-----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, P3lldAQIUc6+hRe43Q1EHCbjr56aSdLb/YqE/cSVRrF1i1rThin+9fe9SOrmTx6X rnr5n1SAtL1n3UuKADg1uw== 0000026058-99-000017.txt : 19990520 0000026058-99-000017.hdr.sgml : 19990520 ACCESSION NUMBER: 0000026058-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990519 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: 99630494 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 1999 1ST Q 10 Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 4, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _________________ For Quarter Ended Commission File Number April 4, 1999 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 905 West Boulevard North Elkhart, IN 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219)293-7511 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 17,1999: 13,757,068 1 CTS CORPORATION AND SUBSIDIARIES INDEX Page No. PART 1 -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Earnings - For the Three Months Ended April 4, 1999, and March 29, 1998 3 Condensed Consolidated Balance Sheets - As of April 4, 1999, and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended April 4, 1999, and March 29, 1998 5 Consolidated Statements of Comprehensive Earnings - For the Three Months Ended April 4, 1999, and March 29, 1998 6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 PART 2 -- OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 2 Part 1 -- FINANCIAL INFORMATION Item 1. Financial Statements CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS-UNAUDITED (In thousands, except per share amounts) Three Months Ended April 4, March 29, 1999 1998 ---- ---- Net sales $120,339 $94,041 Costs and expenses: Cost of goods sold 83,152 67,674 Selling, general and administrative expenses 15,861 12,708 Research and development expenses 4,659 3,260 Acquired in-process research and development - Note C 12,940 --- Amortization of intangibles 395 76 --- -- Operating earnings 3,332 10,323 Other(expense)income: Interest expense (1,291) (499) Interest income 251 408 Other 936 948 --- --- Total other (expense) income (104) 857 ---- --- Earnings before income taxes 3,228 11,180 Income taxes 1,065 3,802 ----- ----- Earnings from continuing operations 2,163 7,378 Earnings from discontinued operations, net of income tax charge of $889 in 1998 - Note D --- 1,334 ----- ----- Net earnings $ 2,163 $ 8,712 ======= ======= Earnings per share - Note H Basic earnings per share: Continuing operations $ 0.16 $ 0.50 Discontinued operations --- 0.09 ---- Net earnings $ 0.16 $ 0.59 ====== ======= Diluted earnings per share: Continuing operations $ 0.15 $ 0.47 Discontinued operations --- 0.09 ---- Net earnings $ 0.15 $ 0.56 ====== ======= Cash dividends declared per share $ 0.06 $ 0.06 Average common shares outstanding: Basic 13,693 14,867 Diluted 14,332 15,568 See notes to condensed consolidated financial statements. 3 Part 1 -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) April 4, December 31, 1999 1998* ---- ----- ASSETS (Unaudited) Current Assets Cash $16,369 $ 16,273 Accounts receivable, less allowances (1999--$557; 1998--$552) 84,226 47,043 Inventories--Note B 54,066 33,322 Other current assets 2,336 5,553 Deferred income taxes 16,737 16,392 ------ ------ Total current assets 173,734 118,583 Property, Plant and Equipment, less accumulated depreciation (1999--$143,248; 1998--$136,711) 143,976 67,186 Other Assets Prepaid pension 65,050 69,074 Investment in discontinued operations 9,061 35,123 Intangibles--Note C 32,153 1,164 Other 7,460 2,059 ----- ----- Total other assets 113,724 107,420 ------- ------- $431,434 $293,189 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt - Note E $10,250 $14,000 Accounts payable 36,535 17,412 Accrued liabilities 62,597 50,965 ------ ------ Total current liabilities 109,382 82,377 Long-term Debt--Note E 152,750 42,000 Other Long-term Obligations 13,234 13,568 Deferred Income Taxes 27,145 27,145 Postretirement Benefits 4,294 4,260 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 24,185,949 shares 192,393 190,347 Additional contributed capital 8,366 10,872 Retained earnings 198,612 197,285 Cumulative translation adjustment 177 806 --- --- 399,548 399,310 Less cost of common stock held in treasury: 1999--10,418,227 shares; 1998--10,562,449 shares 274,919 275,471 ------- ------- Total shareholders' equity 124,629 123,839 ------- ------- $431,434 $293,189 ======== ======== *The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. 4 Part 1 -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars) Three Months Ended April 4, March 29, 1999 1998 ---- ---- Cash flows from operating activities: Net earnings $ 2,163 $ 8,712 Net earnings from discontinued operations --- (1,334) Depreciation and amortization 6,347 4,023 Acquired in-process research and development 12,940 --- (Increase) decrease net of effects from the purchase of Component Products Division (CPD): Accounts receivable (37,183) (8,405) Inventories 23 (865) Other current assets 2,154 (893) Deferred income taxes (5,172) --- Prepaid pension asset (2,088) (1,733) Gain on sale of fixed assets (816) (1,254) Other 1,790 1,055 Increase in: Accounts payable and accrued liabilities 30,755 177 ------ --- Total adjustments 8,750 (9,229) ----- ------ Net cash provided by(used in) continuing operations 10,913 (517) Net cash used by discontinued operations --- (2,242) ------ ------ Net cash provided by (used in) operating activities 10,913 (2,759) Cash flows from investing activities: Proceeds from sale of property, plant and equipment, including discontinued operations, net 27,267 2,227 Cash paid for purchase of CPD (96,937) --- Capital expenditures (4,214) (4,695) ------ ------ Net cash used in investing activities (73,884) (2,468) Cash flows from financing activities: Proceeds from issuance of long-term obligations 96,937 8,000 Payments of long-term obligations, net (31,937) --- Dividend payments (817) (911) Purchases of treasury stock (480) (32,926) Other 399 392 --- --- Net cash provided by (used in) financing activities 64,102 (25,445) Effect of exchange rate changes on cash ( 1,035) 165 - ----- --- Net increase(decrease)in cash 96 (30,507) Cash at beginning of year 16,273 39,847 ------ ------ Cash at end of period $16,369 $ 9,340 ======= ======= Supplemental cash flow information Cash paid during the period for: Interest $ 1,318 $ 1,044 Income Taxes--Net $ 3,128 $ 3,769 See notes to condensed consolidated financial statements. 5 Part 1 -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (In thousands of dollars) Three Months Ended ------------------ April 4, March 29, 1999 1998 ---- ---- Net earnings $2,163 $8,712 Other comprehensive (loss) earnings - Translation adjustments (629) 403 ---- --- Comprehensive earnings $1,534 $9,115 ====== ====== See notes to condensed consolidated financial statements. 6 Part 1 -- FINANCIAL INFORMATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) April 4, 1999 NOTE A--BASIS OF PRESENTATION The accompanying condensed interim consolidated financial data is unaudited; however, in the opinion of management, the interim data includes all adjustments considered necessary for a fair presentation of the results for the interim period. Operating results for the three-month period ended April 4, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's 1998 Annual Report on Form 10-K. Certain reclassifications have been made for the years presented in the financial statements to conform to the classifications adopted in 1999. NOTE B--INVENTORIES The components of inventory consist of the following: (In thousands) April 4, December 31, 1999 1998 ---- ---- Finished goods $12,871 $ 9,289 Work-in-process 15,794 10,396 Raw material 25,401 13,637 ------ ------ $54,066 $33,322 ======= ======= NOTE C--ACQUISITION On February 26, 1999, CTS Corporation (the "Company") completed the acquisition of the Component Products Division (CPD or CTS Wireless) of Motorola, Inc. ("Motorola"). The Company paid Motorola $94 million at the closing and assumed approximately $49 million of debt (including pension obligation) as part of the acquisition. In addition, the Company may be obligated to pay up to an additional $105 million over five years depending upon increased sales and profitability of CPD. CTS financed a substantial portion of the purchase price through bank borrowings. Intangible assets totaling approximately $22 million were recorded as a result of this acquisition under the purchase method of accounting. The transaction also resulted in the recording of one-time charges of approximately $13 million related to the cost of acquired in-process research and development, and approximately $9 million was recorded as an intangible related to the value of existing CPD products (current technology). CPD designs and manufactures ceramic filters, quartz crystals, crystal oscillators, surface acoustic wave 7 components and piezoceramic devices, in five facilities in the USA and Asia, primarily for the wireless communications industry. The operating results of CTS Wireless have been included in the consolidated statements of earnings from the date of acquisition. Pro forma results of operations as if the acquisition of CPD had occurred at the beginning of the periods presented follows: Three months ended Year ended April 4, 1999 December 31, 1998 ------------- ----------------- Unaudited - --------- Net sales (In millions) $165.2 $675.7 Net earnings (In millions) 3.2 27.7 Diluted earnings per share $0.22 $1.90 For the pro forma effect of full year 1998, see the Company's Current Report on Form 8-K dated March 11, 1999, as amended. These unaudited pro forma consolidated results of operations have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill and other intangibles, and increased interest expense on acquisition debt. In management's opinion, the pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on January 1, 1998, or of future operations of the combined companies under the ownership and operation of the Company. The allocation of purchase price to assets acquired and liabilities assumed is preliminary; however, it is not expected that finalization will have any material effect on the financial position or results of operations. Acquired in-process research and development - -------------------------------------------- The Company allocated $13 million of the total purchase price to acquired in-process research and development related to the CPD acquisition. The Company used independent professional appraisal consultants to assess and allocate values to the in-process research and development. These allocations represent the estimated fair value based on risk-adjusted future cash flows related to the incomplete projects. The fair value assigned to acquired in- process technology was determined by estimating the contribution of the acquired in-process technology to developing commercially viable products and estimating the resulting cash flows from the expected product sales of such products. The resulting cash flows were discounted to their present value using a rate of 18%, which exceeds the overall cost of capital for the Company. Cash flows attributable to development efforts, including the completion of developments underway, and future versions of the product that have not yet been undertaken, were excluded in the valuation of in-process research and development, and the percentage of completion of development was used to recognize only the value of the completed portion of the research and development efforts as in-process research and development. There were no material anticipated changes from historical pricing, margins and expense trends. 8 Estimated net cash inflows from the acquired in-process technology related to CPD are projected to commence in the latter part of 1999 and 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 is approximately $9 million to be incurred through the year 2000. Remaining efforts on the projects are significant and include most phases of project design, development and testing. At the date of the acquisition, the development of these projects had not yet reached technological feasibility, the research and development in progress had no alternative future uses and the remaining efforts on the projects were significant. Accordingly, these costs were expensed as of the acquisition date. Acquired current technology of approximately $9 million was capitalized at the acquisition date and is being amortized over four years on a straight-line basis. The Company believes that the assumptions used in the forecasts were reasonable at the time of the business combination. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results. NOTE D--DISCONTINUED OPERATIONS/DIVESTITURES During 1998, CTS finalized its plan to sell all of the businesses obtained in the Dynamics Corporation of America (DCA) acquisition not strategic to the Company's core business segments of electronic components and electronic assemblies. These noncore businesses are recorded as discontinued operations for all periods presented in the consolidated financial statements. During 1998, CTS completed the sale of the Waring Products Division resulting in gross proceeds of approximately $22 million. During the first quarter of 1999, the divestiture of three of the discontinued operations was completed resulting in gross proceeds of approximately $31 million. These divestitures substantially complete the sale of businesses acquired from DCA which were not strategic to the Company's electronic components or electronic assemblies segments. Proceeds of the divestitures were used to reduce bank debt. NOTE E--LONG-TERM DEBT Interest-bearing debt increased from $56 million at December 31, 1998 to $163 million at April 4, 1999, primarily due to the acquisition of CTS Wireless. The Company borrowed $121 million of the debt under new bank credit facilities which totaled $225 million. The initial variable interest rate on these borrowings is approximately LIBOR plus one percent and the facilities have a term of six 9 years. The $225 million of credit facilities is unsecured and replaced previous credit facilities which totaled $125 million. The remaining $42 million of debt requires payment of interest at a fixed annual weighted-average rate of 7.5 percent. The entire principal amount of $42 million is due in the year 2013. NOTE F--SEGMENT REPORTING 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 automotive sensors used in commercial or consumer vehicles, ceramic filters, surface acoustic wave components, piezoceramic devices, frequency control devices such as crystals and clocks, loudspeakers, resistor networks, switches and variable resistors. Electronic assemblies are assemblies of electronic or electronic and mechanical products which, apart from the assembly, may themselves be marketed as separate stand-alone products. Such assembly represents 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, cursor controls for computers, flex cable assemblies used in the disk drive market and hybrid microcircuits used in the healthcare market. 10 Management evaluates performance based upon operating earnings before interest and income taxes. Summarized financial information concerning CTS' reportable segments is shown in the following table: (In thousands) Electronic Electronic Components Assemblies Total ---------- ---------- ----- First Quarter 1999 Net sales to external customers $ 91,374 $ 28,965 $120,339 Operating earnings 16,482 (210) 16,272 Total assets $376,926 $ 45,447 $422,373 First Quarter 1998 Net sales to external customers $ 61,898 $32,143 $ 94,041 Operating earnings 9,155 1,168 10,323 Total assets $201,541 $59,553 $261,094 Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: (In thousands) Operating Earnings First Quarter First Quarter 1999 1998 ---- ---- Total operating earnings for reportable segments $16,272 $10,323 Acquired in-process research and development charge (12,940) --- Interest expense (1,291) (499) Other income 1,187 1,356 ----- ----- Earnings before income taxes $3,228 $11,180 ====== ======= Assets Total assets for reportable segments $422,373 $261,094 Investment in discontinued operations 9,061 40,690 ----- ------ Total assets $431,434 $301,784 ======== ======== 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. 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 EPS computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the first quarter of 1999 and 1998. The other dilutive securities of approximately 161,000 and 176,000 at April 4, 1999, and March 29, 1998, respectively, consisted of shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their DCA shares. (In thousands, except per share amounts) Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ First Quarter 1999: Basic EPS $2,163 13,693 $0.16 Effect of Dilutive Securities: Stock options 478 Other 161 Diluted EPS $2,163 14,332 $0.15 First Quarter 1998: Basic EPS $8,712 14,867 $0.59 Effect of Dilutive Securities: Stock options 525 Other 176 Diluted EPS $8,712 15,568 $0.56 12 Part 1 -- FINANCIAL INFORMATION Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations Material Changes in Financial Condition: Comparison of April 4, 1999 to December 31, 1998 The following table highlights significant changes in balance sheet items and ratios and other information related to liquidity and capital resources: (Dollars in thousands) April 4, December 31, Increase 1999 1998 (Decrease) ---- ---- ---------- Cash $16,369 $16,273 $ 96 Accounts receivable, net 84,226 47,043 37,183 Inventories, net 54,066 33,322 20,744 Current assets 173,734 118,583 55,151 Accounts payable 36,535 17,412 19,123 Current liabilities 109,382 82,377 27,005 Working capital 64,352 36,206 28,146 Current ratio 1.59 1.44 .15 Interest-bearing debt $163,000 $56,000 $107,000 Shareholders' equity 124,629 123,839 790 Interest-bearing debt as a percent of shareholders' equity 131% 45% 86% pts. Interest-bearing debt as a percent of capitalization 57% 31% 26% pts. From December 31, 1998, to April 4, 1999, working capital of CTS Corporation and its subsidiaries ("CTS" or "Company") increased $28.1 million. This increase is primarily due to the inclusion of CTS Wireless at April 4, 1999. The percentage of interest-bearing debt to shareholders' equity increased significantly due to the increase in debt for the purchase of CTS Wireless. Capital expenditures were $4.2 million during the first quarter, compared with $4.7 million for the same period a year earlier. These capital expenditures were primarily for increased manufacturing capacity, manufacturing improvement programs and new products. LIQUIDITY AND CAPITAL RESOURCES Cash flows used for investing activities totaled $73.9 million through the first quarter of 1999, including $96.9 million paid for the CPD acquisition and $4.2 million of capital expenditures, partially offset by net proceeds received from the sale of property, plant and equipment including discontinued operations of $27.3 million. In the first three months of 1998, cash flows used for investing activities totaled $2.5 million, consisting of $4.7 million of capital expenditures, partially offset by $2.2 million of net proceeds from the sale of property, plant and equipment. 13 Cash flows provided by financing activities were $64.1 million in 1999, consisting of a net increase in debt of $65.0 million (excluding the $42.0 million of debt assumed with the purchase of CPD), partially offset by dividends of $0.8 million, and the net of purchases of treasury stock and other of $0.1 million. The increase in debt was due to financing obtained to fund the CPD acquisition, partially offset by the paydown of debt with the proceeds from the sale of discontinued operations. The Company purchased inventory of CPD, however, it did not purchase accounts receivable or accounts payable. Accordingly, the Company financed the working capital needs of CPD for the month of March principally through the increase in trade accounts payable and will continue to do so prospectively. During the first three months of 1998, cash flows used for financing activities totaled $25.4 million, including $32.9 million of stock purchases and a net of $0.5 million for dividends and other, partially offset by an increase in debt of $8.0 million. 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 $225.0 million with a term of six years. The Company believes its current cash flow and available credit under the bank credit facilities is adequate to fund its operating requirements, working capital, capital expenditures and debt service. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Material Changes in Results of Operations: Comparison of First Quarter 1999 to First Quarter 1998 The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ending April 4, 1999, and March 29, 1998: (Dollars in thousands) April 4, March 29, Increase 1999 1998 (Decrease) ---- ---- ---------- Net sales $120,339 $94,041 $ 26,298 Gross earnings 37,187 26,367 10,820 Gross earnings as a percent of sales 30.9% 28.0% 2.9% Selling, general and administrative expenses 15,861 12,708 3,153 Selling, general and administrative expenses as a percent of sales 13.2% 13.5% (0.3%) Research and development expenses 4,659 3,260 1,399 Acquired in-process research and development (IPR&D) 12,940 --- 12,940 Operating earnings 3,332 10,323 (6,991) Operating earnings excluding IPR&D charge 16,272 10,323 5,949 Operating earnings, excluding IPR&D charge, as a percent of sales 13.5% 11.0% 2.5% Interest expense 1,291 499 792 Earnings before income taxes 3,228 11,180 (7,952) Earnings before income taxes, excluding IPR&D charge 16,168 11,180 4,988 Income taxes 1,065 3,802 (2,737) Income tax rate 33.0% 34.0% (1.0%) Net sales increased by $26.3 million, or 28% from the first quarter of 1998. Sales increases occurred principally as a result of the inclusion of CTS Wireless since February 26, 1999. CTS Wireless' operating results will be reported as part of CTS' electronic components segment. As a percent of total sales, sales of electronic components and electronic assemblies in the first quarter of 1999 were 76% and 24%, respectively. As a percentage of total sales, the first quarter of 1998 sales of electronic components and electronic assemblies were 66% and 34%, respectively. Refer to Note F - Segment Reporting, for a description of the Company's segments. 15 The electronic components segment experienced a $29.5 million sales increase, or 48% from the first quarter of 1998, primarily due to the inclusion of CTS Wireless' financial results since February 26, 1999. Revenue increases were also realized in automotive and traditional frequency product lines. First quarter sales declines were experienced in thermal dissipator products sold to the personal computer market, when 1999 is compared to 1998. The electronic assemblies segment experienced a 1999 sales decrease of $3.2 million, or 10% from the first quarter of 1998, primarily due to declines in flex cable assemblies for the disk drive industry. CTS expects that 1999 annual sales of flex cable assemblies will not reach the level achieved in 1998. Gross earnings increased primarily due to the inclusion of CTS Wireless since February 26, 1999. Increases in gross earnings were also realized as a result of a favorable product mix in the electronic components segment, as well as the earnings effect of the revenue increases in automotive and frequency product lines. Selling, general and administrative expenses in dollars increased in the electronic components segment primarily as a result of the inclusion of CTS Wireless, however, decreased as a percentage of sales on a total company basis. Research and development expenses increased in dollars primarily as a result of the inclusion of CTS Wireless. In addition, the Company continued its investment efforts in new product development and improvements. The acquired in-process research and development of $12.9 million reported during the first three months of 1999 consisted of a one-time charge related to the purchase of CPD. Amortization of intangibles totaled $0.4 million for the first three months of the year, representing a $0.3 million increase compared to the same period in the prior year. This increase was primarily attributable to the recording of the additional intangibles related to the acquisition of CPD in February 1999. The increase in operating earnings dollars, excluding the acquired in- process research and development charge, is principally due to the acquisition of CTS Wireless, the incremental margin impact on higher sales volume and continued control of manufacturing and operating expenses. The effective tax rate decreased by 1% point primarily due to higher earnings in the lower-tax jurisdictions. Year 2000 Computer Systems Compliance CTS is addressing the issues associated with the programming code in existing computer systems and other equipment which may be affected by the rollover of the two-digit year value to 00 in the year 2000. Systems that do not properly recognize such dates could generate erroneous information or cause a system to fail. The Year 2000 issue creates risk for CTS from unforeseen problems in 16 its own systems and from worldwide third parties with whom CTS transacts business. CTS believes that its products are not "time and date" sensitive. CTS has formed a Company-wide Year 2000 Readiness Project to identify and resolve Year 2000 issues. This program includes the inventory of financial, manufacturing, design and other internal systems, hardware, equipment and embedded chips in industrial control instruments, and the assessment, remediation and testing of the systems. All systems were inventoried, reviewed and assessed in 1998, and the majority of systems which were not Year 2000 ready were remedied or replaced and tested in 1998. The project is approximately 95% completed and the remaining remediation of systems is expected to be completed by the end of the second quarter of 1999. Acceptance testing and certification of these systems are projected for completion by the third quarter of 1999. A task force, comprised of members from operating units and executive management, meets regularly and tracks the progress of the program, prioritizes all the potential risks and develops plans to eliminate or reduce risks. CTS also faces risk to the extent that suppliers of products, services and systems purchased by CTS, and others with whom CTS transacts business on a worldwide basis, do not comply with Year 2000 requirements. As part of the program, Year 2000 Readiness Surveys have been sent to significant service providers, vendors, suppliers, customers and governmental entities that are believed to be critical to business operations. CTS is currently in the process of evaluating responses and sending follow-up requests to the estimated 4% that have not responded. While management believes that it will be able to qualify alternative suppliers as needed, until all supplier and customer survey responses have been received and evaluated, the Company cannot fully evaluate the extent of potential problems and the costs associated with corrective actions. A contingency plan is being evaluated and reviewed, and will not be formally established until the third quarter of 1999 when the evaluation of suppliers and the remaining remediation of systems and testing is completed. CTS is unable to determine what effect the failure of systems due to Year 2000 issues by CTS or its suppliers or customers may have, but any significant failures could have an adverse material effect on the Company's results of operations and financial condition. The cost to complete the program is estimated at $2.0 million for the costs of outside consultants, software and hardware applications. There has been $1.5 million spent to date as of April 4, 1999. CTS has not tracked the internal costs incurred for all of the hours spent on the project. 17 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 6. Exhibits and Reports on Form 8-K a. Exhibits 27.1 Financial Data Schedule b. Reports on Form 8-K During the three-month period ended April 4, 1999, the Company filed one Report on Form 8-K, dated March 11, 1999 (as amended) reporting under Item 2. Acquisition and Disposition of Assets, related to the Company's acquisition of the Component Products Division of Motorola, Inc. The Company filed an amendment to the Form 8-K on May 12, 1999, reporting the financial statements and pro forma financial information required by Item 7 of Form 8-K. 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/ Timothy J. Cunningham Jeannine M. Davis Timothy J. Cunningham Senior Vice President, Vice President Finance Secretary and General Counsel and Chief Financial Officer (GRAPHIC OMITTED) Dated: May 19, 1999 18 EX-27 2
5 0000026058 CTS CORPORATION 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 APR-04-1999 MAR-29-1998 16,369 0 0 0 84,783 0 557 0 54,066 0 173,734 0 287,224 0 143,248 0 431,434 0 109,382 0 0 0 0 0 0 0 192,393 0 (67,764) 0 431,434 0 120,339 94,041 120,339 94,041 83,152 67,674 117,007 83,718 (1,187) (1,356) 0 0 1,291 499 3,228 11,180 1,065 3,802 2,163 7,378 0 1,334 0 0 0 0 2,163 8,712 0.16 0.59 0.15 0.56
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