10-Q 1 0001.txt 2000 3RD 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 October 1, 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 October 1, 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 November 10, 2000: 27,756,213. 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 Nine Months ended October 1, 2000, and October 3, 1999 3 Condensed Consolidated Balance Sheets - As of October 1, 2000, and December 31, 1999 4 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 1, 2000, and October 3, 1999 5 Consolidated Statements of Comprehensive Earnings - For the Three Months and Nine Months Ended October 1, 2000, and October 3, 1999 6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis ------------ ------------------------ of Financial Condition and Results of ------------------------------------- Operations 13-21 ---------- PART 2. -- OTHER INFORMATION Item 1. Legal Proceedings 21 ----------------- Item 2. Announcements 21 ------------- Item 6. Exhibits and Reports on Form 8-K 22 -------------------------------- SIGNATURES 22 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 Nine Months Ended ------------------ ----------------- Oct. 1, Oct. 3, Oct. 1, Oct. 3, 2000 1999 2000 1999 ------ ------ ------ ------ Net sales $222,052 $180,203 $633,129 $478,367 Costs and expenses: Cost of goods sold 159,294 125,236 443,030 333,527 Selling, general and administrative expenses 21,716 21,326 69,008 58,787 Research and development expenses 8,237 6,566 24,059 17,804 Acquired in-process research and development-Note C 0 0 0 12,940 Amortization of intangibles 1,513 1,147 3,803 2,448 ------- ------- -------- ------- Operating earnings 31,292 25,928 93,229 52,861 Other(expense)income: Interest expense (3,160) (2,856) (9,427) (7,077) Interest income 200 123 646 603 Other income (expense) 1,273 (421) 1,042 522 ------- ------- -------- ------ Total other expense (1,687) (3,154) (7,739) (5,952) ------- ------- -------- ------ Earnings from continuing operations before income taxes 29,605 22,774 85,490 46,909 Income taxes 8,290 6,825 23,938 14,307 ------- ------- ------- ------- Earnings from continuing operations 21,315 15,949 61,552 32,602 Net loss from discontinued operations, net of income tax benefit of $355 - Note D 0 0 (529) 0 ------- ------- ------- -------- Net earnings $ 21,315 $ 15,949 $ 61,023 $ 32,602 ======== ======== ======== ======== Earnings (loss) per share-Note H Basic: Continuing operations $ 0.77 $ 0.58 $ 2.22 $ 1.19 Discontinued operations 0 0 (0.02) 0 -------- ------- ------- ------- Net earnings per share $ 0.77 $ 0.58 $ 2.20 $ 1.19 ======== ======== ======== ======== Diluted: Continuing operations $ 0.76 $ 0.56 $ 2.15 $ 1.14 Discontinued operations 0 0 (0.02) 0 -------- -------- --------- -------- Net earnings per share $ 0.76 $ 0.56 $ 2.13 $ 1.14 ======== ======== ======== ======== Cash dividends declared per share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ======== ======== ======== ======== Average common shares outstanding: Basic 27,748 27,555 27,764 27,491 Diluted 28,140 28,573 28,639 28,582 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) October 1, December 31, 2000 1999* --------- ----------- ASSETS (Unaudited) Current Assets Cash $ 16,179 $ 24,219 Accounts receivable, less allowances (2000--$2,242; 1999--$2,628) 137,187 124,682 Inventories--Note B 90,728 78,942 Other current assets 15,907 4,869 Deferred income taxes 21,585 21,585 ------- ------- Total current assets 281,586 254,297 Property, Plant and Equipment, less accumulated depreciation(2000--$183,475; 1999--$162,192) 194,679 139,692 Other Assets Prepaid pension expense 80,550 68,990 Investment in discontinued operations - 9,061 Intangible assets--Note C 47,720 47,843 Other 3,316 2,769 ------- ------- Total other assets 131,586 128,663 ------- ------- $607,851 $522,652 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 98,548 $ 68,315 Accrued liabilities 71,043 81,146 Current maturities of long-term debt-Note E 8,750 5,000 ------- ------- Total current liabilities 178,341 154,461 Long-term Debt--Note E 168,500 162,000 Other Long-term Obligations 6,911 9,846 Deferred Income Taxes 27,263 27,263 Postretirement Benefits 4,364 4,318 ------- ------- Total liabilities 385,379 357,888 ------- ------- Shareholders' Equity Preferred stock-authorized 25,000,000 shares without par value; none issued Common stock-authorized 75,000,000 shares without par value; 48,434,490 shares issued at October 1, 2000, and 48,419,604 shares issued at December 31, 1999 198,736 193,612 Additional contributed capital 13,357 9,005 Retained earnings 303,912 245,414 Cumulative translation adjustment (2,094) 291 ------- ------- 513,911 448,322 Less cost of common stock held in treasury 2000--20,680,621 shares; 1999--20,957,649 shares 291,439 283,558 ------- ------- Total shareholders' equity 222,472 164,764 ------- ------- $607,851 $522,652 ======== ======== *The condensed 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) Nine Months Ended ----------------- -- October 1, October 3, 2000 1999 --------- --------- Cash flows from operating activities: Net earnings $ 61,023 $ 32,602 Depreciation and amortization 33,008 25,221 Prepaid pension asset (11,560) (5,145) Gain on sale of fixed assets (262) (863) Acquired in-process research and development 0 12,940 Changes in assets and liabilities, net of effects of acquisition: Accounts receivable (12,505) (68,183) Inventories (12,690) (14,857) Other current assets (10,253) (751) Income taxes payable 2,536 (4,831) Accounts payable and accrued liabilities 24,949 63,529 Other 3,368 (3,617) ------- ------- Total adjustments 16,591 3,443 ------- ------- Net cash provided by continuing operations 77,614 36,045 Loss on disposal of discontinued operations 529 0 ------- ------ Net cash provided by operating activities 78,143 36,045 ------- ------ Cash flows from investing activities: Proceeds from sale of property, plant and equipment including discontinued operations, net 5,580 28,144 Acquisition of businesses (11,200) (97,445) Capital expenditures (83,412) (20,035) ------- ------- Net cash used in investing activities (89,032) (89,336) ------- ------- Cash flows from financing activities: Proceeds from issuance of long-term obligations 23,000 97,445 Payments of long-term obligations, net (12,750) (46,645) Dividend payments (2,504) ( 2,469) Purchases of treasury stock (11,207) ( 3,008) Other 7,286 713 ------- ------- Net cash provided by financing activities 3,825 46,036 ------- ------- Effect of exchange rate changes on cash (976) 45 ------- ------- Net decrease in cash (8,040) (7,210) Cash at beginning of year 24,219 16,273 ------- ------- Cash at end of period $ 16,179 $ 9,063 ======== ======== Supplemental cash flow information Cash paid during the period for: Interest $ 8,811 $ 5,654 Income taxes--net $ 11,516 $ 17,575 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 Nine Months Ended Ended ---------------- --------------- Oct. 1, Oct. 3, Oct. 1, Oct. 3, 2000 1999 2000 1999 ------ ------ ------ ------ Net earnings $21,315 $15,949 $61,023 $32,602 Other comprehensive (loss) earnings - Translation adjustments (775) 957 (2,385) 15 ------- ------- ------- ------- Comprehensive earnings $20,540 $16,906 $58,638 $32,617 ======= ======= ======= ======= See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION ------ ------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED October 1, 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 condensed 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) October 1, December 31, 2000 1999 --------- ----------- Finished goods $19,335 $19,399 Work-in-process 19,021 20,288 Raw materials 52,372 39,255 ------- ------- $90,728 $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. During the third quarter of 2000, CTS paid $11.2 million for the agreed upon 1999 portion of this obligation. 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 is being 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. 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 increased from $167 million at December 31, 1999, to $177 million at October 1, 2000. The Company had total bank borrowings of $135 million at October 1, 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 $262 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 ---------- ---------- ----- Third Quarter 2000 Net sales to external customers $127,759 $ 94,293 $222,052 Operating earnings $ 22,207 $ 9,085 $ 31,292 Total assets $472,516 $135,335 $607,851 Third Quarter 1999 Net sales to external customers $135,126 $ 45,077 $180,203 Operating earnings $ 20,237 $ 5,691 $ 25,928 Total assets $356,260 $109,679 $465,939 First Nine Months of 2000 Net sales to external customers $402,740 $230,389 $633,129 Operating earnings $ 73,348 $ 19,881 $ 93,229 Total assets $472,516 $135,335 $607,851 First Nine Months of 1999 Net sales to external customers $373,645 $104,722 $478,367 Operating earnings $ 59,232 $ 6,569 $ 65,801 Total assets $356,260 $109,679 $465,939 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 Nine Months Ended Ended ------------ ------------ Oct. 1, Oct. 3, Oct. 1, Oct. 3, 2000 1999 2000 1999 ---- ---- ---- ---- Operating Earnings Total operating earnings for reportable segments $31,292 $25,928 $93,229 $65,801 Acquired in-process research and development charge 0 0 0 (12,940) Interest expense (3,160) (2,856) (9,427) (7,077) Other income (expense) 1,473 (298) 1,688 1,125 ------ ------- ------- ------- Earnings before income taxes $ 29,605 $22,774 $85,490 $46,909 ======== ======= ======= ======= October 1, October 3, 2000 1999 --------- --------- Assets Total assets for reportable segments $607,851 $465,939 Investment in discontinued operations 0 9,061 -------- -------- Total assets $607,851 $475,000 ======== ======== 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. Page 11 NOTE H--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 third quarters and first nine months of 2000 and 1999. The other dilutive securities of approximately 258,000 and 291,000 at October 1, 2000, and October 3, 1999, respectively, consisted of shares of CTS common stock to be issued to DCA shareholders who have not as yet tendered their DCA shares. (In thousands, except per share amounts) Earnings Shares Earnings (Numerator) (Denominator) Per Share ================================================================================ Third Quarter 2000: Basic EPS $21,315 27,748 $0.77 ================================================================================ Effect of Dilutive Securities: Stock options 134 Other 258 -------------------------------------------------------------------------------- Diluted EPS $21,315 28,140 $0.76 ================================================================================ Third Quarter 1999: Basic EPS $15,949 27,555 $0.58 ================================================================================ Effect of Dilutive Securities: Stock options 727 Other 291 -------------------------------------------------------------------------------- Diluted EPS $15,949 28,573 $0.56 ================================================================================ First Nine Months of 2000: Basic EPS $61,023 27,764 $2.20 ================================================================================ Effect of Dilutive Securities: Stock options 614 Other 261 -------------------------------------------------------------------------------- Diluted EPS $61,023 28,639 $2.13 ================================================================================ First Nine Months of 1999: Basic EPS $32,602 27,491 $1.19 ================================================================================ Effect of Dilutive Securities: Stock Options 783 Other 308 -------------------------------------------------------------------------------- Diluted EPS $32,602 28,582 $1.14 ================================================================================ 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 October 1, 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) ------------------------------------- October 1, December 31, Increase 2000 1999 (Decrease) --------- ----------- -------- Cash $ 16,179 $ 24,219 $ (8,040) Accounts receivable, net 137,187 124,682 12,505 Inventories, net 90,728 78,942 11,786 Current assets 281,586 254,297 27,289 Accounts payable 98,548 68,315 30,233 Current liabilities 178,341 154,461 23,880 Working capital 103,245 99,836 3,409 Current ratio 1.58 1.65 (0.07) Interest-bearing debt $177,250 $167,000 $10,250 Shareholders' equity 222,472 164,764 57,708 Interest-bearing debt as a percent of shareholders' equity 80% 101% (21)% pts. Interest-bearing debt as a percent of capitalization 44% 50% (6)% pts. From December 31, 1999 to October 1, 2000, the working capital of CTS Corporation and its subsidiaries increased $3.4 million. Increases in working capital are volume related, primarily due to sales increases of interconnect products. The percentage of interest-bearing debt to shareholders' equity decreased due to an increase in shareholder' equity primarily resulting from increased earnings. The earnings increase was partially offset by an increase in debt related to higher capital expenditures devoted to new products and technologies, capacity expansion and land and building projects. Page 13 Changes in Financial Condition: Comparison of October 1, 2000 to ------------------------------- -------------------------------- December 31, 1999 - Continued ----------------------------- Capital expenditures were $83.4 million during the first nine months of 2000, compared with $20.0 million for first nine months of 1999. These capital expenditures were primarily for equipment and tooling for new products and technologies and capacity expansion covering primarily equipment and tooling for our RF integrated modules (assemblies), and for crystals and oscillators and application specific resistor networks (components) product lines. Additionally, significant expenditures were devoted to land/building projects in Asia and the U.S. for these expansion projects. LIQUIDITY AND CAPITAL RESOURCES For the first nine months of 2000, cash flows provided by operating activities were $78.1 million, compared to $36.0 million in the first nine months of 1999. The increase in operating cash flow was due to higher net earnings in 2000. Cash flow in the first nine months of 1999 was significantly impacted as a result of funding working capital requirements of CTS Wireless following its acquisition. Cash flows used for investing activities totaled $89.0 million through the first nine months of 2000. This use of cash was primarily the result of $83.4 million of capital expenditures and $11.2 million paid to Motorola, Inc. due to financial performance of CTS Wireless for the year ended December 31, 1999,(Note C). Use of cash for investing activities was partially offset by net proceeds received from the sale of property, plant and equipment including discontinued operations of $4.7 million. In the first nine months of 1999, cash flows used for investing activities totaled $89.3 million, consisting of $97.4 million of acquisition related costs for the CTS Wireless acquisition, $20.0 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 provided by financing activities were $3.8 million in the first nine months of 2000, consisting primarily of a net increase in debt of $10.3 million, proceeds from the exercise of stock options, offset by $11.2 million purchases of CTS stock. In 1999, cash flows provided by financing activities were $46.0 million, which consisted of a net increase in debt of $50.8 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, $83.4 million of which has been spent during the first nine months of fiscal 2000. These capital expenditures are primarily for new products and technologies, capacity expansion, and land/building projects in Asia and the U.S. Significant expenditures have been required in the interconnect, and RF integrated modules (assemblies segment), crystals and oscillators and Application Specific Resistor Networks (components segment) product lines. 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 $262.0 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 Third Quarter 2000 to --------------------------------- ----------------------------------- Third Quarter 1999 ------------------ The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended October 1, 2000, and October 3, 1999. (Dollars in thousands) ------------------------------- Oct. 1, Oct. 3, Increase 2000 1999 (Decrease) ------ ------ ---------- Net sales $222,052 $180,203 $41,849 Gross earnings 62,758 54,967 7,791 Gross earnings as a percent of sales 28.3% 30.5% (2.2)% pts. Selling, general and administrative expenses 21,716 21,326 390 Selling, general and administrative expenses as a percent of sales 9.8% 11.8% (2.0)% pts. Research and development expenses 8,237 6,566 1,671 Operating earnings 31,292 25,928 5,364 Operating earnings, as a percent of sales 14.1% 14.4% (0.3)% pts. Interest expense 3,160 2,856 304 Earnings from continuing operations before income taxes 29,605 22,774 6,831 Income taxes 8,290 6,825 1,465 Income tax rate 28.0% 30.0% (2.0)% pts. Earnings from continuing operations $ 21,315 $ 15,949 $ 5,366 Net sales increased by $41.8 million, or 23% from the third 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 the frequency control, resistor and electrocomponents products, but were adversely impacted primarily due to a customer delayed CDMA program, decreases related to the decline in the analog single mode cellular phones and other customer inventory corrections. Page 16 Item 2. Management's Discussion and Analysis of Financial ------- ------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- Changes in Results of Operations: Comparison of Third Quarter 2000 to --------------------------------- ----------------------------------- Third Quarter 1999 ------------------ As a percentage of total sales, sales of electronic components and electronic assemblies in the third quarter of 2000 were 58% and 42%, respectively. As a percentage of total sales, the 1999 third quarter sales of electronic components and electronic assemblies were 75% and 25%, respectively. Refer to Note F - Business Segments, for a description of the Company's business segments. The electronic components segment experienced a $7.3 million sales decrease, or 5% from the third quarter of 1999. Sales decreases in the components segment were related to a drop in wireless components resulting from the decline in the analog single mode cellular phone, combined with customer delays in a new product introduction and a decline in sales into the South Korean market resulting from the termination of certain government subsidies. Additionally, there were no sales in third quarter 2000 compared to $5.1 million in third quarter 1999 of certain Wireless end of life products. Increases were experienced in frequency control product sales primarily for communications infrastructure, and there were improvements experienced in resistor and electrocomponents products primarily for current surface mount devices and new product introductions. The electronic assemblies segment experienced a third quarter 2000 sales increase of $49.2 million, or 109% from the third quarter of 1999. 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 increased primarily due to sales volume increases in the interconnect and frequency control product lines, and gross margin increases in wireless products. Gross earnings includes $2.5 million in third quarter 2000 relating to an inventory adjustment associated with the new management information system implementation. Selling, general and administrative expenses increased primarily due to increases in wireless employee salaries and benefits for the expanding wireless component business units and professional services related to new management information systems implementation costs, primarily for training. Research and development expenses increased primarily in wireless product design and development and for new product development activities in our automotive product lines. The $5.4 million increase in operating earnings, was principally due to the continuing growth in electronic assemblies volume. The slight decrease in operating earnings as a percent of sales was primarily the result of a higher volume of lower margin interconnect electronic assemblies. The effective tax rate decreased by 2.0 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 Third Quarter 2000 to --------------------------------- ----------------------------------- Third Quarter 1999 ------------------ Due to lower than committed volumes from a major customer, the Company incurred a substantial under absorption of manufacturing and operating expenses within the components segment. A memorandum of understanding with the customer commits certain volumes and, accordingly, the Company billed the customer $3.9 million during the third quarter 2000 for the costs incurred. The customer has acknowledged the invoices, the payment of which is subject to verification and audit. While these costs were primarily incurred during the third quarter, no recovery was reflected in the quarter's results of operations. 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 Nine Months of --------------------------------- ---------------------------------- 2000 to First Nine Months of 1999 --------------------------------- The following table highlights changes in significant components of the consolidated statements of earnings for the nine-month periods ended October 1, 2000, and October 3, 1999. (Dollars in thousands) -------------------------------- Oct. 1, Oct. 3, Increase 2000 1999 (Decrease) ------ ------ ---------- Net sales $633,129 $478,367 $154,762 Gross earnings 190,099 144,840 45,259 Gross earnings as a percent of sales 30.0% 30.3% (0.3)% pts. Selling, general and administrative expenses 69,008 58,787 10,221 Selling, general and administrative expenses as a percent of sales 10.9% 12.3% (1.4)% pts. Research and development expenses 24,059 17,804 6,255 Acquired in-process research and development (IPR&D) 0 12,940 (12,940) Operating earnings 93,229 52,861 40,368 Operating earnings, excluding IPR&D charge 93,229 65,801 27,428 Operating earnings excluding IPR&D charge, as a percent of sales 14.7% 13.8% 0.9% pts. Interest expense 9,427 7,077 2,350 Earnings from continuing operations before income taxes 85,490 46,909 38,581 Earnings from continuing operations before income taxes, excluding IPR&D charge 85,490 59,849 25,641 Income taxes 23,938 14,307 9,631 Income tax rate 28.0% 30.5% (2.5)% pts. Net loss from discontinued operations, net of income tax benefit of $355 (529) 0 (529) Net earnings $ 61,023 32,602 $ 28,421 Net sales increased by $154.8 million, or 32% from the first nine months of 1999. Sales increases occurred principally as a result of growth in the electronic assemblies segment, driven by both boxbuild assemblies and RF integrated modules. The electrocomponents and resistor electronic components business also improved significantly as the result of strong demand for current surface mount devices and new product introductions. As a percentage of total sales, sales of electronic components and electronic assemblies in the first nine months of 2000 were 64% and 36%, respectively. As a percentage of total sales, the first nine months of 1999 sales of electronic components and electronic assemblies were 78% and 22%, respectively. Refer to Note F - Business Segments, for a description of the Company's business segments. Page 19 Item 2. Management's Discussion and Analysis of Financial ------- ------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- Changes in Results of Operations: Comparison of First Nine Months of --------------------------------- ---------------------------------- 2000 to First Nine Months of 1999 --------------------------------- The electronic components segment experienced a $29.1 million sales increase in the first nine months of 2000, or 8% over the first nine months of 1999. Revenue increases were realized in frequency control and resistor and electrocomponent product lines. Sales decreases within the components segment included a drop in sales of wireless components as a result of the decline in the analog single mode cellular phone, combined with customer delays in a new product introduction and a decline in sales into the South Korean market resulting from the termination of certain government subsidies. Additionally, there were no sales in the first nine months of 2000 compared to $26.0 million in the first nine months of 1999 related to certain Wireless end of life products. Total 1999 annual sales of these end of life products were $30 million. The increases in frequency control product sales were primarily for communications infrastructure, and the improvements in resistor and electrocomponents products were primarily for current surface mount devices and new product introductions. The electronic assemblies segment experienced an increase in the first nine months of 2000 of $125.7 million, or 120% from the first nine months of 1999. Revenue increases were experienced both in the interconnect and RF integrated module business, primarily due to increased demand for the telecommunication and computer markets. Gross earnings increased $45.3 million primarily due to wireless components improved gross margin, and the sales volume increases in frequency components as well as the increased sales volume of interconnect electronic assemblies segment products. Selling, general and administrative expenses increased primarily as a result of the inclusion of CTS Wireless for a full nine months, and additional wireless depreciation, employee salaries and benefits for the expanding wireless component business units, and the professional services related to new management information systems implementation costs, primarily for training. Research and development expenses increased as a result of the inclusion of CTS Wireless for a full nine 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 was due to the volume driven growth in earnings within the electronic components segment primarily frequency control, resistor and electrocomponents products and the volume driven growth in earnings for the electronic assemblies segment of RF integrated modules and interconnect boxbuild assemblies. Page 20 Item 2. Management's Discussion and Analysis of Financial ------- ------------------------------------------------- Condition and Results of Operations (Continued) ----------------------------------------------- Changes in Results of Operations: Comparison of First Nine Months of --------------------------------- ---------------------------------- 2000 to First Nine Months of 1999 --------------------------------- The effective tax rate decreased by 2.5 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 the sale of the discontinued operations in the first quarter of 2000, resulting in a $.02 unfavorable 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 as required. The impact, if any, of adopting SFAS 133 on CTS' consolidated financial position, results of operations and cash flows, is not anticipated to be significant. In December 1999, the SEC issued Staff Accounting Bulletin Number ("SAB No.") 101, "Revenue Recognition in Financial Statements," which provides additional guidance in applying generally accepted accounting principles for revenue recognition. The Company is not expecting the implementation of SAB 101 to have a material impact on the financial statements. 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 August 25, 2000, Richard G. Cutter was elected Vice President and Assistant Secretary, CTS Corporation. Mr. Cutter retains his position of General Counsel. Additionally, on August 25, 2000, H. Tyler Buchanan was elected Vice President, CTS Corporation. Mr. Buchanan will assume overall responsibility for CTS' automotive sensors and actuator manufacturing facilities and resistor networks/electrocomponents manufacturing operations. Effective October 1, 2000, Michael A. Henning was elected to the CTS Corporation Board of Directors. Mr. Henning is Deputy Chairman, Ernst & Young LLP. Page 21 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: November 14, 2000 Page 22