<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 July 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
July 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 August 13, 1999: 27,549,606.
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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 Six
Months ended July 4, 1999, and June 28, 1998 3
Condensed Consolidated Balance Sheets -
As of July 4, 1999, and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows - For the Six Months Ended July 4,
1999, and June 28, 1998 5
Consolidated Statements of Comprehensive
Earnings - For the Three Months and Six
Months Ended July 4, 1999, and June 28, 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 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 Six Months Ended
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $177,825 $99,293 $298,164 $193,334
Costs and expenses:
Cost of goods sold 125,139 68,074 208,291 135,748
Selling, general and
administrative expenses 21,600 14,152 37,461 26,860
Research and development
expenses 6,579 3,613 11,238 6,873
Acquired in-process research
and development-Note C 0 0 12,940 0
Amortization of intangibles 906 75 1,301 151
------ ------ ------ ------
Operating earnings 23,601 13,379 26,933 23,702
Other(expense)income:
Interest expense (2,930) (608) (4,221) (1,107)
Interest income 229 207 480 615
Other 7 187 943 1,135
------ ------ ------ ------
Total other(expense)income (2,694) (214) (2,798) 643
------ ------ ------ ------
Earnings before income taxes 20,907 13,165 24,135 24,345
Income taxes 6,417 4,265 7,482 8,067
======= ======= ======= =======
Earnings from continuing
operations 14,490 8,900 16,653 16,278
Earnings from discontinued
operations, net of income
tax charge of $511 for the
three months and $1,400 for
the six months ended
June 28, 1998-Note D 0 766 0 2,100
-------- ------- ------- --------
Net earnings $ 14,490 $ 9,666 $16,653 $ 18,378
======== ======= ======= ========
Earnings per share-Note H
Basic earnings per share:
Continuing operations $ 0.53 $ 0.32 $ 0.61 $ 0.57
Discontinued operations 0 0.03 0 0.07
-------- ------- ------- --------
Net earnings $ 0.53 $ 0.35 $ 0.61 $ 0.64
======== ======= ======= ========
Diluted earnings per share:
Continuing operations $ 0.51 $ 0.30 $ 0.58 $ 0.54
Discontinued operations 0 0.03 0 0.07
------- ------- ------- -------
Net earnings $ 0.51 $ 0.33 $ 0.58 $ 0.61
======== ====== ======= ========
Cash dividends declared
per share $ 0.03 $ 0.03 $ 0.06 $ 0.06
======== ====== ======= ========
Average common shares outstanding:
Basic 27,536 27,923 27,460 28,813
Diluted 28,515 29,156 28,588 30,130
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
July 4, December 31,
1999 1998*
ASSETS (Unaudited)
----------- -----------
Current Assets
Cash $ 14,968 $ 16,273
Accounts receivable, less allowances
(1999--$819; 1998--$552) 102,653 47,043
Inventories--Note B 58,741 33,322
Other current assets 2,791 5,553
Deferred income taxes 16,737 16,392
------ ------
Total current assets 195,890 118,583
Property, Plant and Equipment, less accumulated
depreciation(1999--$149,945; 1998--$136,711) 144,325 67,186
Other Assets
Prepaid pension 66,710 69,074
Investment in discontinued operations 9,061 35,123
Intangibles--Note C 31,259 1,164
Other 7,583 2,059
------ ------
Total other assets 114,613 107,420
------- -------
$454,828 $293,189
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt-Note E $ 11,500 $ 14,000
Accounts payable 39,409 17,412
Accrued liabilities 68,668 50,965
------- ------
Total current liabilities 119,577 82,377
Long-term Debt--Note E 156,500 42,000
Other Long-term Obligations 10,837 13,568
Deferred Income Taxes 27,145 27,145
Postretirement Benefits 4,282 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 48,382,956 shares 192,956 190,347
Additional contributed capital 8,159 10,872
Retained earnings 212,267 197,285
Cumulative translation adjustment (136) 806
------- -------
413,246 399,310
Less cost of common stock held in treasury:
1999--20,841,878 shares; 1998--21,124,898
shares 276,759 275,471
------- -------
Total shareholders' equity 136,487 123,839
------- -------
$454,828 $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)
Six Months Ended
----------------------
July 4, June 28,
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $ 16,653 $ 18,378
Deduct Net earnings from discontinued operations 0 (2,100)
Depreciation and amortization 17,302 7,976
Acquired in-process research and development 12,940 0
(Increase)decrease net of effects of
acquisition:
Accounts receivable (55,610) (10,323)
Inventories (4,652) (6,310)
Other current assets 1,699 (373)
Deferred income taxes (5,176) 0
Prepaid pension asset (3,748) (3,477)
Gain on sale of fixed assets (897) (1,251)
Other (2,895) 2,682
Increase (decrease) in:
Accounts payable and accrued liabilities 39,672 (1,915)
------ ------
Total adjustments (1,365) (12,991)
------ -------
Net cash provided by
continuing operations 15,288 3,287
Net cash provided by discontinued operations 0 8,860
------ -----
Net cash provided by operating
activities 15,288 12,147
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment including discontinued
operations, net 28,144 23,253
Purchase of CTS Wireless (96,937) 0
Other acquisition costs 0 (3,329)
Capital expenditures (12,664) (10,652)
------- -------
Net cash(used in)provided by
investing activities (81,457) 9,272
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations - CTS Wireless acquisition 96,937 0
Proceeds from issuance of long-term
obligations - Other 0 5,000
Payments of long-term obligations, net (26,937) (750)
Dividend payments (1,643) (1,785)
Purchases of treasury stock (2,422) (50,950)
Other 523 (2,870)
------- -------
Net cash provided by(used in)
financing activities 66,458 (51,355)
Effect of exchange rate changes on cash (1,594) 194
------ ------
Net decrease in cash (1,305) (29,742)
Cash at beginning of year 16,273 39,847
------ ------
Cash at end of period $ 14,968 $ 10,105
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest $ 3,687 $ 2,251
Income Taxes--Net $ 7,409 $ 9,961
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
CTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
Three Months Six Months
Ended Ended
----- -----
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $14,490 $9,666 $16,653 $18,378
Other comprehensive
(loss) earnings -
Translation adjustments (313) (248) (942) 155
------ ------ ------- -------
Comprehensive earnings $14,177 $9,418 $15,711 $18,533
======= ====== ======= =======
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 4,1999
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 presentation, in all material respects, of the
financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
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)
July 4, December 31,
1999 1998
---- ----
Finished goods $ 14,417 $ 9,289
Work-in-process 17,765 10,396
Raw material 26,559 13,637
------ ------
$ 58,741 $ 33,322
======== ========
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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 $31 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
Six months ended Year ended
July 4, 1999 December 31, 1998
------------ -----------------
Unaudited
- ---------
Net sales (In millions) $343.1 $675.7
Net earnings (In millions) 17.7 27.7
Diluted earnings per share $ 0.62 $ 0.95
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.
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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 half 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 $168
million at July 4,1999, primarily due to the acquisition of CTS Wireless. The
Company had total bank borrowings of $126 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.
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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 and variable resistors.
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 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.
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
---------- ---------- -----
Second Quarter 1999
Net sales to external
customers $147,144 $30,681 $177,825
Operating earnings 22,513 1,088 23,601
Total assets 390,678 55,089 445,767
Second Quarter 1998
Net sales to external
customers $ 65,656 $33,637 $ 99,293
Operating earnings 10,417 2,962 13,379
Total assets 204,176 55,855 260,031
First Half 1999
Net sales to external
customers $238,518 $59,646 $298,164
Operating earnings 38,995 878 39,873
Total assets 390,678 55,089 445,767
First Half 1998
Net sales to external
customers $127,554 $65,780 $193,334
Operating earnings 19,572 4,130 23,702
Total assets 204,176 55,855 260,031
Reconciling information between reportable segments and CTS' consolidated
totals is shown in the following table:
(In thousands)
Three Months Six Months
Ended Ended
----- -----
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
---- ---- ---- ----
Operating Earnings
Total operating earnings for
reportable segments $23,601 $13,379 $39,873 $23,702
Acquired in-process research
and development charge 0 0 (12,940) 0
Interest expense (2,930) (608) (4,221) (1,107)
Other income 236 394 1,423 1,750
------ ------ ------ -----
Earnings before income taxes $20,907 $13,165 $24,135 $24,345
======= ======= ======= =======
Assets July 4, June 28,
1999 1998
---- ----
Total assets for reportable segments $445,767 $260,031
Investment in discontinued operations 9,061 37,240
-------- --------
Total assets $454,828 $297,271
======== ========
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 second quarter and first half of
1999 and 1998. The other dilutive securities of approximately 310,000 and
335,000 at July 4, 1999, and June 28, 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
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------- ---------
Second Quarter 1999:
Basic EPS $14,490 27,536 $0.53
======= ====== =====
Effect of Dilutive
Securities:
Stock options 669
Other 310
Diluted EPS $14,490 28,515 $0.51
======= ====== =====
Second Quarter 1998:
Basic EPS $ 9,666 27,923 $0.35
======= ====== =====
Effect of Dilutive
Securities:
Stock options 898
Other 335
Diluted EPS $ 9,666 29,156 $0.33
======= ====== =====
First Half 1999:
Basic EPS $16,653 27,460 $0.61
======= ====== =====
Effect of Dilutive
Securities:
Stock options 812
Other 316
Diluted EPS $16,653 28,588 $0.58
======= ====== =====
First Half 1998:
Basic EPS $18,378 28,813 $0.64
======= ====== =====
Effect of Dilutive
Securities:
Stock Options 974
Other 343
Diluted EPS $18,378 30,130 $0.61
======= ====== =====
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 July 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)
July 4, December 31, Increase
1999 1998 (Decrease)
---- ---- ----------
Cash $14,968 $16,273 $(1,305)
Accounts receivable, net 102,653 47,043 55,610
Inventories, net 58,741 33,322 25,419
Current assets 195,890 118,583 77,307
Accounts payable 39,409 17,412 21,997
Current liabilities 119,577 82,377 37,200
Working capital 76,313 36,206 40,107
Current ratio 1.64 1.44 .20
Interest-bearing debt $168,000 $56,000 $112,000
Shareholders' equity 136,487 123,839 12,648
Interest-bearing debt
as a percent of
shareholders' equity 123% 45% 78 % pts.
Interest-bearing debt
as a percent of
capitalization 55% 31% 24 % pts.
From December 31, 1998, to July 4, 1999, working capital of CTS Corporation
and its subsidiaries (CTS or Company) increased $40.1 million. This increase
is primarily due to the inclusion of CTS Wireless at July 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 $12.7 million during the first half, compared with
$10.7 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 $81.5 million through the
first half of 1999, including $96.9 million acquisition related costs for the
CTS Wireless acquisition and $12.7 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 six months of
1998, cash flows provided by investing activities totaled $9.3 million,
consisting of $23.3 million of net proceeds from the sale of property, plant
and equipment, partially offset by $10.7 million of capital expenditures, and
$3.3 million of other acquisition related costs.
Cash flows provided by financing activities were $66.5 million in 1999,
consisting of a net increase in debt of $70.0 million (excluding the $42.0
million of debt assumed with the purchase of CTS Wireless), partially offset
by dividends of $1.6 million, and the net of purchases of CTS stock and other
financing activities of $1.9 million. The increase in debt was due to
financing obtained to fund the CTS Wireless acquisition, partially offset by
the paydown of debt with the proceeds from the sale of discontinued
operations. During the first six months of 1998, cash flows used for financing
activities totaled $51.4 million, including $51.0 million of CTS stock
purchases and a net of $4.7 million for dividends and other financing
activities, partially offset by a net increase in long-term obligations of
$4.3 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.
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 Second
Quarter 1999 to Second Quarter 1998
The following table highlights changes in significant components of the
consolidated statements of earnings for the three-month periods ending July
4,1999, and June 28,1998:
(Dollars in thousands)
July 4, June 28, Increase
1999 1998 (Decrease)
---- ---- ----------
Net sales $177,825 $99,293 $78,532
Gross earnings 52,686 31,219 21,467
Gross earnings as a percent
of sales 29.6% 31.4% (1.8)% pts.
Selling, general and
administrative expenses 21,600 14,152 7,448
Selling, general and
administrative expenses as
a percent of sales 12.1% 14.3% (2.2)% pts.
Research and development
expenses 6,579 3,613 2,966
Operating earnings 23,601 13,379 10,222
Interest expense 2,930 608 2,322
Earnings before income taxes 20,907 13,165 7,742
Income taxes 6,417 4,265 2,152
Income tax rate 30.7% 32.4% (1.7)% pts.
Net sales increased by $78.5 million, or 79% from the second quarter of 1998.
Sales increases occurred principally as a result of the inclusion of CTS
Wireless for a full quarter. CTS Wireless' operating results are reported as
part of CTS' electronic components segment. As a percent of total sales, sales
of electronic components and electronic assemblies in the second quarter of
1999 were 83% and 17%, respectively. As a percentage of total sales, the
second 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 an $81.4 million sales increase,
or 124% from the second quarter of 1998, primarily due to the inclusion of CTS
Wireless' sales for a full quarter. Revenue increases were also realized in
automotive and traditional frequency product lines. Second quarter sales
declines were experienced in thermal dissipator products sold to 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 decrease of $2.9
million, or 9% from the second 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. The other products in this segment, such as cursor controls and
interconnect products, experienced significant revenue increases in the 1999
second quarter.
Gross earnings dollars increased primarily due to the inclusion of CTS
Wireless for a full quarter, as well as the earnings effect of the revenue
increases in automotive and frequency 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 $0.9 million for the second quarter of the
year, representing a $0.8 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 two 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 Half
1999 to First Half 1998
The following table highlights changes in significant components of the
consolidated statements of earnings for the six-month periods ending
July 4,1999, and June 28,1998:
(Dollars in thousands)
---------------------------------
July 4, June 28, Increase
1999 1998 (Decrease)
---- ---- ----------
Net sales $298,164 $193,334 $104,830
Gross earnings 89,873 57,586 32,287
Gross earnings as a percent
of sales 30.1% 29.8% 0.3 % pts.
Selling, general and
administrative expenses 37,461 26,860 10,601
Selling, general and
administrative expenses as
a percent of sales 12.6% 13.9% (1.3)% pts.
Research and development
expenses 11,238 6,873 4,365
Acquired in-process research
and development (IPR&D) 12,940 0 12,940
Amortization of intangibles 1,301 151 1,150
Operating earnings 26,933 23,702 3,231
Operating earnings excluding
IPR&D charge 39,873 23,702 16,171
Operating earnings, excluding
IPR&D charge, as a percent
of sales 13.4% 12.3% 1.1% pts.
Interest expense 4,221 1,107 3,114
Earnings before income taxes 24,135 24,345 (210)
Earnings before income taxes,
excluding IPR&D charge 37,075 24,345 12,730
Income taxes 7,482 8,067 (585)
Income tax rate 31.0% 33.0% (2.0)% pts.
Net sales increased by $104.8 million, or 54% from the first half of 1998.
Sales increases occurred principally as a result of the inclusion of CTS
Wireless since February 26, 1999. CTS Wireless' operating results are reported
as part of CTS' electronic components segment. As a percent of total sales,
sales of electronic components and electronic assemblies in the first half of
1999 were 80% and 20%, respectively. As a percentage of total sales, the first
half 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 $111.0 million sales increase,
or 87% from the first half of 1998, primarily due to the inclusion of CTS
Wireless' sales since February 26, 1999. Revenue increases were also realized
in automotive and traditional frequency product lines. First half sales
declines were experienced in thermal dissipator products sold to 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 decrease of $6.1
million, or 9% from the first half 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. The
other products in this segment, such as cursor controls and interconnect
products, experienced revenue increases in the first half of 1999.
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 half of 1999 consisted of a one-time charge related to the
purchase of CTS Wireless. Amortization on intangibles totaled $1.3 million for
the first six months 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.
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 two 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. The Project is
approximately 98% completed with systems testing and certification projected
for completion by 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 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 supplier contingency plan
is being evaluated, and will be completed in the third quarter of 1999 when
the evaluation of suppliers 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 was estimated at $2.0 million for outside
consultants, software and hardware applications and $1.5 million has been
spent to date as of July 4, 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 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
During the six-month period ended July 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.
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: August 17, 1999
Page 23
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