<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 1, 2000
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 1, 2000 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 10, 2000: 27,756,213.
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 1, 2000, and October 3, 1999 3
Condensed Consolidated Balance Sheets -
As of October 1, 2000, and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows - For the Nine Months Ended
October 1, 2000, and October 3, 1999 5
Consolidated Statements of Comprehensive
Earnings - For the Three Months and Nine Months
Ended October 1, 2000, and October 3, 1999 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
------------ ------------------------
of Financial Condition and Results of
-------------------------------------
Operations 13-21
----------
PART 2. -- OTHER INFORMATION
Item 1. Legal Proceedings 21
-----------------
Item 2. Announcements 21
-------------
Item 6. Exhibits and Reports on Form 8-K 22
--------------------------------
SIGNATURES 22
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. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------ ------ ------ ------
Net sales $222,052 $180,203 $633,129 $478,367
Costs and expenses:
Cost of goods sold 159,294 125,236 443,030 333,527
Selling, general and
administrative expenses 21,716 21,326 69,008 58,787
Research and development
expenses 8,237 6,566 24,059 17,804
Acquired in-process research
and development-Note C 0 0 0 12,940
Amortization of intangibles 1,513 1,147 3,803 2,448
------- ------- -------- -------
Operating earnings 31,292 25,928 93,229 52,861
Other(expense)income:
Interest expense (3,160) (2,856) (9,427) (7,077)
Interest income 200 123 646 603
Other income (expense) 1,273 (421) 1,042 522
------- ------- -------- ------
Total other expense (1,687) (3,154) (7,739) (5,952)
------- ------- -------- ------
Earnings from continuing
operations before income taxes 29,605 22,774 85,490 46,909
Income taxes 8,290 6,825 23,938 14,307
------- ------- ------- -------
Earnings from continuing
operations 21,315 15,949 61,552 32,602
Net loss from discontinued
operations, net of income
tax benefit of $355 -
Note D 0 0 (529) 0
------- ------- ------- --------
Net earnings $ 21,315 $ 15,949 $ 61,023 $ 32,602
======== ======== ======== ========
Earnings (loss) per share-Note H
Basic:
Continuing operations $ 0.77 $ 0.58 $ 2.22 $ 1.19
Discontinued operations 0 0 (0.02) 0
-------- ------- ------- -------
Net earnings per share $ 0.77 $ 0.58 $ 2.20 $ 1.19
======== ======== ======== ========
Diluted:
Continuing operations $ 0.76 $ 0.56 $ 2.15 $ 1.14
Discontinued operations 0 0 (0.02) 0
-------- -------- --------- --------
Net earnings per share $ 0.76 $ 0.56 $ 2.13 $ 1.14
======== ======== ======== ========
Cash dividends declared
per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
======== ======== ======== ========
Average common shares
outstanding:
Basic 27,748 27,555 27,764 27,491
Diluted 28,140 28,573 28,639 28,582
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)
October 1, December 31,
2000 1999*
--------- -----------
ASSETS (Unaudited)
Current Assets
Cash $ 16,179 $ 24,219
Accounts receivable, less allowances
(2000--$2,242; 1999--$2,628) 137,187 124,682
Inventories--Note B 90,728 78,942
Other current assets 15,907 4,869
Deferred income taxes 21,585 21,585
------- -------
Total current assets 281,586 254,297
Property, Plant and Equipment, less accumulated
depreciation(2000--$183,475; 1999--$162,192) 194,679 139,692
Other Assets
Prepaid pension expense 80,550 68,990
Investment in discontinued operations - 9,061
Intangible assets--Note C 47,720 47,843
Other 3,316 2,769
------- -------
Total other assets 131,586 128,663
------- -------
$607,851 $522,652
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 98,548 $ 68,315
Accrued liabilities 71,043 81,146
Current maturities of long-term debt-Note E 8,750 5,000
------- -------
Total current liabilities 178,341 154,461
Long-term Debt--Note E 168,500 162,000
Other Long-term Obligations 6,911 9,846
Deferred Income Taxes 27,263 27,263
Postretirement Benefits 4,364 4,318
------- -------
Total liabilities 385,379 357,888
------- -------
Shareholders' Equity
Preferred stock-authorized 25,000,000 shares
without par value; none issued
Common stock-authorized 75,000,000 shares
without par value; 48,434,490 shares
issued at October 1, 2000, and 48,419,604
shares issued at December 31, 1999 198,736 193,612
Additional contributed capital 13,357 9,005
Retained earnings 303,912 245,414
Cumulative translation adjustment (2,094) 291
------- -------
513,911 448,322
Less cost of common stock held in treasury
2000--20,680,621 shares; 1999--20,957,649
shares 291,439 283,558
------- -------
Total shareholders' equity 222,472 164,764
------- -------
$607,851 $522,652
======== ========
*The condensed balance sheet at December 31, 1999, 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 1, October 3,
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings $ 61,023 $ 32,602
Depreciation and amortization 33,008 25,221
Prepaid pension asset (11,560) (5,145)
Gain on sale of fixed assets (262) (863)
Acquired in-process research and development 0 12,940
Changes in assets and liabilities, net of
effects of acquisition:
Accounts receivable (12,505) (68,183)
Inventories (12,690) (14,857)
Other current assets (10,253) (751)
Income taxes payable 2,536 (4,831)
Accounts payable and accrued liabilities 24,949 63,529
Other 3,368 (3,617)
------- -------
Total adjustments 16,591 3,443
------- -------
Net cash provided by continuing operations 77,614 36,045
Loss on disposal of discontinued operations 529 0
------- ------
Net cash provided by operating activities 78,143 36,045
------- ------
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment including discontinued
operations, net 5,580 28,144
Acquisition of businesses (11,200) (97,445)
Capital expenditures (83,412) (20,035)
------- -------
Net cash used in investing activities (89,032) (89,336)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations 23,000 97,445
Payments of long-term obligations, net (12,750) (46,645)
Dividend payments (2,504) ( 2,469)
Purchases of treasury stock (11,207) ( 3,008)
Other 7,286 713
------- -------
Net cash provided by
financing activities 3,825 46,036
------- -------
Effect of exchange rate changes on cash (976) 45
------- -------
Net decrease in cash (8,040) (7,210)
Cash at beginning of year 24,219 16,273
------- -------
Cash at end of period $ 16,179 $ 9,063
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest $ 8,811 $ 5,654
Income taxes--net $ 11,516 $ 17,575
See notes to condensed consolidated financial statements.
Page 5
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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. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------ ------ ------ ------
Net earnings $21,315 $15,949 $61,023 $32,602
Other comprehensive
(loss) earnings -
Translation adjustments (775) 957 (2,385) 15
------- ------- ------- -------
Comprehensive earnings $20,540 $16,906 $58,638 $32,617
======= ======= ======= =======
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 1, 2000
NOTE A--BASIS OF PRESENTATION
The condensed consolidated interim financial statements have been prepared by
CTS Corporation (CTS or the 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 and notes
thereto incorporated by reference in the Company's Form 10-K for the year ended
December 31,1999.
The accompanying unaudited condensed 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, results of operations and cash flows 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 to be expected for the full year.
Certain reclassifications have been made for the periods presented in the
financial statements to conform to the 2000 presentation.
NOTE B--INVENTORIES
Inventories consist of the following:
(In thousands)
October 1, December 31,
2000 1999
--------- -----------
Finished goods $19,335 $19,399
Work-in-process 19,021 20,288
Raw materials 52,372 39,255
------- -------
$90,728 $78,942
======= =======
Page 7
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NOTE C--ACQUISITION
On February 26, 1999, CTS Corporation completed the acquisition of certain
assets and liabilities of the Component Products Division of Motorola, Inc.,
hereafter referred to as "CTS Wireless." CTS Wireless designs and manufactures
electronic components and assemblies including ceramic filters, quartz crystals,
crystal oscillators, surface acoustic wave components and piezoceramic devices.
In 2000, CTS Wireless has grown to seven locations in the USA and Asia,
primarily serving the wireless communications industry.
The 1999 acquisition was accounted for under the purchase method of accounting.
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). Under the terms of the acquisition agreement, the Company could be
obligated to pay up to an additional $80 million for the years 2000 through 2003
depending upon increased sales and profitability of CTS Wireless. During the
third quarter of 2000, CTS paid $11.2 million for the agreed upon 1999 portion
of this obligation. The Company financed a substantial portion of the purchase
price through bank borrowings. CTS incurred approximately $4 million in costs
directly associated with the acquisition which were included in the overall
consideration.
The purchase price was allocated to the assets acquired based on the estimated
fair values as follows:
(In millions)
Inventory $ 19.9
Property, plant and equipment 71.0
Current technology 10.4
Identifiable intangible assets 43.5
In-process research and development (IPR&D) 12.9
------
Total $157.7
======
Identifiable intangible assets include trademarks, tradenames, technology rights
and customer relationships. These intangibles are being amortized on a
straight-line basis over their useful lives which range from four to 30 years.
Current technology is being amortized over four years.
In-process research and development represents the value assigned to the
research and development projects of CTS Wireless that were commenced but not
yet completed or had not yet reached technological feasibility at the date of
acquisition and which, if unsuccessful, had no alternative future use in
research and development activities or otherwise. As of the date of acquisition,
the $12.9 million of purchase price allocated to in-process research and
development related to technologies being developed for next-generation products
and represented products that were then currently in the development cycle that
had not yet reached a level of technological feasibility and had no alternative
future use. CTS Wireless' in-process research and development projects were
initiated to address the rapid technological change associated with the wireless
communications industry. The incomplete projects included developing technology
for the miniaturization of components such as oscillators, quartz and ceramics.
Page 8
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NOTE C -- ACQUISITION (continued)
The calculations of amounts allocated to in-process research and development
projects were based on risk-adjusted future cash flows related to the incomplete
research and development projects. The resulting cash flows were discounted to
their present value using a rate of 18%, which exceeded the overall cost of
capital for the Company.
Estimated net cash inflows from the acquired in-process technology, related to
CTS Wireless, commenced in the latter part of 1999 and are projected to 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 of approximately $9 million is expected
to be incurred through 2000. Remaining efforts on the projects are significant
and include important phases of project design, development and testing.
NOTE D--DISCONTINUED OPERATIONS
Businesses acquired in connection with the 1997 acquisition of Dynamics
Corporation of America (DCA), not strategic to CTS' core business segments, were
recorded as discontinued operations in 1999. During the first quarter of 2000,
the divestiture of all these businesses was completed.
NOTE E--LONG-TERM DEBT
Interest-bearing debt increased from $167 million at December 31, 1999, to $177
million at October 1, 2000. The Company had total bank borrowings of $135
million at October 1, 2000. The variable interest rate on these borrowings is
based upon LIBOR, with adjustments based on the ratio of CTS' consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA).
Effective February 1, 2000, the Company amended its bank credit facility to
increase the commitment under the revolving credit facility to $200 million from
$150 million. The terms of this $50 million supplemental loan commitment require
conversion of the outstanding balance of the supplemental loans on December 31,
2001, to a three-year term loan with variable maturities through December 31,
2005. The Company pays a commitment fee that varies based on performance under
certain financial covenants applicable to the undrawn portion of the revolving
credit agreement. Currently, that fee is 0.25 percent per annum. The credit
agreement and term loans require, among other things, that the Company maintain
a minimum tangible net worth, a minimum fixed charge coverage ratio and a
minimum leverage ratio. CTS has a total of $262 million of committed credit
facilities which are unsecured.
Page 9
<PAGE>
NOTE F--BUSINESS SEGMENTS
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 wireless components used in
cellular handsets, automotive sensors used in commercial or consumer vehicles,
frequency control devices such as crystals and clock oscillators, 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
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, RF (radio frequency) integrated modules used in
cellular handsets, hybrid microcircuits used in the healthcare market and cursor
controls for computers.
Management evaluates performance based upon operating earnings before interest
and income taxes. Summarized financial information concerning CTS' reportable
business segments is shown in the following table:
(In thousands)
Electronic Electronic
Components Assemblies Total
---------- ---------- -----
Third Quarter 2000
Net sales to external
customers $127,759 $ 94,293 $222,052
Operating earnings $ 22,207 $ 9,085 $ 31,292
Total assets $472,516 $135,335 $607,851
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
First Nine Months of 2000
Net sales to external
customers $402,740 $230,389 $633,129
Operating earnings $ 73,348 $ 19,881 $ 93,229
Total assets $472,516 $135,335 $607,851
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
Page 10
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NOTE F--BUSINESS SEGMENTS (Continued)
Reconciling information between reportable segments and CTS' consolidated totals
is shown in the following table:
(In thousands)
Three Months Nine Months
Ended Ended
------------ ------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
---- ---- ---- ----
Operating Earnings
Total operating earnings for
reportable segments $31,292 $25,928 $93,229 $65,801
Acquired in-process research
and development charge 0 0 0 (12,940)
Interest expense (3,160) (2,856) (9,427) (7,077)
Other income (expense) 1,473 (298) 1,688 1,125
------ ------- ------- -------
Earnings before income taxes $ 29,605 $22,774 $85,490 $46,909
======== ======= ======= =======
October 1, October 3,
2000 1999
--------- ---------
Assets
Total assets for reportable segments $607,851 $465,939
Investment in discontinued operations 0 9,061
-------- --------
Total assets $607,851 $475,000
======== ========
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.
Under the terms of the sale agreement related to a discontinued business
acquired from DCA Corporation, CTS retains liability for performance and
warranty obligations under certain customer contracts. The potential liability
expires in 2000. Management does not expect that it will incur any significant
costs associated with this contingency.
Page 11
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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
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 quarters and first nine months of
2000 and 1999. The other dilutive securities of approximately 258,000 and
291,000 at October 1, 2000, and October 3, 1999, respectively, consisted of
shares of CTS common stock to be issued to DCA shareholders who have not as yet
tendered their DCA shares.
(In thousands, except per share amounts)
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
================================================================================
Third Quarter 2000:
Basic EPS $21,315 27,748 $0.77
================================================================================
Effect of Dilutive
Securities:
Stock options 134
Other 258
--------------------------------------------------------------------------------
Diluted EPS $21,315 28,140 $0.76
================================================================================
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
================================================================================
First Nine Months of 2000:
Basic EPS $61,023 27,764 $2.20
================================================================================
Effect of Dilutive
Securities:
Stock options 614
Other 261
--------------------------------------------------------------------------------
Diluted EPS $61,023 28,639 $2.13
================================================================================
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
================================================================================
Page 12
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Part 1 -- FINANCIAL INFORMATION
-------------------------------
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
Changes in Financial Condition: Comparison of October 1, 2000 to
------------------------------- --------------------------------
December 31, 1999
-----------------
The following table highlights changes in balance sheet dollar amounts and
ratios and other information related to liquidity and capital resources:
(Dollars in thousands)
-------------------------------------
October 1, December 31, Increase
2000 1999 (Decrease)
--------- ----------- --------
Cash $ 16,179 $ 24,219 $ (8,040)
Accounts receivable, net 137,187 124,682 12,505
Inventories, net 90,728 78,942 11,786
Current assets 281,586 254,297 27,289
Accounts payable 98,548 68,315 30,233
Current liabilities 178,341 154,461 23,880
Working capital 103,245 99,836 3,409
Current ratio 1.58 1.65 (0.07)
Interest-bearing debt $177,250 $167,000 $10,250
Shareholders' equity 222,472 164,764 57,708
Interest-bearing debt
as a percent of
shareholders' equity 80% 101% (21)% pts.
Interest-bearing debt
as a percent of
capitalization 44% 50% (6)% pts.
From December 31, 1999 to October 1, 2000, the working capital of CTS
Corporation and its subsidiaries increased $3.4 million. Increases in working
capital are volume related, primarily due to sales increases of interconnect
products.
The percentage of interest-bearing debt to shareholders' equity decreased due to
an increase in shareholder' equity primarily resulting from increased earnings.
The earnings increase was partially offset by an increase in debt related to
higher capital expenditures devoted to new products and technologies, capacity
expansion and land and building projects.
Page 13
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Changes in Financial Condition: Comparison of October 1, 2000 to
------------------------------- --------------------------------
December 31, 1999 - Continued
-----------------------------
Capital expenditures were $83.4 million during the first nine months of 2000,
compared with $20.0 million for first nine months of 1999. These capital
expenditures were primarily for equipment and tooling for new products and
technologies and capacity expansion covering primarily equipment and tooling for
our RF integrated modules (assemblies), and for crystals and oscillators and
application specific resistor networks (components) product lines. Additionally,
significant expenditures were devoted to land/building projects in Asia and the
U.S. for these expansion projects.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 2000, cash flows provided by operating activities
were $78.1 million, compared to $36.0 million in the first nine months of 1999.
The increase in operating cash flow was due to higher net earnings in 2000. Cash
flow in the first nine months of 1999 was significantly impacted as a result of
funding working capital requirements of CTS Wireless following its acquisition.
Cash flows used for investing activities totaled $89.0 million through the first
nine months of 2000. This use of cash was primarily the result of $83.4 million
of capital expenditures and $11.2 million paid to Motorola, Inc. due to
financial performance of CTS Wireless for the year ended December 31, 1999,(Note
C). Use of cash for investing activities was partially offset by net proceeds
received from the sale of property, plant and equipment including discontinued
operations of $4.7 million. In the first nine months of 1999, cash flows used
for investing activities totaled $89.3 million, consisting of $97.4 million of
acquisition related costs for the CTS Wireless acquisition, $20.0 million of
capital expenditures, partially offset by $28.1 million of net proceeds from the
sale of property, plant and equipment, including discontinued operations.
Cash flows provided by financing activities were $3.8 million in the first nine
months of 2000, consisting primarily of a net increase in debt of $10.3 million,
proceeds from the exercise of stock options, offset by $11.2 million purchases
of CTS stock. In 1999, cash flows provided by financing activities were $46.0
million, which consisted of a net increase in debt of $50.8 million (excluding
the $42.0 million of debt assumed with the purchase of CTS Wireless).
CTS' capital expenditures for 2000 are presently expected to exceed $100
million, $83.4 million of which has been spent during the first nine months of
fiscal 2000. These capital expenditures are primarily for new products and
technologies, capacity expansion, and land/building projects in Asia and the
U.S. Significant expenditures have been required in the interconnect, and RF
integrated modules (assemblies segment), crystals and oscillators and
Application Specific Resistor Networks (components segment) product lines.
Page 14
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
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
$262.0 million which mature over five 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 other securities and utilization of bank
credit facilities, will be adequate to fund its working capital, capital
expenditures and debt service requirements.
Page 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of Third Quarter 2000 to
--------------------------------- -----------------------------------
Third Quarter 1999
------------------
The following table highlights changes in significant components of the
consolidated statements of earnings for the three-month periods ended October 1,
2000, and October 3, 1999.
(Dollars in thousands)
-------------------------------
Oct. 1, Oct. 3, Increase
2000 1999 (Decrease)
------ ------ ----------
Net sales $222,052 $180,203 $41,849
Gross earnings 62,758 54,967 7,791
Gross earnings as a percent
of sales 28.3% 30.5% (2.2)% pts.
Selling, general and
administrative expenses 21,716 21,326 390
Selling, general and
administrative expenses as
a percent of sales 9.8% 11.8% (2.0)% pts.
Research and development
expenses 8,237 6,566 1,671
Operating earnings 31,292 25,928 5,364
Operating earnings, as
a percent of sales 14.1% 14.4% (0.3)% pts.
Interest expense 3,160 2,856 304
Earnings from continuing
operations before income
taxes 29,605 22,774 6,831
Income taxes 8,290 6,825 1,465
Income tax rate 28.0% 30.0% (2.0)% pts.
Earnings from continuing
operations $ 21,315 $ 15,949 $ 5,366
Net sales increased by $41.8 million, or 23% from the third quarter of 1999.
Sales increases occurred principally in the electronic assemblies segment driven
by both interconnect boxbuild products and RF integrated modules. Electronic
components reflected strong demand in the frequency control, resistor and
electrocomponents products, but were adversely impacted primarily due to a
customer delayed CDMA program, decreases related to the decline in the analog
single mode cellular phones and other customer inventory corrections.
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of Third Quarter 2000 to
--------------------------------- -----------------------------------
Third Quarter 1999
------------------
As a percentage of total sales, sales of electronic components and electronic
assemblies in the third quarter of 2000 were 58% and 42%, respectively. As a
percentage of total sales, the 1999 third quarter sales of electronic components
and electronic assemblies were 75% and 25%, respectively. Refer to Note F -
Business Segments, for a description of the Company's business segments.
The electronic components segment experienced a $7.3 million sales decrease, or
5% from the third quarter of 1999. Sales decreases in the components segment
were related to a drop in wireless components resulting from the decline in the
analog single mode cellular phone, combined with customer delays in a new
product introduction and a decline in sales into the South Korean market
resulting from the termination of certain government subsidies. Additionally,
there were no sales in third quarter 2000 compared to $5.1 million in third
quarter 1999 of certain Wireless end of life products. Increases were
experienced in frequency control product sales primarily for communications
infrastructure, and there were improvements experienced in resistor and
electrocomponents products primarily for current surface mount devices and new
product introductions.
The electronic assemblies segment experienced a third quarter 2000 sales
increase of $49.2 million, or 109% from the third quarter of 1999. Revenue
increases were experienced both in the interconnect boxbuild products and RF
integrated modules. The boxbuild assembly business demand is focused in mass
storage, communications and Internet products.
Gross earnings increased primarily due to sales volume increases in the
interconnect and frequency control product lines, and gross margin increases in
wireless products. Gross earnings includes $2.5 million in third quarter 2000
relating to an inventory adjustment associated with the new management
information system implementation.
Selling, general and administrative expenses increased primarily due to
increases in wireless employee salaries and benefits for the expanding wireless
component business units and professional services related to new management
information systems implementation costs, primarily for training.
Research and development expenses increased primarily in wireless product design
and development and for new product development activities in our automotive
product lines.
The $5.4 million increase in operating earnings, was principally due to the
continuing growth in electronic assemblies volume. The slight decrease in
operating earnings as a percent of sales was primarily the result of a higher
volume of lower margin interconnect electronic assemblies.
The effective tax rate decreased by 2.0 percentage points primarily due to
higher expected earnings in lower-tax jurisdictions, particularly in CTS
Wireless non-U.S. locations.
Page 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of Third Quarter 2000 to
--------------------------------- -----------------------------------
Third Quarter 1999
------------------
Due to lower than committed volumes from a major customer, the Company incurred
a substantial under absorption of manufacturing and operating expenses within
the components segment. A memorandum of understanding with the customer commits
certain volumes and, accordingly, the Company billed the customer $3.9 million
during the third quarter 2000 for the costs incurred. The customer has
acknowledged the invoices, the payment of which is subject to verification and
audit. While these costs were primarily incurred during the third quarter, no
recovery was reflected in the quarter's results of operations.
Page 18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of First Nine Months of
--------------------------------- ----------------------------------
2000 to First Nine Months of 1999
---------------------------------
The following table highlights changes in significant components of the
consolidated statements of earnings for the nine-month periods ended October 1,
2000, and October 3, 1999.
(Dollars in thousands)
--------------------------------
Oct. 1, Oct. 3, Increase
2000 1999 (Decrease)
------ ------ ----------
Net sales $633,129 $478,367 $154,762
Gross earnings 190,099 144,840 45,259
Gross earnings as a percent
of sales 30.0% 30.3% (0.3)% pts.
Selling, general and
administrative expenses 69,008 58,787 10,221
Selling, general and
administrative expenses as
a percent of sales 10.9% 12.3% (1.4)% pts.
Research and development
expenses 24,059 17,804 6,255
Acquired in-process research
and development (IPR&D) 0 12,940 (12,940)
Operating earnings 93,229 52,861 40,368
Operating earnings, excluding
IPR&D charge 93,229 65,801 27,428
Operating earnings excluding
IPR&D charge, as a percent
of sales 14.7% 13.8% 0.9% pts.
Interest expense 9,427 7,077 2,350
Earnings from continuing
operations before income
taxes 85,490 46,909 38,581
Earnings from continuing
operations before income
taxes, excluding IPR&D charge 85,490 59,849 25,641
Income taxes 23,938 14,307 9,631
Income tax rate 28.0% 30.5% (2.5)% pts.
Net loss from discontinued
operations, net of income tax
benefit of $355 (529) 0 (529)
Net earnings $ 61,023 32,602 $ 28,421
Net sales increased by $154.8 million, or 32% from the first nine months of
1999. Sales increases occurred principally as a result of growth in the
electronic assemblies segment, driven by both boxbuild assemblies and RF
integrated modules. The electrocomponents and resistor electronic components
business also improved significantly as the result of strong demand for current
surface mount devices and new product introductions. As a percentage of total
sales, sales of electronic components and electronic assemblies in the first
nine months of 2000 were 64% and 36%, respectively. As a percentage of total
sales, the first nine months of 1999 sales of electronic components and
electronic assemblies were 78% and 22%, respectively. Refer to Note F - Business
Segments, for a description of the Company's business segments.
Page 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of First Nine Months of
--------------------------------- ----------------------------------
2000 to First Nine Months of 1999
---------------------------------
The electronic components segment experienced a $29.1 million sales increase in
the first nine months of 2000, or 8% over the first nine months of 1999. Revenue
increases were realized in frequency control and resistor and electrocomponent
product lines. Sales decreases within the components segment included a drop in
sales of wireless components as a result of the decline in the analog single
mode cellular phone, combined with customer delays in a new product introduction
and a decline in sales into the South Korean market resulting from the
termination of certain government subsidies. Additionally, there were no sales
in the first nine months of 2000 compared to $26.0 million in the first nine
months of 1999 related to certain Wireless end of life products. Total 1999
annual sales of these end of life products were $30 million. The increases in
frequency control product sales were primarily for communications
infrastructure, and the improvements in resistor and electrocomponents products
were primarily for current surface mount devices and new product introductions.
The electronic assemblies segment experienced an increase in the first nine
months of 2000 of $125.7 million, or 120% from the first nine months of 1999.
Revenue increases were experienced both in the interconnect and RF integrated
module business, primarily due to increased demand for the telecommunication and
computer markets.
Gross earnings increased $45.3 million primarily due to wireless components
improved gross margin, and the sales volume increases in frequency components as
well as the increased sales volume of interconnect electronic assemblies segment
products.
Selling, general and administrative expenses increased primarily as a result of
the inclusion of CTS Wireless for a full nine months, and additional wireless
depreciation, employee salaries and benefits for the expanding wireless
component business units, and the professional services related to new
management information systems implementation costs, primarily for training.
Research and development expenses increased as a result of the inclusion of CTS
Wireless for a full nine months. Research and development programs are directed
to improve product performance and miniaturization through advanced technology
and integration, and new product development primarily in the crystals and
oscillators product lines. Also expenditures and research and development
efforts were devoted to new product development programs in our automotive
product lines.
The increase in operating earnings was due to the volume driven growth in
earnings within the electronic components segment primarily frequency control,
resistor and electrocomponents products and the volume driven growth in earnings
for the electronic assemblies segment of RF integrated modules and interconnect
boxbuild assemblies.
Page 20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------- -------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of First Nine Months of
--------------------------------- ----------------------------------
2000 to First Nine Months of 1999
---------------------------------
The effective tax rate decreased by 2.5 percentage points primarily due to
higher expected earnings in lower-tax jurisdictions, particularly in CTS
Wireless non-U.S. locations.
The accounting for discontinued operations was finalized following the
completion of the sale of the discontinued operations in the first quarter of
2000, resulting in a $.02 unfavorable impact on earnings per share.
Recently Issued Accounting Pronouncements
-----------------------------------------
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133),"Accounting for Derivative
Instruments and Hedging." SFAS 133 provides guidance for the recognition and
measurement of derivatives and hedging activities. It requires an entity to
record, at fair value, all derivatives as either assets or liabilities in the
balance sheet, and it establishes specific accounting rules for certain types of
hedging. This Statement is effective for fiscal years beginning after June 15,
2000, and will be adopted by the Company as required. The impact, if any, of
adopting SFAS 133 on CTS' consolidated financial position, results of operations
and cash flows, is not anticipated to be significant.
In December 1999, the SEC issued Staff Accounting Bulletin Number ("SAB No.")
101, "Revenue Recognition in Financial Statements," which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. The Company is not expecting the implementation of SAB 101 to have
a material impact on the financial statements.
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
------- -------------
On August 25, 2000, Richard G. Cutter was elected Vice President and
Assistant Secretary, CTS Corporation. Mr. Cutter retains his position
of General Counsel.
Additionally, on August 25, 2000, H. Tyler Buchanan was elected Vice
President, CTS Corporation. Mr. Buchanan will assume overall
responsibility for CTS' automotive sensors and actuator manufacturing
facilities and resistor networks/electrocomponents manufacturing
operations.
Effective October 1, 2000, Michael A. Henning was elected to the CTS
Corporation Board of Directors. Mr. Henning is Deputy Chairman, Ernst
& Young LLP.
Page 21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
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/Patrick J. Dennis
Executive Vice President, Senior Vice President Finance
Administration, and and Chief Financial Officer
Secretary
Dated: November 14, 2000
Page 22
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