provided by operating activities 53,174 15,288 Cash flows from investing activities: Proceeds from sale of property, plant and equipment including discontinued operations, net 4,692 28,144 Purchase of CTS Wireless 0 (96,937) Capital expenditures (47,739) (12,664) -------- -------- Net cash used in investing activities (43,047) (81,457) Cash flows from financing activities: Proceeds from issuance of long-term obligations - CTS Wireless acquisition 0 96,937 Payments of long-term obligations, net (11,500) (26,937) Dividend payments (1,658) ( 1,643) Purchases of treasury stock (6,182) ( 2,422) Other 6,741 523 -------- ------- Net cash provided by(used in) financing activities (12,599) 66,458 Effect of exchange rate changes on cash (636) ( 1,594) -------- -------- Net decrease in cash (3,108) (1,305) Cash at beginning of year 24,219 16,273 -------- -------- Cash at end of period $ 21,111 $ 14,968 ======== ======== Supplemental cash flow information Cash paid during the period for: Interest $ 6,158 $ 3,687 Income taxes--net $ 6,805 $ 7,409 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 Six Months Ended Ended ----------------- ---------------- July 2, July 4, July 2, July 4, 2000 1999 2000 1999 ------ ------- ------- ------- Net earnings $20,461 $14,490 $39,708 $16,653 Other comprehensive (loss) earnings - Translation adjustments (1,213) (313) (1,610) (942) ------- ------- ------- ------- Comprehensive earnings $19,248 $14,177 $38,098 $15,711 ======= ======= ======= ======= See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION - ------ ------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED July 2, 2000 NOTE A--BASIS OF PRESENTATION The 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 and notes thereto incorporated by reference in the Company's 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 results of operations and cash flows 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 to be expected for the full year. Certain reclassifications have been made for the periods presented in the financial statements to conform to the 2000 presentation. NOTE B--INVENTORIES Inventories consist of the following: (In thousands) July 2, December 31, 2000 1999 ---- ---- Finished goods $16,726 $19,399 Work-in-process 19,771 20,288 Raw materials 43,727 39,255 ------- ------- $80,224 $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 serving 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 $80 million for the years 2000 through 2003 depending upon increased sales and profitability of CTS Wireless. CTS has accrued $11 million for the 1999 obligation, paid in July 2000. 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 71.0 Current technology 10.4 Identifiable intangible assets 43.5 In-process research and development (IPR&D) 12.9 ------ Total $157.7 ====== 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, were recorded as discontinued operations in 1999. During the first 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 $156 million at July 2, 2000. The Company had total bank borrowings of $114 million at July 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 of the supplemental loans 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 $275 million of committed credit facilities which are unsecured. Page 9 NOTE F--BUSINESS SEGMENTS 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 clock oscillators, 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 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 ---------- ---------- ----- Second Quarter 2000 Net sales to external customers $135,936 $ 70,675 $206,611 Operating earnings $ 26,991 $ 4,264 $ 31,255 Total assets $444,135 $106,259 $550,394 Second Quarter 1999 Net sales to external customers $147,144 $ 30,681 $177,825 Operating earnings $ 22,513 $ 1,088 $ 23,601 Total assets $390,678 $ 55,089 $445,767 First Half 2000 Net sales to external customers $274,981 $136,096 $411,077 Operating earnings $ 51,141 $ 10,796 $ 61,937 Total assets $444,135 $106,259 $550,394 First Half 1999 Net sales to external customers $238,518 $ 59,646 $298,164 Operating earnings $ 38,995 $ 878 $ 39,873 Total assets $390,678 $ 55,089 $445,767 Page 10 NOTE F--BUSINESS SEGMENTS (Continued) Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: (In thousands) Three Months Six Months Ended Ended --------------- --------------- July 2, July 4, July 2, July 4, 2000 1999 2000 1999 ---- ---- ---- ---- Operating Earnings Total operating earnings for reportable segments $31,255 $23,601 $61,937 $39,873 Acquired in-process research and development charge 0 0 0 (12,940) Interest expense ( 3,085) (2,930) (6,267) (4,221) Other income 248 236 215 1,423 ------- ------- ------- ------- Earnings before income taxes $28,418 $20,907 $55,885 $24,135 ======= ======= ======= ======= July 2, July 4, 2000 1999 -------- -------- Assets Total assets for reportable segments $550,394 $445,767 Investment in discontinued operations 0 9,061 -------- -------- Total assets $550,394 $454,828 ======== ======== 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 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 as required. 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 second quarter and first half of 2000 and 1999. The other dilutive securities of approximately 261,000 and 310,000 at July 2, 2000, and July 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) Earnings Shares Earnings (Numerator) (Denominator) Per Share ================================================================================ Second Quarter 2000: Basic EPS $20,461 27,786 $0.74 ================================================================================ Effect of Dilutive Securities: Stock options 678 Other 261 - -------------------------------------------------------------------------------- Diluted EPS $20,461 28,725 $0.71 ================================================================================ Second Quarter 1999: Basic EPS $14,490 27,536 $0.53 ================================================================================ Effect of Dilutive Securities: Stock options 669 Other 310 - -------------------------------------------------------------------------------- Diluted EPS $14,490 28,515 $0.51 ================================================================================ First Half 2000: Basic EPS $39,708 27,771 $1.43 ================================================================================ Effect of Dilutive Securities: Stock options 854 Other 263 - -------------------------------------------------------------------------------- Diluted EPS $39,708 28,888 $1.37 ================================================================================ First Half 1999: Basic EPS $16,653 27,460 $0.61 ================================================================================ Effect of Dilutive Securities: Stock Options 812 Other 316 - -------------------------------------------------------------------------------- Diluted EPS $16,653 28,588 $0.58 ================================================================================ 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 July 2, 2000 to - -------------------------------------------------------------- December 31, 1999 - ----------------- The following table highlights changes in balance sheet dollar amounts and ratios and other information related to liquidity and capital resources: (Dollars in thousands) ---------------------------------- July 2, December 31, Increase 2000 1999 (Decrease) ------ ----------- -------- Cash $ 21,111 $ 24,219 $ (3,108) Accounts receivable, net 116,078 124,682 (8,604) Inventories, net 80,224 78,942 1,282 Current assets 252,603 254,297 (1,694) Accounts payable 69,803 68,315 1,488 Current liabilities 156,438 154,461 1,977 Working capital 96,165 99,836 (3,671) Current ratio 1.61 1.65 (0.04) Interest-bearing debt $155,500 $167,000 $ (11,500) Shareholders' equity 207,107 164,764 42,343 Interest-bearing debt as a percent of shareholders' equity 75% 101% (26)% pts. Interest-bearing debt as a percent of capitalization 43% 50% (7)% pts. From December 31, 1999 to July 2, 2000, the working capital of CTS Corporation and its subsidiaries decreased $3.7 million. This decrease, was principally the result of reductions in accounts receivable. The accounts receivable decrease was a result of improved collections, principally at the wireless operations, offset by increases related to sales of interconnect products. 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 July 2, 2000 to - -------------------------------------------------------------- December 31, 1999 - Continued - ----------------------------- Capital expenditures were $47.7 million during the first half of 2000, compared with $12.7 million for first half of 1999. These capital expenditures were primarily for capacity expansion and related infrastructure improvements for wireless communications products, both in the U.S. and Asia. Most of the planned additional capacity is anticipated to be in place in the second half of 2000. LIQUIDITY AND CAPITAL RESOURCES In the first half of 2000, cash flows provided by operating activities were $53.2 million, compared to $15.3 million in the first half of 1999. The most significant reasons for the increase in operating cash flow during 2000 were higher net earnings. Cash flow in the first half of 1999 was significantly affected by the funding of working capital requirements of CTS Wireless following its acquisition. Cash flows used for investing activities totaled $43.0 million through the first half of 2000. This use of cash was primarily the result of $47.7 million of capital expenditures, partially offset by net proceeds received from the sale of property, plant and equipment including discontinued operations of $4.7 million. In the first half of 1999, cash flows used for investing activities totaled $81.5 million, consisting of $96.9 million acquisition related costs for the CTS Wireless acquisition, $12.7 million of capital expenditures, partially offset by $28.1 million of net proceeds from the sale of property, plant and equipment, including discontinued operations. Cash flows used in financing activities were $12.6 million in the first half of 2000, consisting primarily of a net decrease in debt of $11.5 million and $6.2 million purchases of CTS stock, offset by other financing activities, primarily related to proceeds from the exercise of stock options. In 1999, cash flows provided by financing activities were $66.5 million, which consisted of a net increase in debt of $70.0 million (excluding the $42.0 million of debt assumed with the purchase of CTS Wireless). CTS' capital expenditures for 2000 are presently expected to exceed $100 million, $47.7 million of which has been spent during the first six 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 RF integrated modules to increase capacity, and for the oscillator products and the necessary equipment to reduce product size as a result of customer demands in the wireless handset industry. Also, in order to increase capacity, production equipment will be required for the ceramic duplexer products. 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 $275.0 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 Second Quarter 2000 to - ----------------------------------------------------------------------- Second Quarter 1999 - ------------------- The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended July 2, 2000, and July 4, 1999. (Dollars in thousands) -------------------------------- July 2, July 4, Increase 2000 1999 (Decrease) ------ ------ ---------- Net sales $206,611 $177,825 $ 28,786 Gross earnings 64,515 52,686 11,829 Gross earnings as a percent of sales 31.2% 29.6% 1.6% pts. Selling, general and administrative expenses 24,060 21,600 2,460 Selling, general and administrative expenses as a percent of sales 11.6% 12.1% (0.5)% pts. Research and development expenses 7,955 6,579 1,376 Operating earnings 31,255 23,601 7,654 Operating earnings, as a percent of sales 15.1% 13.3% 1.8 % pts. Interest expense 3,085 2,930 155 Earnings from continuing operations before income taxes 28,418 20,907 7,511 Income taxes 7,957 6,417 1,540 Income tax rate 28.0% 31.0% (3.0)% pts. Net earnings $ 20,461 $ 14,490 $ 5,971 Net sales increased by $28.8 million, or 16% from the second quarter of 1999. Sales increases occurred principally in the electronic assemblies segment driven by both interconnect boxbuild products and RF integrated modules. Electronic components reflected strong demand in automotive and frequency control products. Page 16 Item 2. Management's Discussion and Analysis of Financial - ----------------------------------------------------------- Condition and Results of Operations (Continued) - ----------------------------------------------- Changes in Results of Operations: Comparison of Second Quarter 2000 to - ----------------------------------------------------------------------- Second Quarter 1999 - ------------------- As a percentage of total sales, sales of electronic components and electronic assemblies in the second quarter of 2000 were 66% and 34%, respectively. As a percentage of total sales, the 1999 second quarter sales of electronic components and electronic assemblies were 83% and 17%, respectively. Refer to Note F - Business Segments, for a description of the Company's business segments. The electronic components segment experienced an $11.2 million sales decrease, or 8% from the second quarter of 1999, primarily due to decreases in wireless components, offset partially by increased sales of automotive and frequency control products. Sales decreases in the components segment were related to a drop in wireless components of one type of cellular phone, combined with delays in a new product introduction. Additionally, there were no sales in second quarter 2000 compared to $12.5 million in second quarter 1999 of certain CTS Wireless end of life products. The electronic assemblies segment experienced a second quarter 2000 sales increase of $40.0 million, or 130% from the second quarter of 1999. The revenue increases were experienced both in the interconnect boxbuild products and RF integrated modules. The boxbuild assembly business demand is focused in mass storage, communications and Internet products. Gross earnings dollars increased primarily due to sales volume increases in the interconnect and frequency control product lines, and gross margin increases in wireless products. Selling, general and administrative expenses increased primarily due to increases in wireless and administrative manpower, additional depreciation and systems implementation costs related to growth. Research and development expenses increased primarily in new wireless product design and development, as well as new product development activities in our automotive product lines. The increase in operating earnings dollars, was principally due to the continuing growth in volume and earnings of electronic assemblies and growth in earnings for electronic components. New product introductions and the focus on operational excellence programs resulted in improved operating margins. The effective tax rate decreased by 3.0 percentage points primarily due to higher expected earnings in lower-tax jurisdictions, particularly in CTS Wireless non-U.S. locations. 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 Half 2000 to - --------------------------------- -------------------------------- First Half 1999 - --------------- The following table highlights changes in significant components of the consolidated statements of earnings for the six-month periods ended July 2, 2000, and July 4, 1999. (Dollars in thousands) ---------------------- July 2, July 4, Increase 2000 1999 (Decrease) ------ ------ ---------- Net sales $411,077 $298,164 $112,913 Gross earnings 127,341 89,873 37,468 Gross earnings as a percent of sales 31.0% 30.1% 0.9% pts. Selling, general and administrative expenses 47,292 37,461 9,831 Selling, general and administrative expenses as a percent of sales 11.5% 12.6% (1.1)% pts. Research and development expenses 15,822 11,238 4,584 Acquired in-process research and development (IPR&D) 0 12,940 (12,940) Operating earnings 61,937 26,933 35,004 Operating earnings, excluding IPR&D charge 61,937 39,873 22,064 Operating earnings excluding IPR&D charge, as a percent of sales 15.1% 13.4% 1.7% pts. Interest expense 6,267 4,221 2,046 Earnings from continuing operations before income taxes 55,885 24,135 31,750 Earnings from continuing operations before income taxes, excluding IPR&D charge 55,885 37,075 18,810 Income taxes 15,648 7,482 8,166 Income tax rate 28.0% 31.0% (3.0)% pts. Net loss from discontinued operations, net of income tax benefit of $355 (529) 0 (529) Net earnings $ 39,708 $ 16,653 $ 23,055 Net sales increased by $112.9 million, or 38% from the second half of 1999. Sales increases occurred principally as a result of growth in the electronic assemblies segment, driven by increased boxbuild assemblies and RF integrated modules, and the inclusion of CTS Wireless for a full six months in 2000, compared to four months in first half 1999. As a percentage of total sales, sales of electronic components and electronic assemblies in the first half of 2000 were 67% and 33%, respectively. As a percentage of total sales, the first half of 1999 sales of electronic components and electronic assemblies were 80% and 20%, respectively. Refer to Note F - Business Segments, for a description of the Company's business segments. Page 18 Item 2. Management's Discussion and Analysis of Financial - ----------------------------------------------------------- Condition and Results of Operations (Continued) - ----------------------------------------------- Changes in Results of Operations: Comparison of First Half 2000 to - --------------------------------- -------------------------------- First Half 1999 - --------------- The electronic components segment experienced a $36.5 million sales increase in the first half of 2000, or 15% over the first half of 1999, primarily due to the inclusion of CTS Wireless' sales for a full six months in 2000, compared to four months following the acquisition in 1999. Revenue increases were also realized in automotive and frequency product lines. Sales decreases in the components segment were related to a drop in wireless components of one type of cellular phone combined with delays in a new product introduction. Additionally, there were no sales in the first half of 2000 compared to $20.9 million in the first half of 1999 of CTS certain Wireless end of life products. Total 1999 annual sales of these products were $30 million. The electronic assemblies segment experienced an increase in the first half of 2000 of $76.4 million, or 128% from the first half of 1999. The revenue increases were experienced both in the interconnect and the wireless product lines. This is primarily due to increased demand for boxbuild assemblies for the telecommunications and computer markets, and the development of the RF integrated modules product line. Gross earnings dollars increased primarily due to the inclusion of wireless products sales for a full six months and the increased sales volume of the electronic assemblies segment products. The higher percent of sales is principally driven by the improved margins of wireless products and the growing electronic assemblies segment for both the RF integrated modules and interconnect boxbuild assemblies products. Selling, general and administrative expenses increased primarily as a result of the inclusion of CTS Wireless for a full six months, and additional wireless and administrative manpower, additional depreciation and systems implementation costs related to growth. Research and development expenses increased as a result of the inclusion of CTS Wireless for a full six months. Research and development programs are directed to improve product performance and miniaturization through advanced technology and integration, and new product development primarily in the crystals and oscillators product lines. Also expenditures and research and development efforts were devoted to new product development programs in our automotive product lines. The increase in operating earnings dollars was primarily due to the growth in earnings for the electronic components segment, which included wireless revenues for a full six months, and the growth in RF integrated modules and boxbuild assemblies. The effective tax rate decreased by 3.0 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 $.02 unfavorable impact on earnings per share. Page 19 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 as required. The impact, if any, of adopting SFAS 133 on CTS' consolidated financial position, results of operations and cash flows, has not been fully determined. 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. Item 2. Announcements - ---------------------- On June 27, 2000, Jeannine M. Davis, Executive Vice President, Administration, and Secretary, was elected to the CTS Board of Directors. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- Exhibits 27.1 Financial Data Schedule b. Reports on Form 8-K None Page 20 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 Jeannine M. Davis Patrick J. Dennis Executive Vice President, Senior Vice President Finance Administration, and and Chief Financial Officer Secretary (GRAPHIC OMITTED) Dated: August 14, 2000 Page 21 EX-27 2 0002.txt
5 0000026058 CTS CORPORATION 6-MOS 6-MOS DEC-31-2000 DEC-31-1999 APR-02-2000 APR-04-1999 JUL-02-2000 JUL-04-1999 21,111 14,968 0 0 118,475 103,472 2,397 819 80,224 58,741 252,603 195,890 345,121 294,270 176,706 149,945 550,394 454,828 156,438 119,577 0 0 0 0 0 0 198,505 192,956 8,602 (56,469) 550,394 454,828 411,077 298,164 411,077 298,164 283,736 208,291 65,404 62,940 (215) (1,423) 0 0 6,267 4,221 55,885 24,135 15,648 7,482 40,237 16,653 (529) 0 0 0 0 0 39,708 16,653 1.43 0.61 1.37 0.58
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