-----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, OY2AivOPG/PidZRRh8HQ3JEQXh0ZYgZYDE3eNKCvHJ8ZoxiNM4dWUIuyOXGUljLh 9VmBL26E18u0Hted8HZSsQ== 0000026058-98-000020.txt : 19981111 0000026058-98-000020.hdr.sgml : 19981111 ACCESSION NUMBER: 0000026058-98-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04639 FILM NUMBER: 98743497 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 1998 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 September 27, 1998 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 September 27, 1998 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 6, 1998: 13,599,863 Page 1 of 16 CTS CORPORATION FORM 10-Q INDEX Page No. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Earnings - For the Three Months and Nine Months ended September 27,1998, and September 28,1997 3 Condensed Consolidated Balance Sheets - As of September 27, 1998, and December 31, 1997 4 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 27, 1998, and September 28, 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Part Ii -- Other Information Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 -------------------------------- SIGNATURES 16 Page 2 of 16 Part I. -- 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 Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 Net sales $106,585 $89,980 $357,150 $288,731 Costs and expenses: Cost of goods sold 77,076 64,818 259,523 209,441 Selling, general and administrative expenses 13,688 10,404 46,201 34,270 Research and development expenses 3,032 3,134 10,207 9,183 ------- ------- ------- ------- Operating earnings 12,789 11,624 41,219 35,837 ------- ------- ------- ------- Other expenses (income): Interest expense 1,130 976 3,420 1,649 Other (162) (1,565) (1,867) (2,488) ------- ------- ------ ------ Total other expenses (income) 968 (589) 1,553 (839) ------- -------- ----- ------ Earnings before income taxes 11,821 12,213 39,666 36,676 Income taxes 3,623 4,530 13,090 13,581 ------- ------- ------ ------- Net earnings $ 8,198 $ 7,683 $26,576 $ 23,095 ======= ======= ======= ======== Net earnings per share: Basic $ 0.60 $ 0.49 $ 1.88 $ 1.48 ======= ======= ======= ======== Diluted $ 0.58 $ 0.48 $ 1.80 $ 1.45 ======= ======= ======= ======== Cash dividends declared per share $ 0.06 $ 0.06 $ 0.18 $ 0.18 Average common shares outstanding: Basic 13,669 15,738 14,158 15,700 Diluted 14,202 15,926 14,779 15,865 See notes to condensed consolidated financial statements. Page 3 of 16 Part I. -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) September 27, December 31, 1998 1997* ------------ ----------- ASSETS (Unaudited) Current Assets: Cash $ 18,033 $ 39,847 Accounts receivable, less allowances (1998-$1,159; 1997-$1,074) 64,512 68,679 Inventories--Note B 46,947 56,007 Other current assets 6,021 5,327 Deferred income taxes 15,873 15,873 ----- -------- Total current assets 151,386 185,733 Property, Plant and Equipment, less accumulated depreciation (1998--$135,672; 1997--$130,907) 84,165 76,027 Other Assets Prepaid pension 67,099 61,738 Other 3,572 6,083 -------- -------- Total other assets 70,671 67,821 -------- -------- $306,222 $329,581 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term obligations $ 6,740 $ 5,465 Accounts payable 20,424 28,200 Accrued liabilities 63,550 58,687 -------- -------- Total current liabilities 90,714 92,352 Long-term Obligations 77,045 63,474 Deferred Income Taxes 19,070 21,950 Postretirement Benefits 4,292 4,309 Shareholders' Equity: Preferred stock - authorized 25,000,000 shares without par value; none issued Common stock-authorized 75,000,000 shares without par value; issued 24,182,451 shares 190,107 186,794 Additional contributed capital 10,775 15,822 Retained earnings 187,213 163,169 Cumulative translation adjustment 1,286 694 ------- -------- 389,381 366,479 Less cost of common stock held in treasury: 1998-- 10,553,040 shares; 1997-- 8,873,056 shares 274,280 218,983 ------- -------- Total shareholders' equity 115,101 147,496 -------- -------- $306,222 $329,581 ======== ======== *The balance sheet at December 31, 1997, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. Page 4 of 16 Part I. -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars) Nine Months Ended Sept.27, Sept.28, 1998 1997 Cash flows from operating activities: Net earnings $26,576 $23,095 Depreciation and amortization 13,620 11,224 Decrease (increase) in: Accounts receivable 90 (9,350) Inventories 2,269 8,860 Other current assets (878) (2,149) Prepaid pension asset (5,361) (5,157) Other 900 (1,148) Increase in: Accounts payable and accrued liabilities (5,593) 16,198 ------- ------- Total adjustments 5,047 18,478 ------ ------- Net cash provided by operating activities 31,623 41,573 Cash flows from investing activities: Proceeds from sale of property and other assets 24,061 1,843 Capital expenditures (17,215) (16,115) Investment in Dynamics Corporation of America (DCA) (68,364) Acquisition related costs (6,387) -------- ------- Net cash provided by (used in) investing activities 459 (82,636) Cash flows from financing activities: Net proceeds from revolving credit 10,250 Credit agreement arrangement fee (937) Term loan borrowings 50,000 Payments of long-term obligations (1,706) (214) Dividend payments (2,604) (2,822) Purchases of treasury stock (55,503) Other (5,165) 531 ------- ------- Net cash (used in) provided by financing activities (54,728) 46,558 Effect of exchange rate changes on cash 832 (874) ------- --------- Net (decrease) increase in cash (21,814) 4,621 Cash at beginning of year 39,847 44,957 ------- ------- Cash at end of period $18,033 $49,578 ======= ======= Supplemental cash flow information Cash paid during the period for: Interest $ 2,861 $ 1,302 Income Taxes--Net $17,560 $ 6,804 See notes to condensed consolidated financial statements. Page 5 of 16 Part I. -- FINANCIAL INFORMATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, in thousands of dollars except per share data) September 27, 1998 Note A - Basis of Presentation The accompanying condensed consolidated interim financial statements have been prepared by CTS Corporation ("CTS" or "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). 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, 1997. The accompanying unaudited consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Note B - Inventories The components of inventory consist of the following: September 27, December 31, 1998 1997 Finished goods $ 7,704 $ 8,061 Work-in-process 22,477 26,036 Raw material 16,766 21,910 ------ ------- $46,947 $56,007 ======= ======= Page 6 of 16 Note C - 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. Note D - Integration of DCA The Company is continuing the process of evaluating the alternatives for the business units acquired from DCA, which is expected to be completed by the end of 1998. During the second quarter of 1998, the Company substantially completed the sale of the Waring Products Division and closed the DCA corporate headquarters in Greenwich, Connecticut. The Company does not expect that the finalization of this process will have any significant effect on the consolidated financial position or results of operations of the Company. Note E - Earnings Per Share (EPS) FASB Statement No. 128, "Earnings per Share," requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted 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 quarter and first nine months of 1998 and 1997. The other dilutive securities of approximately 164,000 at September 27, 1998, consisted of shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their DCA shares. Page 7 of 16 Net Net Earnings Shares Earnings (Numerator) (Denominator) Per Share Third Quarter 1998: Basic $ 8,198 13,669 $0.60 - ----------------------------- ---------------------------------------------- Effect of Dilutive Securities: Stock options 369 Other 164 - ---------------------------- ----------------------------------------------- Diluted $ 8,198 14,202 $0.58 - ---------------------------------------------------------------------------- Third Quarter 1997: Basic $ 7,683 15,738 $0.49 - ---------------------------------------------------------------------------- Effect of Dilutive Securities: Stock options 188 Other 0 - ---------------------------------------------------------------------------- Diluted $ 7,683 15,926 $0.48 - ---------------------------------------------------------------------------- First Nine Months of 1998: Basic $26,576 14,158 $1.88 - ---------------------------------------------------------------------------- Effect of Dilutive Securities: Stock options 452 Other 169 - --------------------------- ------------------------------------------------ Diluted $26,576 14,779 $1.80 - ---------------------------------------------------------------------------- First Nine Months of 1997: Basic $23,095 15,700 $1.48 - ---------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 165 Other 0 - ---------------------------------------------------------------------------- Diluted $23,095 15,865 $1.45 - ---------------------------------------------------------------------------- Note F - Comprehensive Earnings Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. Other comprehensive earnings include Page 8 of 16 foreign currency translation adjustments. The Company's comprehensive earnings for the third quarter and first nine months of 1998 and the comparable period last year were as follows: Three Months Ended Sept. 27, Sept. 28, 1998 1997 (In thousands of dollars) Third Quarter Net earnings $8,198 $7,683 Other comprehensive earnings (loss)- translation adjustments 437 (816) ----- ------ Comprehensive earnings $8,635 $6,867 ======= ======= Nine Months Ended Sept. 27, Sept. 28, 1998 1997 First Nine Months Net earnings $26,576 $23,095 Other comprehensive earnings(loss)- translation adjustments 592 (1,377) ------ ------ Comprehensive earnings $27,168 $21,718 ======= ======= Part I. -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Material Changes in Financial Condition: Comparison of September 27, 1998, to December 31, 1997 The following table highlights significant changes in balance sheet items and ratios and other information related to liquidity and capital resources: (Dollars in thousands) Sept. 27, Dec. 31, Increase 1998 1997 (Decrease) Cash $18,033 $ 39,847 (21,814) Accounts receivable, net 64,512 68,679 (4,167) Inventories, net 46,947 56,007 (9,060) Current assets 151,386 185,733 (34,347) Accounts payable 20,424 28,200 (7,776) Other current liabilities 63,550 58,687 4,863 Current liabilities 90,714 92,352 (1,638) Working capital 60,672 93,381 (32,709) Current ratio 1.67 2.01 (.34) Interest bearing debt 69,750 61,206 8,544 Net tangible worth 114,063 146,320 (32,257) Ratio of interest bearing debt to net tangible worth .61 .42 .19 Page 9 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) From December 31, 1997, to September 27, 1998, cash decreased by $21.8 million primarily due to common stock repurchases of $55.5 million, partially offset by cash proceeds from asset sales of $24.1 million and net proceeds from revolving credit of $10.3 million. The Company's stock repurchases include the purchase of 0.7 million of CTS common shares from WHX Corporation on March 5, 1998, and 1.0 million shares in the open market and other transactions. On June 26, 1998, the Company announced the authorization by the Board of Directors to purchase an additional 500,000 shares of its stock from time to time in open market or privately negotiated transactions. The cash proceeds from asset sales represent the sale of the Waring Products division of DCA to Conair Corporation, the sale of the Company's Bentonville, Arkansas facility and the sale of other assets. Working capital decreased $32.7 million due to the cash decrease of $21.8 million, as explained above, decreases in inventory of $9.1 million primarily relating to the sale of Waring and increases in other current liabilities of $4.9 million relating primarily to the remaining severance expenses associated with the retirement/termination of DCA executives and the termination of other employees, partially offset by a decrease in accounts payable of $7.8 million. The current ratio decreased slightly due to the relative decrease in current assets, primarily cash, due to the level of common stock repurchases. The ratio of interest bearing debt to net tangible worth increased due to an $8.5 million net increase in debt and a decrease of $32.3 million in net tangible worth, relating primarily to the stock repurchase activity. Capital expenditures were $17.2 million during the first nine months, compared with $16.1 million for the same period a year earlier. These capital expenditures were primarily for increased manufacturing capacity, manufacturing improvement programs and new products. The Company has entered into an agreement to acquire the Component Products Division (CPD) of Motorola's Automotive, Component, Computer and Energy Sector (ACCES). The businesses included in the transaction are Motorola's Ceramics, Quartz, Oscillator, Piezoelectric Technology and Surface Acoustic Wave operations. While the final terms of the transaction have not been set, it is contemplated that the Company will acquire CPD for approximately 1.2 times estimated annual sales. A significant portion of the purchase price would be in the form of deferred payments which are contingent on CPD's future operating results. The Company expects to finance a substantial portion of the purchase price through bank borrowings or the issuance of debt securities. The transaction is subject to the execution of definitive documentation, receipt of the appropriate corporate approvals and other conditions. Accordingly, there can be no assurance that the transaction will be completed or, if completed, the timing thereof. Page 10 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Material Changes in Results of Operations: Comparison of Third Quarter 1998 to Third Quarter 1997 The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended September 27, 1998, and September 28, 1997: (Dollars in thousands) Sept. 27, Sept. 28, Increase 1998 1997 (Decrease) Net sales $106,585 $ 89,980 $16,605 Gross earnings 29,509 25,162 4,347 Gross earnings as a percent of sales 27.69% 27.96% (0.27%) Selling, general and administrative expenses 13,688 10,404 3,284 Selling, general and administrative expenses as a percent of sales 12.84% 11.56% 1.28% Research and development expenses 3,032 3,134 (102) Operating earnings 12,789 11,624 1,165 Operating earnings as a percent of sales 12.00% 12.92% (0.92%) Interest expense 1,130 976 154 Earnings before income taxes 11,821 12,213 (392) Income taxes 3,623 4,530 (907) Net Earnings 8,198 7,683 515 Income tax rate 30.65% 37.00% (6.35%) Net sales increased by $16.6 million, or 18.5%, from the third quarter of 1997. Sales increases occurred principally as a result of the inclusion of Dynamics Corporation of America (DCA) operating units, partially offset by the decline in sales of products to the disk drive industry, the 1997 sale of our domestic military and aerospace connector business, reduced shipments arising from the General Motors strike and lower demand in Europe for our interconnect products. As a percent of total sales, sales of electronic components, electronic component assemblies and other products in the third quarter of 1998 were 52.0%, 26.0% and 22.0%, respectively. As a percentage of total sales, the third quarter of 1997 sales of electronic components, electronic component assemblies and other products were 59.6%, 40.0% and 0.4%, respectively. The increase in other products relates to the inclusion of DCA operations in 1998. Sales of electronic component assemblies decreased in 1998 due primarily to the 1997 sale of our domestic military and aerospace connector business, the decline in the disk drive industry, and the lower European demand for our interconnect products. Gross earnings, as a percentage of sales, slightly decreased primarily due to the inclusion of the lower margin DCA businesses, primarily offset by improvements in CTS core electronic component and assembly business margins from 28.0% to 31.8%, due to productivity improvements and expense control programs. Page 11 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selling, general and administrative expenses increased as a result of the inclusion of acquired DCA businesses. Research and development expenses remained relatively flat compared to the same period in the prior year. The effective tax rate decreased approximately 6% points primarily due to higher earnings in the lower-tax non-U.S. jurisdictions. Material Changes in Results of Operations: Comparison of First Nine Months of 1998 to First Nine Months of 1997. The following table highlights changes in significant components of the consolidated statements of earnings for the nine-month periods ending September 27, 1998, and September 28, 1997: (Dollars in thousands) Sept. 27, Sept. 28, Increase 1998 1997 (Decrease) --------- --------- --------- Net sales $357,150 $ 288,731 $68,419 Gross earnings 97,627 79,290 18,337 Gross earnings as a percent of sales 27.34% 27.46% (0.12%) Selling, general and administrative expenses 46,201 34,270 11,931 Selling, general and administrative expenses as a percent of sales 12.94% 11.87% 1.07% Research and development expenses 10,207 9,183 1,024 Operating earnings 41,219 35,837 5,382 Operating earnings as a percent of sales 11.54% 12.41% (0.87%) Interest expense 3,420 1,649 1,771 Earnings before income taxes 39,666 36,676 2,990 Income taxes 13,090 13,581 (491) Net earnings 26,576 23,095 3,481 Income tax rate 33.00% 37.00% (4.00%) Net sales increased by $68.4 million, or 23.7% from the first nine months of 1997. Sales increases occurred principally as a result of the inclusion of the acquired DCA businesses, partially offset by the decline in the sales of products to the disk drive industry, the 1997 sale of our domestic military and aerospace connector business and reduced shipments arising from the General Motors strike. As a percent of total sales, sales of electronic components, electronic component assemblies and other products for the first nine months of Page 12 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 1998 were 51.4%, 25.9% and 22.7%, respectively. As a percentage of total sales, the first nine months of 1997 sales of electronic components, electronic component assemblies and other products were 58.7%, 40.9% and 0.4%, respectively. The increase in other products relates to the inclusion of DCA operations in 1998. Sales of electronic component assemblies decreased in 1998 due primarily to the 1997 sale of our domestic military and aerospace connector business and the decline in the disk drive industry. Gross earnings, as a percentage of sales, slightly decreased primarily due to the inclusion of lower margin DCA businesses, primarily offset by improvements in CTS core business margins from 27.5% to 31.5%, due to productivity improvements and expense control programs. Selling, general and administrative expenses in dollars increased as a result of the inclusion of acquired businesses. CTS businesses decreased in dollars due to continued cost control. Research and development expenses increased 11.2% as the Company continued investment efforts in new product development and improvements. The effective tax rate decreased by 4% points primarily due to higher earnings in the lower-tax non-U.S. jurisdictions. Year 2000 Computer Systems Compliance As many computer systems and other equipment with embedded chips or processors (collectively, "Systems") use only two digits to represent the year, they may be unable to accurately process certain data before, during or after the year 2000. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company recognizes the need to ensure its operations will not be adversely affected by Year 2000 software failures and has established a project team to address the Year 2000 issue. Many of the Company's Systems are Year 2000 compliant. However, the Company has a program in place designed to bring the remaining Systems into Year 2000 compliance in time to minimize any significant detrimental effects on operations. Our goal is to have our remediated and replaced systems operational by the first quarter of 1999 to allow time for testing and verification. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. Page 13 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The first phase of the Year 2000 compliance program is to identify the internal Systems of the Company that are susceptible to system failures or processing errors as a result of the Year 2000 issue. This effort is substantially complete with the Company having identified the Systems that may require remediation or replacement and established priorities for repair or replacement. Those Systems considered most critical to continuing operations are being given the highest priority. The second phase of the Year 2000 compliance program involves the actual remediation and replacement of Systems. The Company is using both internal and external resources to complete this phase. Systems ranked highest in priority have either been remediated or replaced, or are scheduled for remediation or replacement. Systems previously earmarked for retirement and replacement without regard to the Year 2000 issue have been evaluated for remediation or early replacement with Year 2000 compliant systems or programs. The Company's objective is to complete substantially all remediation and replacement of internal Systems by March 1999, and to complete final testing and certification for Year 2000 readiness by September 1999. The Company also faces risk to the extent that suppliers of products, services and systems purchased by the Company and others with whom the Company transacts business on a worldwide basis do not comply with Year 2000 requirements. As part of the Year 2000 compliance program, significant service providers, vendors, suppliers, customers and governmental entities that are believed to be critical to business operations after January 1, 2000, have been identified and steps are being undertaken to reasonably determine their stage of Year 2000 readiness. Costs to be incurred in the remainder of 1998 and 1999 to resolve Year 2000 problems are estimated at approximately $2 million. These estimated costs do not include normal ongoing costs for computer hardware and software that would be replaced in the next year even without the presence of the Year 2000 issue. The Company does not expect the costs relating to Year 2000 remediation to have a material effect on its results of operations or financial condition. Based on the progress the Company has made in addressing its Year 2000 issues and the Company's timeline to complete its compliance program, the Company does not foresee significant risks associated with its Year 2000 compliance at this time. As the Company's plan is to address its significant Year 2000 issues prior to being affected by them, it has not developed a comprehensive contingency plan. However, if the Company identifies significant risks related to its Year 2000 compliance or its progress deviates from the anticipated timeline, the Company will develop contingency plans as deemed necessary at that time. Page 14 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The estimates and conclusions herein contain forward-looking statements and are based on management's best estimates of future events. However, there can be no assurance that the Company will timely identify and remediate all significant Year 2000 problems, that remedial efforts will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company's business, results of operations or financial position. Part II -- 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 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K Announcement of the adoption of a shareholder Rights Plan and certain bylaw amendments; filed September 2, 1998. Announcement of a proposed agreement by which CTS will acquire the Component Products Division of Motorola's Automotive, Component, Computer and Energy Sector; filed September 15, 1998. Page 15 of 16 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 Timothy J. Cunningham Vice President, Secretary Vice President Finance and General Counsel and Chief Financial Officer Dated: November 10, 1998 Page 16 of 16 EX-27 2 FDS --
5 9-MOS DEC-31-1998 JUN-28-1998 SEP-27-1998 18,033 0 65,671 1,159 46,947 151,386 219,837 135,672 306,222 90,714 0 0 0 190,107 (75,006) 306,222 106,585 106,585 77,076 93,796 (162) 0 1,130 11,821 3,623 8,198 0 0 0 8,198 0.60 0.58
-----END PRIVACY-ENHANCED MESSAGE-----