-----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, MtZ81COCdPnG/yKdN1owDEEAUDLf8cZdZXZEC0Q4v39x240zaaes8dod6nyLT7nl 8HyTHu3wxNgLZrSnAoYDqA== 0000026058-01-500012.txt : 20010807 0000026058-01-500012.hdr.sgml : 20010807 ACCESSION NUMBER: 0000026058-01-500012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010806 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: 1934 Act SEC FILE NUMBER: 001-04639 FILM NUMBER: 1699099 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 secondqtr10q.txt SECOND QUARTER 2001 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 1, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _________________ Commission File Number 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 July 26, 2001: 28,494,996. 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 1, 2001 and July 2, 2000 3 Condensed Consolidated Balance Sheets - As of July 1, 2001 and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows - For the Six Months Ended July 1, 2001, and July 2, 2000 5 Consolidated Statements of Comprehensive Earnings - For the Three Months and Six Months Ended July 1, 2001, and July 2, 2000 6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-19 Item 3. Quantitative and Qualitative Disclosure About Market Risk 19 PART 2. -- OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 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 1, July 2, July 1, July 2, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 143,723 206,611 $ 320,711 $ 411,077 Costs and expenses: Cost of goods sold 120,845 142,096 257,268 283,736 Selling, general and administrative expenses 19,340 24,060 42,714 47,292 Research and development expenses 7,488 7,955 17,268 15,822 Amortization of intangibles 1,724 1,245 3,370 2,290 Restructuring and impairment charges--Note C 14,011 - 14,011 - ------- ------ ------- ------ Operating earnings (loss) (19,685) 31,255 (13,920) 61,937 ------- ------ ------- ------ Other(expense)income: Interest expense (3,233) (3,085) (6,599) (6,267) Interest income 169 248 349 446 Other (149) - (465) (231) ------ ------ ------ ------ Total other expense (3,213) (2,837) (6,715) (6,052) ------ ------ ------ ------ Earnings(loss) before income taxes (22,898) 28,418 (20,635) 55,885 Income taxes (5,725) 7,957 (5,159) 15,648 ------- ------ ------ ------ Earnings (loss) from continuing operations (17,173) 20,461 (15,476) 40,237 Net loss from discontinued operations, net of income tax benefit of $355 - Note E - - - (529) -------- -------- -------- -------- Net earnings (loss) $ (17,173) $ 20,461 $(15,476) $ 39,708 ========= ======== ======== ======== Earnings (loss) per share- Note I Basic: Continuing operations $ (0.62) $ 0.74 $ (0.56) $ 1.45 Discontinued operations - - - (0.02) ------- ------- ------- ------- Net earnings (loss) per share $ (0.62) $ 0.74 $ 0.56 $ 1.43 ======= ======= ======= ======= Diluted: Continuing operations $ (0.62) $ 0.71 $ (0.56) $ 1.39 Discontinued operations - - (0.02) ------- ------- ------- ------- Net earnings (loss) per share $ (0.62) $ 0.71 $ (0.56) $ 1.37 ======= ======= ======= ======= Cash dividends declared per share $ 0.03 $ 0.03 $ 0.06 $ 0.06 ======= ====== ======== ======= Average common shares outstanding: Basic 27,697 27,786 27,684 27,771 Diluted 27,697 28,725 27,684 28,888 See notes to condensed consolidated financial statements. Page 3 Part 1 -- FINANCIAL INFORMATION (Cont'd) CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) July 1, December 31, 2001 2000* ---- ----- ASSETS (Unaudited) - ------ Current Assets Cash $ 18,590 $ 20,564 Accounts receivable, less allowances (2001--$1,831; 2000--$1,837) 98,341 145,920 Inventories--Note B 79,182 104,316 Other current assets 7,848 8,920 Deferred income taxes 25,902 25,976 ------- ------- Total current assets 229,863 305,696 Property, Plant and Equipment, less accumulated depreciation(2001--$209,897; 2000--$189,219) 251,433 224,861 Other Assets Prepaid pension expense 93,626 84,301 Intangible assets--Note D 49,744 53,606 Other 5,016 4,465 -------- -------- Total other assets 148,386 142,372 -------- -------- $629,682 $672,929 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities Current maturities of long-term debt--Note F $ 12,500 $ 10,000 Notes payable 12,008 7,397 Accounts payable 55,517 100,394 Accrued liabilities 72,434 85,100 ------- ------- Total current liabilities 152,459 202,891 Long-term debt--Note F 204,500 178,000 Other long-term obligations 3,390 6,689 Deferred income taxes 34,897 34,612 Postretirement benefits 4,414 4,380 Shareholders' Equity Preferred stock-authorized 25,000,000 shares without par value; none issued - - Common stock-authorized 75,000,000 shares without par value; 48,510,750 issued at July 1, 2001, and 48,436,908 shares issued at December 31, 2000 200,729 198,877 Additional contributed capital 14,537 14,558 Retained earnings 308,690 325,850 Cumulative translation adjustment (2,671) (1,561) ------- ------- 521,285 537,724 Less cost of common stock held in treasury 2001- 20,624,723 shares; 2000 - 20,655,721 shares (291,263) (291,367) -------- -------- Total shareholders' equity 230,022 246,357 -------- -------- $629,682 $672,929 ======== ======== *The balance sheet at December 31, 2000, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. Page 4 Part 1 -- FINANCIAL INFORMATION(Cont'd) CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (In thousands of dollars) Six Months Ended ---------------- July 1, July 2, 2001 2000 ---- ---- Cash flows from operating activities: Net earnings (loss) $(15,476) 39,708 Depreciation and amortization 26,000 21,342 Deferred income taxes (402) - Loss on disposal of discontinued operations - 529 Prepaid pension asset (7,525) (7,797) Income tax benefit related to exercised stock options 33 5,615 Restructuring and impairment charges 14,011 - Changes in assets and liabilities: Accounts receivable 47,579 8,604 Inventories 25,134 (1,282) Other current assets 1,072 (8,736) Accounts payable and accrued liabilities (66,658) (4,535) Other 326 (592) ------ ------ Total adjustments 39,570 13,148 ------ ------ Net cash provided by continuing operations 24,094 52,856 Net cash provided by discontinued operations - 318 ------ ------ Net cash provided by operating activities 24,094 53,174 Cash flows from investing activities: Proceeds from sale of property, plant and equipment including discontinued operations, net - 6,955 DCA acquisition costs (2,450) (533) Capital expenditures (56,234) (47,739) ------- ------- Net cash used in investing activities (58,684) (41,317) Cash flows from financing activities: Payments of long-term obligations (5,000) (11,500) Proceeds from issuance of long term obligations 34,000 - Dividend payments (1,678) (1,658) Purchases of treasury stock - (6,182) Other 5,119 5,011 ------ ------ Net cash provided by(used in) financing activities 32,441 (14,329) Effect of exchange rate changes on cash 175 (636) ------ ------ Net decrease in cash (1,974) (3,108) Cash at beginning of year 20,564 24,219 ------ ------ Cash at end of period $ 18,590 $ 21,111 ======== ======== Supplemental cash flow information Cash paid during the period for: Interest $ 7,331 $ 6,158 Income taxes--net $ 8,265 $ 6,805 See notes to condensed consolidated financial statements. Page 5 Part 1 -- FINANCIAL INFORMATION (Cont'd) CTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED (In thousands of dollars) Three Months Six Months Ended Ended ----- ----- July 1, July 2, July 1, July 2, 2001 2000 2001 2000 ---- ---- ---- ---- Net earnings (loss) $(17,173) $20,461 $(15,476) $39,708 Other comprehensive loss - Translation adjustments (130) (1,213) (1,110) (1,610) ------- ------- ------- ------- Comprehensive earnings (loss) $(17,303) $19,248 $(16,586) $38,098 See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED July 1, 2001 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, 2000. 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 that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ 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 periods presented in the financial statements to conform to the 2001 presentation. NOTE B--INVENTORIES Inventories consist of the following: (In thousands) July 1, December 31, 2001 2000 ---- ---- Finished goods $24,767 $ 29,756 Work-in-process 14,414 16,490 Raw materials 40,001 58,070 ------ ------ $79,182 $104,316 ======= ======== Page 7 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES During the second quarter of 2001, CTS recorded $14.0 million of restructuring and impairment charges relating to a plan to realign its operations. This plan was implemented during the second quarter of 2001. The plan was designed to permit the Company to operate more efficiently in the current environment and at the same time be well positioned when the economy improves. The plan involves the consolidation of facilities in Asia, North America and Europe and includes plant closures, product consolidation and discontinuing the manufacture of intermediate frequency surface acoustical wave filters ("IF SAWs"). CTS anticipates completing a substantial portion of these activities within fiscal 2001. Approximately $8.4 million relates to facility consolidations, including plant closures and product consolidations. Included in this amount is approximately $6.4 million of severance benefits associated with the separation of approximately 1,275 employees. Approximately 10% of the employees to be severed are managerial employees and 90% are nonmanagement employees. As of July 1, 2001, approximately $1.9 million of severance benefits, relating to approximately 450 employees, had been paid. Of the remaining $2.0 million of facility consolidation charges, $0.5 million has been paid. The following table displays the second quarter activity and restructuring reserve balances as of July 1, 2001: ($ in millions) Other Workforce Facility Reductions Consolidation Total ---------- ------------- ------ Original restructuring and impairment charge $6.4 $2.0 $8.4 Items paid (1.9) (0.5) (2.4) --- --- --- July 1, 2001 reserve balance $4.5 $1.5 $6.0 ==== === === The plan also includes a $7.4 million asset impairment charge resulting primarily from the second quarter decision to discontinue the manufacture of IF SAWs (included in CTS' electronic components segment). In accordance with Financial Accounting Standard ("FAS") #121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," an impairment charge was necessary to write these assets down to their estimated fair value. CTS also recognized a pension plan curtailment gain of approximately $1.8 million in the second quarter of 2001 resulting from plant closures under the restructuring plan. Also during the second quarter, CTS recorded in cost of sales $5.4 million of one-time charges, consisting primarily of inventory writedowns relating to restructuring activities. Page 8 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTE D--ACQUISITION In 1999, CTS acquired certain assets and liabilities of the Component Products Division of Motorola, Inc., hereafter referred to as "CTS Wireless." The acquisition was accounted for under the purchase method of accounting. As part of the purchase agreement, CTS may be obligated to pay additional amounts depending upon increased sales and profitability of CTS Wireless through 2003. The calculation resulted in an additional payment of approximately $11 million for 1999 and an estimated liability of $15 million for 2000. The maximum remaining potential payment under the acquisition agreement was $79.6 million at December 31, 2000. NOTE E--DISCONTINUED OPERATIONS During 1998, CTS finalized a plan to sell all of the businesses obtained in the acquisition of Dynamics Corporation of America ("DCA") not strategic to CTS' electronic components or electronic assemblies core business segments. During the first quarter of 2000, the disposition of DCA acquired businesses was completed resulting in a net loss of $0.5 million. NOTE F--LONG-TERM DEBT Long-term debt (including the current portion) increased from $188 million at December 31, 2000, to $217 million at July 1, 2001. Interest rates on these borrowings fluctuate based upon LIBOR, with adjustments based on the ratio of CTS' consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization. CTS 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 CTS maintain a minimum net worth, a minimum fixed charge coverage ratio and a maximum leverage ratio. CTS has a total of $266 million of committed credit facilities which are unsecured. NOTE G--BUSINESS SEGMENTS FAS # 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to provide certain information about their operating segments. 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 potentiometers. 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 an assembly represents a completed, higher- level Page 9 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTE G--BUSINESS SEGMENTS (Cont'd) functional product to be used in customer end products or assemblies. These products consist principally of integrated interconnect systems products containing 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 pointing sticks/cursor controls for notebook 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 2001 Net sales to external customers $ 80,582 $ 63,141 $143,723 Operating loss $(18,590) $ (1,095) $(19,685) Total assets $503,298 $126,384 $629,682 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 First Half 2001 Net sales to external customers $180,447 $140,264 $320,711 Operating earnings (loss) $(14,223) $ 303 $(13,920) Total assets $503,298 $126,384 $629,682 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 Page 10 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTE G--BUSINESS SEGMENTS (Cont'd) Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: (In thousands) Three Months Six Months Ended Ended ----- ----- July 1, July 2, July 1, July 2 2001 2000 2001 2000 ---- ---- ---- ---- Operating Earnings (Loss) Total operating earnings (loss) for reportable segments $(19,685) $31,255 $(13,920) $61,937 Interest expense (3,233) (3,085) (6,599) (6,267) Other income (expense) 20 248 (116) 215 ------- ------- ------- ------- Earnings (loss) before income taxes $(22,898) $28,418 $(20,635) $55,885 ======== ======= ======== ======= NOTE H--CONTINGENCIES Certain processes in the manufacture of CTS' current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party ("PRP") regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of CTS. Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business and contracts relating to sales of property. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS' consolidated financial position or results of operations. NOTE I--EARNINGS PER SHARE FAS #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. Approximately 767,000, for the second quarter of 2001, and 868,000, for the first half of 2001, of common stock equivalents were excluded from the computation of diluted Page 11 Part 1 -- FINANCIAL INFORMATION(Cont'd) NOTE I--EARNINGS PER SHARE (Cont'd) earnings per share due to their anti-dilutive effect. At July 2, 2000, the other dilutive securities include approximately 261,000 shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their stock certificates for exchange in the DCA acquisition. (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 ================================================================================ 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 ================================================================================ NOTE J--INCOME TAXES In 2001, CTS lowered its overall effective tax rate to 25% from 28% in 2000. The reduction in income tax expense for 2001 results from a higher percentage of income in lower tax rate jurisdictions. NOTE K--ACCOUNTING PRONOUNCEMENTS The FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which is effective for CTS on January 1, 2002. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. CTS continues to evaluate the impact of adopting the standard. Page 12 Part 1 -- FINANCIAL INFORMATION (Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Changes in Financial Condition: Comparison of July 1, 2001 to December 31, 2000 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 1, December 31, Increase 2001 2000 (Decrease) ---- ---- ---------- Cash $ 18,590 $ 20,564 $ (1,974) Accounts receivable, net 98,341 145,920 (47,579) Inventories, net 79,182 104,316 (25,134) Current assets 229,863 305,696 (75,833) Accounts payable 55,517 100,394 (44,877) Current liabilities 152,459 202,891 (50,432) Working capital 77,404 102,805 (25,401) Current ratio 1.5 1.5 - Long-term debt $217,000 $188,000 $ 29,000 Shareholders' equity 230,022 246,357 (16,335) Long-term debt as a percent of shareholders' equity 94% 76% 18% pts. Long-term debt as a percent of capitalization 49% 43% 6 % pts. From December 31, 2000 to July 1, 2001, CTS' working capital decreased $25.4 million. This net decrease, was principally the result of reductions in accounts receivable and inventories offset partially by a decrease in accounts payable. The decreases were the result of lower sales and related production volumes in 2001 due to the weak economic conditions. The percentage of long-term debt to shareholders' equity increased due to the increase in debt primarily to fund capital expenditures and the decrease in shareholders' equity primarily resulting from decreased earnings. Capital expenditures were $56.2 million during the first half of 2001, compared with $47.7 million for first half of 2000. The 2001 capital expenditures are primarily for new products and technologies and building projects in Asia. Page 13 Part 1 -- FINANCIAL INFORMATION(Cont'd) Changes in Financial Condition: Comparison of July 1, 2001 to December 31, 2000 - Continued LIQUIDITY AND CAPITAL RESOURCES In the first half of 2001, cash flows provided by operating activities were $24.1 million, compared to $53.2 million in the first half of 2000. The most significant reasons for the decrease in operating cash flow during 2001 were lower net earnings and changes in working capital. Cash flows used for investing activities totaled $58.7 million through the first half of 2001. This use of cash was primarily the result of $56.2 million of capital expenditures. In the first half of 2000, cash flows used for investing activities totaled $41.3 million. 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 $7.0 million. Cash flows provided by financing activities were $32.4 million in the first half of 2001, consisting primarily of a net increase in debt of $29 million and other financing activities, primarily related to proceeds from additional borrowings under the short-term notes payable and the exercise of stock options. In the first half of 2000, cash flows used for financing activities were $14.3 million. This use of cash consisted 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. CTS' capital expenditures for 2001 are presently expected to be approximately $85 million, $56.2 million of which has been spent during the first six months of the year. These capital expenditures are primarily for new products and technologies and building projects in Asia. In the CTS traditional product lines, expenditures are required in the automotive and resistor product lines for new product introduction and new technology. Projected capital expenditures in 2001 for CTS Wireless projects include programs for the RF Integrated Modules and for the necessary equipment to reduce product size as a result of customer demands in the wireless handset industry. Expenditures for new Asian facilities for CTS Wireless, in accordance with the acquisition agreement, continue and totaled $26.1 million during the first six months of 2001. During the second quarter of 2001, CTS implemented actions to restructure its business in response to current market conditions. Restructuring and related one-time charges, including $2.1 million of severance recorded in the first quarter of 2001, are expected to aggregate $27 million, a substantial portion of which will be incurred during 2001. CTS 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 $266 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, restructuring activities, capital expenditures and debt service requirements. Page 14 Part 1 -- FINANCIAL INFORMATION(Cont'd) Changes in Results of Operations: Comparison of Second Quarter 2001 to Second Quarter 2000 The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended July 1, 2001, and July 2, 2000. (Dollars in thousands) ---------------------- July 1, July 2, Increase 2001 2000 (Decrease) ---- ---- ---------- Net sales $143,723 $206,611 $(62,888) Gross earnings 22,878 64,515 (41,637) Gross earnings as a percent of sales 15.9% 31.2% (15.3) pts. Selling, general and administrative expenses 19,340 24,060 (4,720) Selling, general and administrative expenses as a percent of sales 13.5% 11.6% 1.9% pts. Research and development expenses 7,488 7,955 (467) Restructuring and impairment charges 14,011 - 14,011 Operating earnings (loss) (19,685) 31,255 (50,940) Operating earnings (loss) as a percent of sales (13.7%) 15.1% (28.8) % pts. Interest expense 3,233 3,085 148 Earnings (loss) from continuing operations before income taxes (22,898) 28,418 (51,316) Income taxes (5,725) 7,957 (13,682) Income tax rate 25.0% 28.0% (3.0)% pts. Net earnings (loss) $(17,173) $ 20,461 $(37,634) Net sales decreased by $62.9 million, or 30% from the second quarter of 2000. Sales decreases occurred in the electronic components and electronic assemblies segments by $55.4 million and $7.5 million, respectively. The decreases are the result of the weak economic conditions and related effect on the primary markets served by CTS' two operating segments. Gross earnings decreased due to under absorption of fixed costs and the inclusion of $5.4 million of one-time charges consisting primarily of inventory writedowns relating to restructuring activities. The operating loss for the second quarter of 2001 is largely due to the $14 million restructuring charge, $5.4 million related one-time charges incurred during the second quarter and under absorbed overheads caused by lower production levels. This was partially offset by selling and general and administrative expenses, which were $4.7 million lower in the second quarter of 2001 as compared to the second quarter of 2000. Page 15 Part 1 -- FINANCIAL INFORMATION(Cont'd) Changes in Results of Operations: Comparison of Second Quarter 2001 to Second Quarter 2000 As a percentage of total sales, sales of electronic components and electronic assemblies in the second quarter of 2001 were 56% and 44%, respectively. As a percentage of total sales, the 2000 second quarter sales of electronic components and electronic assemblies were 66% and 34%, respectively. Refer to Note G - Business Segments, for a description of the Company's business segments. The electronic components segment experienced a $55.4 million sales decrease, or 41% from the second quarter of 2000, primarily due to softness in the demand for wireless and related components. The electronic assemblies segment experienced a second quarter 2001 sales decrease of $7.5 million, or 11% from the second quarter of 2000. The revenue decrease was primarily a result of a decline in the sales of RF Integrated modules used in wireless handsets. Gross earnings dollars decreased primarily due to lower sales volume. The lower percent of sales in both segments results principally from under absorbed overheads caused by lower production levels combined with a shift to lower margin products in the electronic assemblies segment. Also included in the second quarter of 2001 is $5.4 million of one-time charges, consisting primarily of inventory writedowns, relating to the 2001 restructuring activities. Selling, general and administrative expenses were $19.3 million in second quarter of 2001 versus $24.1 million in the prior year's quarter. The decrease relates to overall expense control and lower sales volume. Research and development expenses decreased $0.5 million to $7.5 million in second quarter of 2001. During the second quarter of 2001, CTS recorded $14.0 million of restructuring and impairment charges relating to a plan to realign its operations. This plan was implemented during the second quarter of 2001. The plan was designed to permit the Company to operate more efficiently in the current environment and at the same time be well positioned when the economy improves. The plan involves the consolidation of facilities in Asia, North America and Europe and includes plant closures, product consolidation and discontinuing the manufacture of intermediate frequency surface acoustical wave filters ("IF SAWs"). CTS anticipates completing a substantial portion of these activities within fiscal 2001. Approximately $8.4 million relates to facility consolidations, including plant closures and product consolidations. Included in this amount is approximately $6.4 million of severance benefits associated with the separation of approximately 1,275 employees. Approximately 10% of the employees to be severed are managerial employees and 90% are nonmanagement employees. As of July 1, 2001, approximately $1.9 million of severance benefits, relating to approximately 450 employees, had been paid. Of the remaining $2.0 million of facility consolidation charges, $0.5 million has been paid. Page 16 Part 1 -- FINANCIAL INFORMATION(Cont'd) Changes in Results of Operations: Comparison of Second Quarter 2001 to Second Quarter 2000 The plan also includes a $7.4 million asset impairment charge resulting primarily from the second quarter decision to discontinue the manufacture of IF SAWs (included in CTS' electronic components segment). In accordance with Financial Accounting Standard ("FAS") #121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," an impairment charge was necessary to write these assets down to their estimated fair value. CTS also recognized a pension plan curtailment gain of approximately $1.8 million in the second quarter of 2001 resulting from plant closures under the restructuring plan. The decrease in operating earnings dollars, was principally due to the restructuring charge of $14.0 million and related one-time charges of $5.4 million recorded during the quarter and lower volume as a result of the overall softness in the served markets, particularly the wireless handset demand within both the electronic components and electronic assemblies segments. The effective tax rate decreased to 25.0% from the previous rate of 28% primarily due to a shift in earnings to lower-tax jurisdictions. The following table highlights changes in significant components of the consolidated statements of earnings for the six-month periods ended July 1, 2001, and July 2, 2000. (Dollars in thousands) ---------------------- July 1, July 2, Increase 2001 2000 (Decrease) ---- ---- ---------- Net sales $320,711 $411,077 $(90,366) Gross earnings 63,443 127,341 (63,898) Gross earnings as a percent of sales 19.8% 31.0% (11.2)pts. Selling, general and administrative expenses 42,714 47,292 (4,578) Selling, general and administrative expenses as a percent of sales 13.3% 11.5% 1.8 % pts. Research and development expenses 17,268 15,822 1,446 Restructuring and impairment charges 14,011 - 14,011 Operating earnings (loss) (13,920) 61,937 (75,857) Operating earnings (loss), as a percent of sales (4.3)% 15.1% (19.4)% pts. Interest expense 6,599 6,267 332 Earnings (loss) from continuing operations before income taxes (20,635) 55,885 (76,520) Income taxes (5,159) 15,648 (20,807) Income tax rate 25.0% 28.0% (3.0)% pts. Net loss from discontinued operations, net of income tax benefit of $355 - (529) 529 Net earnings (loss) $(15,476) $ 39,708 $(55,184) Page 17 Part 1 -- FINANCIAL INFORMATION(Cont'd) Changes in Results of Operations: Comparison of First Half 2001 to First Half 2000 Net sales decreased by $90.4 million, or 22% from the second half of 2000. Sales decreases of $94.5 million in the electronic component segments were partially offset by minor increases of $4.1 million in the electronic assemblies segment. The decrease in electronic components was due to weak economic conditions and related effect in the primary markets served by CTS' two operating segments. The increase in the electronic assemblies segment was experienced primarily in the interconnect product lines within this segment due to the demand for integrated interconnect systems, and was partially offset by the decline in the sales of RF integrated modules used in wireless handsets. As a percentage of total sales, sales of electronic components and electronic assemblies in the first half of 2001 were 56% and 44%, respectively. In the first half of 2000, as a percentage of total sales, sales of electronic components and electronic assemblies were 67% and 33%, respectively. Refer to Note G - Business Segments, for a description of the Company's business segments. Gross earnings dollars decreased primarily due to lower sales levels. The lower percent of sales in both segments results principally from under absorbed overheads caused by lower production levels, combined with a shift to lower margin products in the electronic assemblies segment. Also included in the first half of 2001 is $5.4 million of one-time charges relating to the 2001 restructuring plan and $2.1 million of severance recorded in the first quarter. Selling, general and administrative expenses decreased due to overall expense control and lower sales volume. Research and development expenses increased as a result of activities related to our wireless product lines that will support new product applications for multi-functional cellular phones, PDA's, two-way pagers and global positioning systems (GPS). These and other programs are directed to improve product performance and to achieve miniaturization through advanced technology and integration, and new product development in other product lines, most notably automotive and resistor. During the first half of 2001, CTS recorded $14 million of restructuring and impairment charges relating to a plan to realign its operations. The decrease in operating earnings dollars was primarily due to lower volumes as a result of the overall softness in the served markets, particularly the wireless handset demand within both the electronic components and electronic assemblies segments. Also, operating earnings were lower due to the $14 million restructuring and impairment charges and $7.5 million related one-time charges recorded during the first half of 2001. The effective tax rate decreased to 25.0% from the previous rate of 28.0% primarily due to a shift in earnings to lower-tax jurisdictions. 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 unfavorable impact on earnings per share. Statements about the Company's earnings outlook and its plans, estimates and beliefs concerning the future are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, based on the Company's current expectations. Actual results may differ materially from those stated in the forward-looking statements due to a variety of factors which could affect Page 18 Part 1 -- FINANCIAL INFORMATION(Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the Company's operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statements. Factors that could impact future results include among others: the impact of the ongoing slowdown in the overall economy; the Company's successful execution of its restructuring, consolidation and cost reduction plans; pricing pressures and demand for the Company's products, especially if economic conditions worsen or do not recover in the key markets for the Company's products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political risks. Investors are encouraged to examine the Company's SEC filings, which more fully describe the risks and uncertainties associated with the Company's business. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in CTS' market risk since December 31, 2000. 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. See also Note H--"Contingencies" in the financial statements. Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None Page 19 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 Jeannine M. Davis Vinod M. Khilnani Executive Vice President, Senior Vice President Administration, and and Chief Financial Officer Secretary Dated: August 6, 2001 Page 20 -----END PRIVACY-ENHANCED MESSAGE-----