<PAGE>
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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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