-----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, Mp5/FfMSplvTm7/Ei0MHYUxg/R1ZXfSYfUsDObeFIqkefU1mMP755Bnt+275qT6j hvK/xjj9JWp4a+XN4GI6sA== 0001005477-99-005101.txt : 19991111 0001005477-99-005101.hdr.sgml : 19991111 ACCESSION NUMBER: 0001005477-99-005101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991110 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: 99746246 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 3RD Q 10 Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 3, 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 October 3, 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 November 3, 1999: 27,529,504. Page 1 CTS CORPORATION AND SUBSIDIARIES INDEX Page No. -------- PART 1. -- FINANCIAL INFORMATION Item 1. Financial Statements -------------------- Condensed Consolidated Statements of Earnings - For the Three Months and Nine Months ended October 3, 1999, and September 27, 1998 3 Condensed Consolidated Balance Sheets - As of October 3, 1999, and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 3, 1999, and September 27, 1998 5 Consolidated Statements of Comprehensive Earnings - For the Nine Months Ended October 3, 1999, and September 27, 1998 6 Notes to Condensed Consolidated Financial Statements 7-14 Item 2. Management's Discussion and Analysis ------------------------------------ of Financial Condition and Results of ------------------------------------- Operations 15-21 ---------- PART 2. -- OTHER INFORMATION Item 1. Legal Proceedings 22 ----------------- Item 2. Announcements 22 ------------- Item 6. Exhibits and Reports on Form 8-K 22 -------------------------------- SIGNATURES 23 Page 2 Part 1 -- FINANCIAL INFORMATION Item 1. Financial Statements CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS-UNAUDITED (In thousands, except per share amounts) Three Months Ended Nine Months Ended ------------------ ----------------- Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $180,203 $83,777 $478,367 $277,111 Costs and expenses: Cost of goods sold 125,236 57,436 333,527 193,184 Selling, general and administrative expenses 21,326 11,701 58,787 38,561 Research and development expenses 6,566 3,022 17,804 9,895 Acquired in-process research and development-Note C - - 12,940 - Amortization of intangibles 1,147 75 2,448 226 ------ ------ ------ ------ Operating earnings 25,928 11,543 52,861 35,245 Other(expense)income: Interest expense (2,856) (545) (7,077) (1,652) Interest income 123 226 603 841 Other (421) (59) 522 1,076 ------ ------ ------ ------ Total other(expense)income (3,154) (378) (5,952) 265 ------ ------ ------ ------ Earnings before income taxes 22,774 11,165 46,909 35,510 Income taxes 6,825 3,361 14,307 11,428 ------ ------ ------ ------ Earnings from continuing operations 15,949 7,804 32,602 24,082 Earnings from discontinued operations, net of income tax charge of $262 for the three months and $1,662 for the nine months ended Sept. 27, 1998-Note D - 394 - 2,494 ------- ------- ------- ------- Net earnings $15,949 $ 8,198 $32,602 $26,576 ======= ======= ======= ======= Earnings per share-Note I Basic earnings per share: Continuing operations $ 0.58 $ 0.28 $ 1.19 $ 0.85 Discontinued operations - 0.02 - 0.09 ------- ------- ------- ------- Net earnings $ 0.58 $ 0.30 $ 1.19 $ 0.94 ======= ======= ======= ======= Diluted earnings per share: Continuing operations $ 0.56 $ 0.28 $ 1.14 $ 0.82 Discontinued operations - 0.01 - 0.08 ------- ------- ------- ------- Net earnings $ 0.56 $ 0.29 $ 1.14 $ 0.90 ======= ======= ======= ======= Cash dividends declared per share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ======= ======= ======= ======= Average common shares outstanding: Basic 27,555 27,338 27,491 28,316 Diluted 28,573 28,404 28,582 29,558 See notes to condensed consolidated financial statements. Page 3 Part 1 -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) October 3, December 31, 1999 1998* ---- ----- ASSETS (Unaudited) Current Assets Cash $ 9,063 $ 16,273 Accounts receivable, less allowances (1999--$2,107; 1998--$552) 115,226 47,043 Inventories--Note B 68,946 33,322 Other current assets 5,749 5,553 Deferred income taxes 16,392 16,392 ------- ------- Total current assets 215,376 118,583 Property, Plant and Equipment, less accumulated depreciation(1999--$156,403; 1998--$136,711) 130,378 67,186 Other Assets Prepaid pension 67,767 69,074 Investment in discontinued operations 9,061 35,123 Intangibles--Note C 45,637 1,164 Other 6,781 2,059 ------- ------- Total other assets 129,246 107,420 ------- ------- $475,000 $293,189 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt-Note E $ 12,750 $ 14,000 Accounts payable 62,086 17,412 Accrued liabilities 69,858 50,965 ------- ------- Total current liabilities 144,694 82,377 Long-term Debt--Note E 136,050 42,000 Other Long-term Obligations 10,213 13,568 Deferred Income Taxes 27,145 27,145 Postretirement Benefits 4,310 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 48,401,598 shares 193,516 190,347 Additional contributed capital 8,188 10,872 Retained earnings 227,380 197,285 Cumulative translation adjustment 821 806 ------- ------- 429,905 399,310 Less cost of common stock held in treasury 1999--20,836,668 shares; 1998--21,124,898 shares 277,317 275,471 ------- ------- Total shareholders' equity 152,588 123,839 ------- ------- $475,000 $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. Page 4 Part 1 -- FINANCIAL INFORMATION - ------------------------------- CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (In thousands of dollars) Nine Months Ended ----------------- October 3, September 27, 1999 1998 ---- ---- Cash flows from operating activities: Net earnings $ 32,602 $ 26,576 Deduct net earnings from discontinued operations - (2,494) Depreciation and amortization 25,221 12,036 Acquired in-process research and development 12,940 - (Increase)decrease net of effects of acquisition: Accounts receivable (68,183) (3,667) Inventories (14,857) (3,874) Other current assets (751) 792 Deferred income taxes (4,831) - Prepaid pension asset (5,145) (5,361) Gain on sale of fixed assets (863) (1,750) Other (3,617) 2,650 Increase (decrease) in: Accounts payable and accrued liabilities 63,529 (6,291) ------- ------- Total adjustments 3,443 (5,465) ------- ------- Net cash provided by continuing operations 36,045 18,617 Net cash provided by discontinued operations - 12,577 ------- ------ Net cash provided by operating activities 36,045 31,194 Cash flows from investing activities: Proceeds from sale of property, plant and equipment including discontinued operations, net 28,144 24,061 Purchase of CTS Wireless (97,445) - Other acquisition costs - (6,387) Capital expenditures (20,035) (16,786) ------- ------- Net cash(used in)provided by investing activities (89,336) 888 Cash flows from financing activities: Proceeds from issuance of long-term obligations - CTS Wireless acquisition 97,445 - Proceeds from issuance of long-term Obligations - other - 10,250 Payments of long-term obligations, net (46,645) (1,706) Dividend payments (2,469) (2,604) Purchases of treasury stock (3,008) (55,503) Other 713 (5,165) --- ------ Net cash provided by(used in) financing activities 46,036 (54,728) Effect of exchange rate changes on cash 45 832 -- --- Net decrease in cash (7,210) (21,814) Cash at beginning of year 16,273 39,847 ------ ------ Cash at end of period $ 9,063 $ 18,033 ========= ======== Supplemental cash flow information Cash paid during the period for: Interest $ 5,654 $ 2,861 Income taxes--net $ 17,575 $ 17,560 See notes to condensed consolidated financial statements. Page 5 Part 1 -- FINANCIAL INFORMATION - ------------------------------- CTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED (In thousands of dollars) Three Months Nine Months Ended Ended ----- ----- Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Net earnings $15,949 $ 8,198 $32,602 $26,576 Other comprehensive earnings - Translation adjustments 957 437 15 592 --- --- -- --- Comprehensive earnings $16,906 $ 8,635 $32,617 $27,168 ======= ======= ======= ======= See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION - ------ ------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) October 3, 1999 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. 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, 1998. 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 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. Certain reclassifications have been made for the years presented in the financial statements to conform to the classifications effective in 1999. NOTE B--INVENTORIES The components of inventory consist of the following: (In thousands) October 3, December 31, 1999 1998 ---- ---- Finished goods $15,776 $ 9,289 Work-in-process 22,056 10,396 Raw material 31,114 13,637 ------ ------ $68,946 $33,322 ======= ======= Page 7 NOTE C--ACQUISITION On February 26, 1999, CTS Corporation completed the acquisition of the Component Products Division of Motorola, Inc., hereafter referred to as "CTS Wireless." As part of the acquisition, the Company paid Motorola, Inc. $94 million at the closing and assumed approximately $49 million of debt (including pension obligation). Additionally, the Company may be obligated to pay up to an additional $105 million over five years depending upon increased sales and profitability of CTS Wireless. The Company financed a substantial portion of the purchase price through bank borrowings. Intangible assets totaling approximately $45.0 million were recorded as a result of this acquisition under the purchase method of accounting, which included approximately $9 million recorded as an intangible related to the value of existing CTS Wireless products (current technology). 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. CTS Wireless designs and manufactures ceramic filters, quartz crystals, crystal oscillators, surface acoustic wave 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 CTS Wireless had occurred at the beginning of the periods presented follow: Pro forma Pro forma Nine months ended Year ended October 3, 1999 December 31, 1998 --------------- ----------------- Unaudited - --------- Net sales (In millions) $523.3 $675.7 Net earnings (In millions) 33.7 27.7 Diluted earnings per share $1.18 $0.95 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. Page 8 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 CTS Wireless 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. Estimated net cash inflows from the acquired in-process technology related to CTS Wireless 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. Page 9 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 nine months 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 $149 million at October 3, 1999, primarily due to the acquisition of CTS Wireless. The Company had total bank borrowings of $107 million. The variable interest rate on these borrowings was approximately LIBOR plus one percent and the facilities have a term of six years. CTS has $225 million of credit facilities which are unsecured and replaced the previous credit facilities which totaled $125 million. The additional $42 million of debt was assumed as part of the CTS Wireless acquisition and 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. Page 10 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, variable resistors and RF (radio frequency) integrated modules used in the telecommunications industry. Electronic assemblies are assemblies of electronic or electronic and mechanical products which, apart from the combined products, may themselves be marketed as separate stand-alone products. Such assemblies represent a completed, higher-level functional product to be used in customer end products or assemblies. These products consist principally of interconnect products such as backpanel and connector assemblies used in the telecommunications industry, cursor controls for computers, flex cable assemblies used in the disk drive market and hybrid microcircuits used in the healthcare market. Page 11 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 ---------- ---------- ----- Third Quarter 1999 - ------------------ Net sales to external customers $135,126 $ 45,077 $180,203 Operating earnings 20,237 5,691 25,928 Total assets 356,260 109,679 465,939 Third Quarter 1998 - ------------------ Net sales to external customers $ 55,488 $ 28,289 $ 83,777 Operating earnings 9,353 2,190 11,543 Total assets 203,200 58,020 261,220 First Nine Months of 1999 - ------------------------- Net sales to external customers $373,645 $104,722 $478,367 Operating earnings 59,232 6,569 65,801 Total assets 356,260 109,679 465,939 First Nine Months of 1998 - ------------------------- Net sales to external customers $183,042 $ 94,069 $277,111 Operating earnings 28,925 6,320 35,245 Total Assets 203,200 58,020 261,220 Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: (In thousands) Three Months Nine Months Ended Ended ----- ----- Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Operating Earnings - ------------------ Total operating earnings for reportable segments $25,928 $11,543 $65,801 $35,245 Acquired in-process research and development charge - - (12,940) - Interest expense (2,856) (545) (7,077) (1,652) Other (expense) income (298) 167 1,125 1,917 ------- ------- ------- ------- Earnings before income taxes $22,774 $11,165 $46,909 $35,510 ======= ======= ======= ======= Assets Oct. 3, Sept. 27, 1999 1998 ---- ---- Total assets for reportable segments $465,939 $261,220 Investment in discontinued operations 9,061 32,937 ------- ------- Total assets $475,000 $294,157 ======== ======== Page 12 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. NOTE H--CAPITAL STOCK On June 24, 1999, the CTS Corporation Board of Directors declared a 2-for-1 stock split in the form of a stock dividend to CTS shareholders of record on July 12, 1999. Under the split, CTS common shareholders received a stock dividend of one CTS share for each CTS share held. All shares outstanding and per share amounts have been restated to reflect the stock split. Page 13 NOTE I--EARNINGS PER SHARE FASB Statement No. 128, "Earnings per Share," requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the third quarter and first nine months of 1999 and 1998. The other dilutive securities of approximately 291,000 and 328,000 at October 3, 1999, and September 27, 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) Net Net Earnings Shares Earnings (Numerator) (Denominator) Per Share ----------- ------------- --------- Third Quarter 1999: - ------------------- Basic EPS $15,949 27,555 $0.58 Effect of Dilutive Securities: Stock options 727 Other 291 Diluted EPS $15,949 28,573 $0.56 Third Quarter 1998: - ------------------- Basic EPS $ 8,198 27,338 $0.30 Effect of Dilutive Securities: Stock options 738 Other 328 Diluted EPS $ 8,198 28,404 $0.29 First Nine Months of 1999: - -------------------------- Basic EPS $32,602 27,491 $1.19 Effect of Dilutive Securities: Stock options 783 Other 308 Diluted EPS $32,602 28,582 $1.14 First Nine Months of 1998: - -------------------------- Basic EPS $26,576 28,316 $0.94 Effect of Dilutive Securities: Stock Options 904 Other 338 Diluted EPS $26,576 29,558 $0.90 Page 14 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 October 3, 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) October 3, December 31, Increase 1999 1998 (Decrease) ---- ---- ---------- Cash $ 9,063 $16,273 $ (7,210) Accounts receivable, net 115,226 47,043 68,183 Inventories, net 68,946 33,322 35,624 Current assets 215,376 118,583 96,793 Accounts payable 62,086 17,412 44,674 Current liabilities 144,694 82,377 62,317 Working capital 70,682 36,206 34,476 Current ratio 1.49 1.44 0.05 Interest-bearing debt $148,800 $56,000 $92,800 Shareholders' equity 152,588 123,839 28,749 Interest-bearing debt as a percent of shareholders' equity 98% 45% 53% pts. Interest-bearing debt as a percent of capitalization 49% 31% 18% pts. From December 31, 1998, to October 3, 1999, the working capital of CTS Corporation and its subsidiaries (CTS or Company) increased $34.5 million. This increase, which principally impacts accounts receivable and inventories somewhat offset by accounts payable, is primarily due to the inclusion of CTS Wireless at October 3, 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 $20.0 million during the first nine months, compared with $16.8 million for the same period a year earlier. These capital expenditures were primarily for increased manufacturing capacity, manufacturing improvement programs and new products. Page 15 LIQUIDITY AND CAPITAL RESOURCES Cash flows used for investing activities totaled $89.3 million through the first nine months of 1999, including $97.4 million acquisition related costs for the CTS Wireless acquisition and $20.0 million of capital expenditures, partially offset by net proceeds received from the sale of property, plant and equipment including discontinued operations of $28.1 million. In the first nine months of 1998, cash flows provided by investing activities totaled $0.9 million, consisting of $24.1 million of net proceeds from the sale of property, plant and equipment, partially offset by $16.8 million of capital expenditures, and $6.4 million of other acquisition related costs. Cash flows provided by financing activities were $46.0 million in 1999, consisting of a net increase in debt of $50.8 million (excluding the $42.0 million of debt assumed with the purchase of CTS Wireless), partially offset by dividends of $2.5 million, and the net of purchases of CTS stock and other financing activities of $2.3 million. The increase in debt was due to financing obtained to fund the CTS Wireless acquisition, partially offset by the paydown of debt with net earnings and the proceeds from the sale of discontinued operations. During the first nine months of 1998, cash flows used for financing activities totaled $54.7 million, including $55.5 million of CTS stock purchases and $7.8 million for dividends and other financing activities, partially offset by a net increase in long-term obligations of $8.6 million. CTS presently expects to pursue a growth-oriented strategy involving investment for internal and external growth. CTS' capital expenditures for 1999 are presently expected to total approximately $36 million, $20 million of which has been spent during the first nine months of the year. As of the date of this report, management has not established its capital expenditure budget for 2000. However, in light of increasing demand and capacity constraints in wireless communications and other business opportunities, management presently anticipates a higher level of investment in its business during 2000 than in 1999, primarily for wireless products and includes manufacturing equipment for new assembly lines for the production of radio frequency integrated modules, ceramic filters and surface acoustic wave components. In addition, management expects to continue to evaluate potential complementary acquisitions. Management believes that CTS has the capital resources to finance its growth strategy at reasonable capital costs and to maintain sufficient financial flexibility to respond to changes in the financial and business markets. 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 its ability to obtain additional cash, either through the issuance of additional shares of common stock or utilization of bank credit facilities, is adequate to fund its operating requirements, working capital, capital expenditures and debt service. Page 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 1999 to Third Quarter 1998 - --------------------------------------------------------------- The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended October 3, 1999, and September 27, 1998: (Dollars in thousands) ---------------------- October 3, September 27, Increase 1999 1998 (Decrease) ---- ---- ---------- Net sales $180,203 $83,777 $96,426 Gross earnings 54,967 26,341 28,626 Gross earnings as a percent of sales 30.5% 31.4% (0.9)% pts. Selling, general and administrative expenses 21,326 11,701 9,625 Selling, general and administrative expenses as a percent of sales 11.8% 14.0% (2.2)% pts. Research and development expenses 6,566 3,022 3,544 Amortization of intangibles 1,147 75 1,072 Operating earnings 25,928 11,543 14,385 Interest expense 2,856 545 2,311 Earnings before income taxes 22,774 11,165 11,609 Income taxes 6,825 3,361 3,464 Income tax rate 30.0% 30.1% (0.1)% pts. Net sales increased by $96.4 million, or 115% from the third quarter of 1998. Sales increases occurred principally as a result of the inclusion of CTS Wireless. CTS Wireless' operating results are reported primarily as part of CTS' electronic components segment. As a percent of total sales, sales of electronic components and electronic assemblies in the third quarter of 1999 were 75% and 25%, respectively. As a percentage of total sales, the third 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. The electronic components segment experienced a $79.6 million sales increase, or 143% from the third quarter of 1998, primarily due to the inclusion of CTS Wireless' sales. Revenue increases were also realized in automotive and resistor components. Third quarter sales declines were experienced in thermal management components used primarily in the personal computer market due to competitive pressures from Asian manufacturers, when 1999 is compared to 1998. Page 17 The electronic assemblies segment experienced a 1999 sales increase of $16.8 million, or 59% from the third quarter of 1998, primarily due to sales increases of interconnect and cursor control assemblies. The introduction of RF (radio frequency) integrated modules in 1999 also contributed to the revenue increase. This increase more than offset the revenue loss of flex cable assemblies for the disk drive industry. Gross earnings dollars increased primarily due to the inclusion of CTS Wireless, as well as the earnings effect of the revenue increases in automotive and resistor product lines. The lower percent of sales was related to the inclusion of CTS Wireless, which has lower margins than CTS historical margins. Selling, general and administrative expenses in dollars increased in the electronic components segment primarily as a result of the inclusion of CTS Wireless. However, these expenses decreased as a percentage of sales on a total Company basis due to the fixed nature of most of these costs. 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. Amortization of intangibles totaled $1.1 million for the third quarter of the year, representing a $1.1 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 CTS Wireless in February 1999. The increase in operating earnings dollars, 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 0.1 percentage points primarily due to higher earnings in the lower-tax jurisdictions, particularly CTS Wireless locations. Page 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ----------------------------------------------- Material Changes in Results of Operations: Comparison of First Nine Months of 1999 to First Nine Months of 1998 - ------------------------------------------- The following table highlights changes in significant components of the consolidated statements of earnings for the nine-month periods ended October 3, 1999, and September 27, 1998: (Dollars in thousands) ---------------------- October 3, September 27, Increase 1999 1998 (Decrease) ---- ---- ---------- Net sales $478,367 $277,111 $201,256 Gross earnings 144,840 83,927 60,913 Gross earnings as a percent of sales 30.3% 30.3% 0.0% pts. Selling, general and administrative expenses 58,787 38,561 20,226 Selling, general and administrative expenses as a percent of sales 12.3% 13.9% (1.6)% pts. Research and development expenses 17,804 9,895 7,909 Acquired in-process research and development (IPR&D) 12,940 - 12,940 Amortization of intangibles 2,448 226 2,222 Operating earnings 52,861 35,245 17,616 Operating earnings excluding IPR&D charge 65,801 35,245 30,556 Operating earnings, excluding IPR&D charge, as a percent of sales 13.8% 12.7% 1.1% pts. Interest expense 7,077 1,652 5,425 Earnings before income taxes 46,909 35,510 11,399 Earnings before income taxes, excluding IPR&D charge 59,849 35,510 24,339 Income taxes 14,307 11,428 2,879 Income tax rate 30.5% 32.2% (1.7)% pts. Net sales increased by $201.3 million, or 73% from the first nine months of 1998. Sales increases occurred principally as a result of the inclusion of CTS Wireless since February 26, 1999. CTS Wireless' operating results are principally reported as part of CTS' electronic components segment. As a percent of total sales, sales of electronic components and electronic assemblies in the first nine months of 1999 were 78% and 22%, respectively. As a percentage of total sales, the first nine months 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. Page 19 The electronic components segment experienced a $190.6 million sales increase, or 104% from the first nine months of 1998, primarily due to the inclusion of CTS Wireless' sales since February 26, 1999. Revenue increases were also realized in automotive and resistor components. First nine months sales declines were experienced in thermal management components used primarily in the personal computer market due to competitive pressures from Asian manufacturers, when 1999 is compared to 1998. The electronic assemblies segment experienced a 1999 sales increase of $10.7 million, or 11% from the first nine months of 1998, primarily due to sales increases of interconnect and cursor control assemblies. The introduction of RF (radio frequency) integrated modules in 1999 also contributed to the revenue increase. This increase more than offset the revenue loss of flex cable assemblies for the disk drive industry. 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 communications infrastructure 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, these expenses decreased as a percentage of sales on a total Company basis due to the fixed nature of most of these costs. 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 nine months of 1999 consisted of a one-time charge related to the purchase of CTS Wireless. Amortization on intangibles totaled $2.4 million for the first nine months of the year, representing a $2.2 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 CTS Wireless in February 1999. The increase in operating earnings dollars, excluding the acquired in- process research and development charge, was 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 1.7 percentage points primarily due to higher earnings in the lower-tax jurisdictions. Page 20 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 its own systems and those of third parties worldwide with whom CTS transacts business. CTS has formed a Company-wide Year 2000 Readiness Project to identify and resolve Year product and system issues. The products of CTS operating units are not "date and time sensitive." CTS may add date and time sensitive components to CTS' products at the direction of its customers and upon the customer's assumption of responsibility for the Year 2000 compliance of the components selected. The Project 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 those 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. Systems testing and certification were completed in the third quarter of 1999. A task force, comprised of members from each operating unit and executive management, meets monthly and tracks the progress of the Project, prioritizes all the potential risks and develops plans to eliminate or reduce risks. As part of the Project, 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 has prepared supplier contingency plans based on survey responses and continues to solicit information about the status of these third parties. CTS will adjust contingency planning as needed to reflect new information as it becomes available. CTS will continue to be diligent in identifying and addressing potential Year 2000 issues which may develop in the coming months. 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 was estimated at $2.0 million for outside consultants, software and hardware applications and $1.5 million has been spent to date as of October 3, 1999. CTS has not tracked the internal costs incurred for all of the hours spent on the project. Page 21 Part 2 -- OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings - ------- ----------------- CTS is involved in litigation and in other administrative proceedings with government agencies regarding the protection of the environment, and other matters, the results of which are not yet determinable. In the opinion of management, based upon currently available information, adequate provision for anticipated costs has been made, or the ultimate costs resulting from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Item 2. Announcements - ------- ------------- During the period between June 25, 1999, and the date of this report, the following persons, each of which was previously an executive officer of CTS, were elected by CTS' Board of Directors to the positions indicated: NAME POSITION ---- -------- Jeannine M. Davis Executive Vice President - Administration, General Counsel and Secretary William J. Kaska Executive Vice President Philip G. Semprevio Executive Vice President One June 25, 1999, the CTS Board also elected Randall J. Weisenburger, Executive Vice President and Chief Financial Officer of Omnicom Group, Inc. as a member of the CTS Board of Directors. Effective November 12, 1999, Timothy J. Cunningham, CTS Chief Financial Officer, resigned to accept a position as Senior Vice President and Chief Financial Officer of eLoyalty, a division of Technology Solutions Company. Ms. Davis will act as interim Chief Financial Officer until a replacement for Mr. Cunningham is announced. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- a. Exhibits 27.1 Financial Data Schedule b. Reports on Form 8-K During the nine-month period ended October 3, 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. Page 22 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 Executive Vice President, Vice President Finance Administration, General and Chief Financial Officer Counsel and Secretary Dated: November 10, 1999 Page 24 EX-27 2
5 0000026058 CTS CORPORATION 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JUL-04-1999 JUN-28-1998 OCT-03-1999 SEP-27-1998 9,063 18,033 0 0 117,333 49,674 2,107 798 68,946 31,766 215,376 120,633 286,781 212,741 156,403 142,825 475,000 294,157 144,694 78,660 0 0 0 0 0 0 193,516 190,107 (40,928) (75,006) 475,000 294,157 478,367 277,111 478,367 277,111 333,527 193,184 91,979 48,682 (1,125) (1,917) 0 0 7,077 1,652 46,909 35,510 14,307 11,428 32,602 24,082 0 2,494 0 0 0 0 32,602 26,576 1.19 0.94 1.14 0.90
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