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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____________ to _________________
For Quarter Ended Commission File Number
April 4, 1999 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
905 West Boulevard North
Elkhart, IN 46514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219)293-7511
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No_______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 17,1999: 13,757,068
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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
Ended April 4, 1999, and March 29, 1998 3
Condensed Consolidated Balance Sheets -
As of April 4, 1999, and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows - For the Three Months Ended April 4,
1999, and March 29, 1998 5
Consolidated Statements of Comprehensive
Earnings - For the Three Months Ended
April 4, 1999, and March 29, 1998 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13-17
PART 2 -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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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
April 4, March 29,
1999 1998
---- ----
Net sales $120,339 $94,041
Costs and expenses:
Cost of goods sold 83,152 67,674
Selling, general and administrative expenses 15,861 12,708
Research and development expenses 4,659 3,260
Acquired in-process research and
development - Note C 12,940 ---
Amortization of intangibles 395 76
--- --
Operating earnings 3,332 10,323
Other(expense)income:
Interest expense (1,291) (499)
Interest income 251 408
Other 936 948
--- ---
Total other (expense) income (104) 857
---- ---
Earnings before income taxes 3,228 11,180
Income taxes 1,065 3,802
----- -----
Earnings from continuing operations 2,163 7,378
Earnings from discontinued operations,
net of income tax charge of $889 in
1998 - Note D --- 1,334
----- -----
Net earnings $ 2,163 $ 8,712
======= =======
Earnings per share - Note H
Basic earnings per share:
Continuing operations $ 0.16 $ 0.50
Discontinued operations --- 0.09
----
Net earnings $ 0.16 $ 0.59
====== =======
Diluted earnings per share:
Continuing operations $ 0.15 $ 0.47
Discontinued operations --- 0.09
----
Net earnings $ 0.15 $ 0.56
====== =======
Cash dividends declared per share $ 0.06 $ 0.06
Average common shares outstanding:
Basic 13,693 14,867
Diluted 14,332 15,568
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
April 4, December 31,
1999 1998*
---- -----
ASSETS (Unaudited)
Current Assets
Cash $16,369 $ 16,273
Accounts receivable, less allowances
(1999--$557; 1998--$552) 84,226 47,043
Inventories--Note B 54,066 33,322
Other current assets 2,336 5,553
Deferred income taxes 16,737 16,392
------ ------
Total current assets 173,734 118,583
Property, Plant and Equipment, less accumulated
depreciation (1999--$143,248; 1998--$136,711) 143,976 67,186
Other Assets
Prepaid pension 65,050 69,074
Investment in discontinued operations 9,061 35,123
Intangibles--Note C 32,153 1,164
Other 7,460 2,059
----- -----
Total other assets 113,724 107,420
------- -------
$431,434 $293,189
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt - Note E $10,250 $14,000
Accounts payable 36,535 17,412
Accrued liabilities 62,597 50,965
------ ------
Total current liabilities 109,382 82,377
Long-term Debt--Note E 152,750 42,000
Other Long-term Obligations 13,234 13,568
Deferred Income Taxes 27,145 27,145
Postretirement Benefits 4,294 4,260
Shareholders' Equity:
Preferred stock-authorized 25,000,000 shares
without par value; none issued
Common stock-authorized 75,000,000 shares
without par value; issued 24,185,949 shares 192,393 190,347
Additional contributed capital 8,366 10,872
Retained earnings 198,612 197,285
Cumulative translation adjustment 177 806
--- ---
399,548 399,310
Less cost of common stock held in treasury:
1999--10,418,227 shares; 1998--10,562,449
shares 274,919 275,471
------- -------
Total shareholders' equity 124,629 123,839
------- -------
$431,434 $293,189
======== ========
*The balance sheet at December 31, 1998, has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
(In thousands of dollars)
Three Months Ended
April 4, March 29,
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $ 2,163 $ 8,712
Net earnings from discontinued operations --- (1,334)
Depreciation and amortization 6,347 4,023
Acquired in-process research and
development 12,940 ---
(Increase) decrease net of effects from
the purchase of Component Products
Division (CPD):
Accounts receivable (37,183) (8,405)
Inventories 23 (865)
Other current assets 2,154 (893)
Deferred income taxes (5,172) ---
Prepaid pension asset (2,088) (1,733)
Gain on sale of fixed assets (816) (1,254)
Other 1,790 1,055
Increase in:
Accounts payable and accrued liabilities 30,755 177
------ ---
Total adjustments 8,750 (9,229)
----- ------
Net cash provided by(used in)
continuing operations 10,913 (517)
Net cash used by discontinued operations --- (2,242)
------ ------
Net cash provided by (used in)
operating activities 10,913 (2,759)
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment, including discontinued
operations, net 27,267 2,227
Cash paid for purchase of CPD (96,937) ---
Capital expenditures (4,214) (4,695)
------ ------
Net cash used in investing activities (73,884) (2,468)
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations 96,937 8,000
Payments of long-term obligations, net (31,937) ---
Dividend payments (817) (911)
Purchases of treasury stock (480) (32,926)
Other 399 392
--- ---
Net cash provided by
(used in) financing activities 64,102 (25,445)
Effect of exchange rate changes on cash ( 1,035) 165
- ----- ---
Net increase(decrease)in cash 96 (30,507)
Cash at beginning of year 16,273 39,847
------ ------
Cash at end of period $16,369 $ 9,340
======= =======
Supplemental cash flow information
Cash paid during the period for:
Interest $ 1,318 $ 1,044
Income Taxes--Net $ 3,128 $ 3,769
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
CTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
Three Months Ended
------------------
April 4, March 29,
1999 1998
---- ----
Net earnings $2,163 $8,712
Other comprehensive (loss) earnings -
Translation adjustments (629) 403
---- ---
Comprehensive earnings $1,534 $9,115
====== ======
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 4, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying condensed interim consolidated financial data is unaudited;
however, in the opinion of management, the interim data includes all
adjustments considered necessary for a fair presentation of the results for
the interim period. Operating results for the three-month period ended April
4, 1999, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's 1998 Annual Report on Form 10-K.
Certain reclassifications have been made for the years presented in the
financial statements to conform to the classifications adopted in 1999.
NOTE B--INVENTORIES
The components of inventory consist of the following:
(In thousands)
April 4, December 31,
1999 1998
---- ----
Finished goods $12,871 $ 9,289
Work-in-process 15,794 10,396
Raw material 25,401 13,637
------ ------
$54,066 $33,322
======= =======
NOTE C--ACQUISITION
On February 26, 1999, CTS Corporation (the "Company") completed the
acquisition of the Component Products Division (CPD or CTS Wireless) of
Motorola, Inc. ("Motorola"). The Company paid Motorola $94 million at the
closing and assumed approximately $49 million of debt (including pension
obligation) as part of the acquisition. In addition, the Company may be
obligated to pay up to an additional $105 million over five years depending
upon increased sales and profitability of CPD. CTS financed a substantial
portion of the purchase price through bank borrowings.
Intangible assets totaling approximately $22 million were recorded as a result
of this acquisition under the purchase method of accounting. The transaction
also resulted in the recording of one-time charges of approximately $13
million related to the cost of acquired in-process research and development,
and approximately $9 million was recorded as an intangible related to the
value of existing CPD products (current technology). CPD designs and
manufactures ceramic filters, quartz crystals, crystal oscillators, surface
acoustic wave
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components and piezoceramic devices, in five facilities in the USA and Asia,
primarily for the wireless communications industry.
The operating results of CTS Wireless have been included in the consolidated
statements of earnings from the date of acquisition. Pro forma results of
operations as if the acquisition of CPD had occurred at the beginning of the
periods presented follows:
Three months ended Year ended
April 4, 1999 December 31, 1998
------------- -----------------
Unaudited
- ---------
Net sales (In millions) $165.2 $675.7
Net earnings (In millions) 3.2 27.7
Diluted earnings per share $0.22 $1.90
For the pro forma effect of full year 1998, see the Company's Current Report
on Form 8-K dated March 11, 1999, as amended.
These unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of goodwill and other
intangibles, and increased interest expense on acquisition debt. In
management's opinion, the pro forma consolidated results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated on January 1, 1998, or of future operations of
the combined companies under the ownership and operation of the Company. The
allocation of purchase price to assets acquired and liabilities assumed is
preliminary; however, it is not expected that finalization will have any
material effect on the financial position or results of operations.
Acquired in-process research and development
- --------------------------------------------
The Company allocated $13 million of the total purchase price to acquired
in-process research and development related to the CPD acquisition.
The Company used independent professional appraisal consultants to assess and
allocate values to the in-process research and development. These allocations
represent the estimated fair value based on risk-adjusted future cash flows
related to the incomplete projects. The fair value assigned to acquired in-
process technology was determined by estimating the contribution of the
acquired in-process technology to developing commercially viable products and
estimating the resulting cash flows from the expected product sales of such
products. The resulting cash flows were discounted to their present value
using a rate of 18%, which exceeds the overall cost of capital for the
Company. Cash flows attributable to development efforts, including the
completion of developments underway, and future versions of the product that
have not yet been undertaken, were excluded in the valuation of in-process
research and development, and the percentage of completion of development was
used to recognize only the value of the completed portion of the research and
development efforts as in-process research and development. There were no
material anticipated changes from historical pricing, margins and expense
trends.
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Estimated net cash inflows from the acquired in-process technology related to
CPD are projected to commence in the latter part of 1999 and steadily decline
through 2004.
As of the date of acquisition, approximately $10 million had been expended to
develop these research and development projects. The estimated cost to
complete the projects is approximately $9 million to be incurred through the
year 2000. Remaining efforts on the projects are significant and include most
phases of project design, development and testing.
At the date of the acquisition, the development of these projects had not yet
reached technological feasibility, the research and development in progress
had no alternative future uses and the remaining efforts on the projects were
significant. Accordingly, these costs were expensed as of the acquisition
date.
Acquired current technology of approximately $9 million was capitalized at the
acquisition date and is being amortized over four years on a straight-line
basis.
The Company believes that the assumptions used in the forecasts were
reasonable at the time of the business combination. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.
NOTE D--DISCONTINUED OPERATIONS/DIVESTITURES
During 1998, CTS finalized its plan to sell all of the businesses obtained in
the Dynamics Corporation of America (DCA) acquisition not strategic to the
Company's core business segments of electronic components and electronic
assemblies. These noncore businesses are recorded as discontinued operations
for all periods presented in the consolidated financial statements. During
1998, CTS completed the sale of the Waring Products Division resulting in
gross proceeds of approximately $22 million.
During the first quarter of 1999, the divestiture of three of the discontinued
operations was completed resulting in gross proceeds of approximately $31
million. These divestitures substantially complete the sale of businesses
acquired from DCA which were not strategic to the Company's electronic
components or electronic assemblies segments. Proceeds of the divestitures
were used to reduce bank debt.
NOTE E--LONG-TERM DEBT
Interest-bearing debt increased from $56 million at December 31, 1998 to $163
million at April 4, 1999, primarily due to the acquisition of CTS Wireless.
The Company borrowed $121 million of the debt under new bank credit facilities
which totaled $225 million. The initial variable interest rate on these
borrowings is approximately LIBOR plus one percent and the facilities have a
term of six
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years. The $225 million of credit facilities is unsecured and replaced
previous credit facilities which totaled $125 million.
The remaining $42 million of debt requires payment of interest at a fixed
annual weighted-average rate of 7.5 percent. The entire principal amount of
$42 million is due in the year 2013.
NOTE F--SEGMENT REPORTING
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments.
CTS' reportable segments are based upon the nature of products within the
Company. The products comprising the reportable segments are managed
separately and have differing technology and marketing strategies.
CTS has two reportable segments: electronic components and electronic
assemblies. Electronic components are products which perform the basic level
electronic function for a given product family for use in customer assemblies.
Electronic components consist principally of automotive sensors used in
commercial or consumer vehicles, ceramic filters, surface acoustic wave
components, piezoceramic devices, frequency control devices such as crystals
and clocks, loudspeakers, resistor networks, switches and variable resistors.
Electronic assemblies are assemblies of electronic or electronic and
mechanical products which, apart from the assembly, may themselves be marketed
as separate stand-alone products. Such assembly represents a completed,
higher-level functional product to be used in customer end products or
assemblies. These products consist principally of interconnect products such
as backpanel and connector assemblies used in the telecommunications industry,
cursor controls for computers, flex cable assemblies used in the disk drive
market and hybrid microcircuits used in the healthcare market.
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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
---------- ---------- -----
First Quarter 1999
Net sales to external
customers $ 91,374 $ 28,965 $120,339
Operating earnings 16,482 (210) 16,272
Total assets $376,926 $ 45,447 $422,373
First Quarter 1998
Net sales to external
customers $ 61,898 $32,143 $ 94,041
Operating earnings 9,155 1,168 10,323
Total assets $201,541 $59,553 $261,094
Reconciling information between reportable segments and CTS' consolidated
totals is shown in the following table:
(In thousands)
Operating Earnings First Quarter First Quarter
1999 1998
---- ----
Total operating earnings for
reportable segments $16,272 $10,323
Acquired in-process research
and development charge (12,940) ---
Interest expense (1,291) (499)
Other income 1,187 1,356
----- -----
Earnings before income taxes $3,228 $11,180
====== =======
Assets
Total assets for reportable segments $422,373 $261,094
Investment in discontinued operations 9,061 40,690
----- ------
Total assets $431,434 $301,784
======== ========
NOTE G--LITIGATION AND CONTINGENCIES
Contested claims involving various matters, including environmental claims
brought by government agencies, are being litigated by CTS, both in legal and
administrative forums. In the opinion of management, based upon currently
available information, adequate provision for potential costs has been made,
or the costs which could ultimately result from such litigation or
administrative proceedings will not materially affect the consolidated
financial position of the Company or the results of operations.
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NOTE H- EARNINGS PER SHARE
FASB Statement No. 128, "Earnings per Share," requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted EPS
computations. The calculation below provides net earnings, average common
shares outstanding and the resultant earnings per share for both basic and
diluted EPS for the first quarter of 1999 and 1998. The other dilutive
securities of approximately 161,000 and 176,000 at April 4, 1999, and March
29, 1998, respectively, consisted of shares of CTS common stock to be issued
to DCA shareholders who have not yet tendered their DCA shares.
(In thousands, except per share amounts)
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
First Quarter 1999:
Basic EPS $2,163 13,693 $0.16
Effect of Dilutive
Securities:
Stock options 478
Other 161
Diluted EPS $2,163 14,332 $0.15
First Quarter 1998:
Basic EPS $8,712 14,867 $0.59
Effect of Dilutive
Securities:
Stock options 525
Other 176
Diluted EPS $8,712 15,568 $0.56
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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 April 4, 1999 to
December 31, 1998
The following table highlights significant changes in balance sheet items and
ratios and other information related to liquidity and capital resources:
(Dollars in thousands)
April 4, December 31, Increase
1999 1998 (Decrease)
---- ---- ----------
Cash $16,369 $16,273 $ 96
Accounts receivable, net 84,226 47,043 37,183
Inventories, net 54,066 33,322 20,744
Current assets 173,734 118,583 55,151
Accounts payable 36,535 17,412 19,123
Current liabilities 109,382 82,377 27,005
Working capital 64,352 36,206 28,146
Current ratio 1.59 1.44 .15
Interest-bearing debt $163,000 $56,000 $107,000
Shareholders' equity 124,629 123,839 790
Interest-bearing debt
as a percent of
shareholders' equity 131% 45% 86% pts.
Interest-bearing debt
as a percent of
capitalization 57% 31% 26% pts.
From December 31, 1998, to April 4, 1999, working capital of CTS Corporation
and its subsidiaries ("CTS" or "Company") increased $28.1 million. This
increase is primarily due to the inclusion of CTS Wireless at April 4, 1999.
The percentage of interest-bearing debt to shareholders' equity increased
significantly due to the increase in debt for the purchase of CTS Wireless.
Capital expenditures were $4.2 million during the first quarter, compared with
$4.7 million for the same period a year earlier. These capital expenditures
were primarily for increased manufacturing capacity, manufacturing improvement
programs and new products.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used for investing activities totaled $73.9 million through the
first quarter of 1999, including $96.9 million paid for the CPD acquisition
and $4.2 million of capital expenditures, partially offset by net proceeds
received from the sale of property, plant and equipment including discontinued
operations of $27.3 million. In the first three months of 1998, cash flows
used for investing activities totaled $2.5 million, consisting of $4.7 million
of capital expenditures, partially offset by $2.2 million of net proceeds from
the sale of property, plant and equipment.
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Cash flows provided by financing activities were $64.1 million in 1999,
consisting of a net increase in debt of $65.0 million (excluding the $42.0
million of debt assumed with the purchase of CPD), partially offset by
dividends of $0.8 million, and the net of purchases of treasury stock and
other of $0.1 million. The increase in debt was due to financing obtained to
fund the CPD acquisition, partially offset by the paydown of debt with the
proceeds from the sale of discontinued operations. The Company purchased
inventory of CPD, however, it did not purchase accounts receivable or accounts
payable. Accordingly, the Company financed the working capital needs of CPD
for the month of March principally through the increase in trade accounts
payable and will continue to do so prospectively. During the first three
months of 1998, cash flows used for financing activities totaled $25.4
million, including $32.9 million of stock purchases and a net of $0.5 million
for dividends and other, partially offset by an increase in debt of $8.0
million.
The Company has historically been able to fund its capital and operating needs
through its cash flows from operations and available credit under its bank
credit facilities. CTS currently has unsecured bank credit facilities totaling
$225.0 million with a term of six years. The Company believes its current cash
flow and available credit under the bank credit facilities is adequate to fund
its operating requirements, working capital, capital expenditures and debt
service.
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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 First Quarter 1999
to First Quarter 1998
The following table highlights changes in significant components of the
consolidated statements of earnings for the three-month periods ending April
4, 1999, and March 29, 1998:
(Dollars in thousands)
April 4, March 29, Increase
1999 1998 (Decrease)
---- ---- ----------
Net sales $120,339 $94,041 $ 26,298
Gross earnings 37,187 26,367 10,820
Gross earnings as a percent
of sales 30.9% 28.0% 2.9%
Selling, general and
administrative expenses 15,861 12,708 3,153
Selling, general and
administrative expenses as
a percent of sales 13.2% 13.5% (0.3%)
Research and development
expenses 4,659 3,260 1,399
Acquired in-process research
and development (IPR&D) 12,940 --- 12,940
Operating earnings 3,332 10,323 (6,991)
Operating earnings excluding
IPR&D charge 16,272 10,323 5,949
Operating earnings, excluding
IPR&D charge, as a percent
of sales 13.5% 11.0% 2.5%
Interest expense 1,291 499 792
Earnings before income taxes 3,228 11,180 (7,952)
Earnings before income taxes,
excluding IPR&D charge 16,168 11,180 4,988
Income taxes 1,065 3,802 (2,737)
Income tax rate 33.0% 34.0% (1.0%)
Net sales increased by $26.3 million, or 28% from the first quarter of 1998.
Sales increases occurred principally as a result of the inclusion of CTS
Wireless since February 26, 1999. CTS Wireless' operating results will be
reported as part of CTS' electronic components segment. As a percent of total
sales, sales of electronic components and electronic assemblies in the first
quarter of 1999 were 76% and 24%, respectively. As a percentage of total
sales, the first quarter of 1998 sales of electronic components and electronic
assemblies were 66% and 34%, respectively. Refer to Note F - Segment
Reporting, for a description of the Company's segments.
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The electronic components segment experienced a $29.5 million sales increase,
or 48% from the first quarter of 1998, primarily due to the inclusion of CTS
Wireless' financial results since February 26, 1999. Revenue increases were
also realized in automotive and traditional frequency product lines. First
quarter sales declines were experienced in thermal dissipator products sold to
the personal computer market, when 1999 is compared to 1998.
The electronic assemblies segment experienced a 1999 sales decrease of $3.2
million, or 10% from the first quarter of 1998, primarily due to declines in
flex cable assemblies for the disk drive industry. CTS expects that 1999
annual sales of flex cable assemblies will not reach the level achieved in
1998.
Gross earnings increased primarily due to the inclusion of CTS Wireless since
February 26, 1999. Increases in gross earnings were also realized as a result
of a favorable product mix in the electronic components segment, as well as
the earnings effect of the revenue increases in automotive and frequency
product lines.
Selling, general and administrative expenses in dollars increased in the
electronic components segment primarily as a result of the inclusion of CTS
Wireless, however, decreased as a percentage of sales on a total company
basis.
Research and development expenses increased in dollars primarily as a result
of the inclusion of CTS Wireless. In addition, the Company continued its
investment efforts in new product development and improvements.
The acquired in-process research and development of $12.9 million reported
during the first three months of 1999 consisted of a one-time charge related
to the purchase of CPD. Amortization of intangibles totaled $0.4 million for
the first three months of the year, representing a $0.3 million increase
compared to the same period in the prior year. This increase was primarily
attributable to the recording of the additional intangibles related to the
acquisition of CPD in February 1999.
The increase in operating earnings dollars, excluding the acquired in- process
research and development charge, is principally due to the acquisition of CTS
Wireless, the incremental margin impact on higher sales volume and continued
control of manufacturing and operating expenses.
The effective tax rate decreased by 1% point primarily due to higher earnings
in the lower-tax jurisdictions.
Year 2000 Computer Systems Compliance
CTS is addressing the issues associated with the programming code in existing
computer systems and other equipment which may be affected by the rollover of
the two-digit year value to 00 in the year 2000. Systems that do not properly
recognize such dates could generate erroneous information or cause a system to
fail. The Year 2000 issue creates risk for CTS from unforeseen problems in
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its own systems and from worldwide third parties with whom CTS transacts
business. CTS believes that its products are not "time and date" sensitive.
CTS has formed a Company-wide Year 2000 Readiness Project to identify and
resolve Year 2000 issues. This program includes the inventory of financial,
manufacturing, design and other internal systems, hardware, equipment and
embedded chips in industrial control instruments, and the assessment,
remediation and testing of the systems. All systems were inventoried, reviewed
and assessed in 1998, and the majority of systems which were not Year 2000
ready were remedied or replaced and tested in 1998. The project is
approximately 95% completed and the remaining remediation of systems is
expected to be completed by the end of the second quarter of 1999. Acceptance
testing and certification of these systems are projected for completion by the
third quarter of 1999. A task force, comprised of members from operating units
and executive management, meets regularly and tracks the progress of the
program, prioritizes all the potential risks and develops plans to eliminate
or reduce risks.
CTS also faces risk to the extent that suppliers of products, services and
systems purchased by CTS, and others with whom CTS transacts business on a
worldwide basis, do not comply with Year 2000 requirements. As part of the
program, Year 2000 Readiness Surveys have been sent to significant service
providers, vendors, suppliers, customers and governmental entities that are
believed to be critical to business operations. CTS is currently in the
process of evaluating responses and sending follow-up requests to the
estimated 4% that have not responded. While management believes that it will
be able to qualify alternative suppliers as needed, until all supplier and
customer survey responses have been received and evaluated, the Company cannot
fully evaluate the extent of potential problems and the costs associated with
corrective actions. A contingency plan is being evaluated and reviewed, and
will not be formally established until the third quarter of 1999 when the
evaluation of suppliers and the remaining remediation of systems and testing
is completed. CTS is unable to determine what effect the failure of systems
due to Year 2000 issues by CTS or its suppliers or customers may have, but any
significant failures could have an adverse material effect on the Company's
results of operations and financial condition.
The cost to complete the program is estimated at $2.0 million for the costs of
outside consultants, software and hardware applications. There has been $1.5
million spent to date as of April 4, 1999. CTS has not tracked the internal
costs incurred for all of the hours spent on the project.
17
<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 three-month period ended April 4, 1999, the Company filed
one Report on Form 8-K, dated March 11, 1999 (as amended) reporting
under Item 2. Acquisition and Disposition of Assets, related to the
Company's acquisition of the Component Products Division of Motorola,
Inc. The Company filed an amendment to the Form 8-K on May 12, 1999,
reporting the financial statements and pro forma financial information
required by Item 7 of Form 8-K.
<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
Jeannine M. Davis Timothy J. Cunningham
Senior Vice President, Vice President Finance
Secretary and General Counsel and Chief Financial Officer
(GRAPHIC OMITTED)
Dated: May 19, 1999
18
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