<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 2, 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
July 2, 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 August 8, 2000: 27,733,538.
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 Six Months
ended July 2, 2000, and July 4, 1999 3
Condensed Consolidated Balance Sheets -
As of July 2, 2000, and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows - For the Six Months Ended
July 2, 2000, and July 4, 1999 5
Consolidated Statements of Comprehensive
Earnings - For the Three Months and Six Months
Ended July 2, 2000, and July 4, 1999 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13-20
PART 2. -- OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Announcements 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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 2, July 4, July 2, July 4,
2000 1999 2000 1999
---- ---- ---- ----
Net sales $206,611 $177,825 $411,077 $298,164
Costs and expenses:
Cost of goods sold 142,096 125,139 283,736 208,291
Selling, general and
administrative expenses 24,060 21,600 47,292 37,461
Research and development
expenses 7,955 6,579 15,822 11,238
Acquired in-process research
and development-Note C 0 0 0 12,940
Amortization of intangibles 1,245 906 2,290 1,301
------- ------- ------- -------
Operating earnings 31,255 23,601 61,937 26,933
Other(expense)income:
Interest expense (3,085) (2,930) (6,267) (4,221)
Interest income 248 229 446 480
Other 0 7 (231) 943
------- ------- ------- -------
Total other expense (2,837) (2,694) (6,052) (2,798)
------- ------- ------- -------
Earnings before income taxes 28,418 20,907 55,885 24,135
Income taxes 7,957 6,417 15,648 7,482
------- ------- ------- -------
Earnings from continuing
operations 20,461 14,490 40,237 16,653
Net loss from discontinued
operations, net of income
tax benefit of $355 -
Note D 0 0 (529) 0
-------- -------- ------- -------
Net earnings $ 20,461 $ 14,490 $ 39,708 $ 16,653
======== ======== ======== ========
Earnings (loss) per share-Note I
Basic:
Continuing operations $ 0.74 $ 0.53 $ 1.45 $ 0.61
Discontinued operations 0 0 (0.02) 0
-------- -------- -------- --------
Net earnings per share $ 0.74 $ 0.53 $ 1.43 $ 0.61
======== ======== ======== ========
Diluted:
Continuing operations $ 0.71 $ 0.51 $ 1.39 $ 0.58
Discontinued operations 0 0 (0.02) 0
-------- -------- -------- --------
Net earnings per share $ 0.71 $ 0.51 $ 1.37 $ 0.58
======== ======== ======== ========
Cash dividends declared
per share $ 0.03 $ 0.03 $ 0.06 $ 0.06
======== ======== ======== ========
Average common shares
outstanding:
Basic 27,786 27,536 27,771 27,460
Diluted 28,725 28,515 28,888 28,588
See notes to condensed consolidated financial statements.
Page 3
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Part 1 -- FINANCIAL INFORMATION
-------------------------------
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
July 2, December 31,
2000 1999*
---- ----
ASSETS (Unaudited)
------
Current Assets
Cash $ 21,111 $ 24,219
Accounts receivable, less allowances
(2000--$2,397; 1999--$2,628) 116,078 124,682
Inventories--Note B 80,224 78,942
Other current assets 13,605 4,869
Deferred income taxes 21,585 21,585
-------- --------
Total current assets 252,603 254,297
Property, Plant and Equipment, less accumulated
depreciation(2000--$176,706; 1999--$162,192) 168,415 139,692
Other Assets
Prepaid pension expense 76,787 68,990
Investment in discontinued operations 0 9,061
Intangible assets--Note C 49,220 47,843
Other 3,369 2,769
-------- --------
Total other assets 129,376 128,663
-------- --------
$550,394 $522,652
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 69,803 $ 68,315
Accrued liabilities 79,135 81,146
Current maturities of long-term debt-Note E 7,500 5,000
-------- --------
Total current liabilities 156,438 154,461
Long-term Debt--Note E 148,000 162,000
Other Long-term Obligations 7,237 9,846
Deferred Income Taxes 27,263 27,263
Postretirement Benefits 4,349 4,318
Shareholders' Equity
Preferred stock-authorized 25,000,000 shares
without par value; none issued
Common stock-authorized 75,000,000 shares
without par value; 48,431,850 shares
issued at July 2, 2000, and 48,419,604
shares issued at December 31, 1999 198,505 193,612
Additional contributed capital 12,895 9,005
Retained earnings 283,438 245,414
Cumulative translation adjustment (1,319) 291
-------- --------
493,519 448,322
Less cost of common stock held in treasury
2000--20,646,074 shares; 1999--20,957,649
shares 286,412 283,558
-------- --------
Total shareholders' equity 207,107 164,764
-------- --------
$550,394 $522,652
======== ========
*The 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)
Six Months Ended
----------------
July 2, July 4,
2000 1999
---- ----
Cash flows from operating activities:
Net earnings $ 39,708 $ 16,653
Depreciation and amortization 21,342 17,302
Prepaid pension asset (7,797) (3,748)
Gain on sale of fixed assets (316) (897)
Acquired in-process research and development 0 12,940
Changes in assets and liabilities, net of
effects of acquisition:
Accounts receivable 8,604 (55,610)
Inventories (2,186) (4,652)
Other current assets (7,951) 1,699
Deferred income taxes (1,393) (5,176)
Accounts payable and accrued liabilities (2,975) 39,672
Other 5,609 (2,895)
-------- --------
Total adjustments 12,937 (1,365)
-------- --------
Net cash provided by continuing operations 52,645 15,288
Loss on disposal of discontinued operations 529 0
-------- --------
Net cash provided by operating activities 53,174 15,288
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment including discontinued
operations, net 4,692 28,144
Purchase of CTS Wireless 0 (96,937)
Capital expenditures (47,739) (12,664)
-------- --------
Net cash used in investing activities (43,047) (81,457)
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations - CTS Wireless acquisition 0 96,937
Payments of long-term obligations, net (11,500) (26,937)
Dividend payments (1,658) ( 1,643)
Purchases of treasury stock (6,182) ( 2,422)
Other 6,741 523
-------- -------
Net cash provided by(used in)
financing activities (12,599) 66,458
Effect of exchange rate changes on cash (636) ( 1,594)
-------- --------
Net decrease in cash (3,108) (1,305)
Cash at beginning of year 24,219 16,273
-------- --------
Cash at end of period $ 21,111 $ 14,968
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest $ 6,158 $ 3,687
Income taxes--net $ 6,805 $ 7,409
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 Six Months
Ended Ended
----------------- ----------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------ ------- ------- -------
Net earnings $20,461 $14,490 $39,708 $16,653
Other comprehensive
(loss) earnings -
Translation adjustments (1,213) (313) (1,610) (942)
------- ------- ------- -------
Comprehensive earnings $19,248 $14,177 $38,098 $15,711
======= ======= ======= =======
See notes to condensed consolidated financial statements.
Page 6
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Part 1 -- FINANCIAL INFORMATION
------ ------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
July 2, 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 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)
July 2, December 31,
2000 1999
---- ----
Finished goods $16,726 $19,399
Work-in-process 19,771 20,288
Raw materials 43,727 39,255
------- -------
$80,224 $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. CTS has
accrued $11 million for the 1999 obligation, paid in July 2000. 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 has been 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. The
Company has reviewed the assumptions used in the forecasts and continues to
believe that the amount allocated to acquired in-process research and
development is reasonable.
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 decreased from $167 million at December 31, 1999, to $156
million at July 2, 2000. The Company had total bank borrowings of $114 million
at July 2, 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 $275 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
---------- ---------- -----
Second Quarter 2000
Net sales to external
customers $135,936 $ 70,675 $206,611
Operating earnings $ 26,991 $ 4,264 $ 31,255
Total assets $444,135 $106,259 $550,394
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
First Half 2000
Net sales to external
customers $274,981 $136,096 $411,077
Operating earnings $ 51,141 $ 10,796 $ 61,937
Total assets $444,135 $106,259 $550,394
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
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 Six Months
Ended Ended
--------------- ---------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
---- ---- ---- ----
Operating Earnings
Total operating earnings for
reportable segments $31,255 $23,601 $61,937 $39,873
Acquired in-process research
and development charge 0 0 0 (12,940)
Interest expense ( 3,085) (2,930) (6,267) (4,221)
Other income 248 236 215 1,423
------- ------- ------- -------
Earnings before income taxes $28,418 $20,907 $55,885 $24,135
======= ======= ======= =======
July 2, July 4,
2000 1999
-------- --------
Assets
Total assets for reportable segments $550,394 $445,767
Investment in discontinued operations 0 9,061
-------- --------
Total assets $550,394 $454,828
======== ========
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.
NOTE H--RECENT 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, has not been fully determined.
Page 11
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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 2000 and
1999. The other dilutive securities of approximately 261,000 and 310,000 at July
2, 2000, and July 4, 1999, 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 Earnings
(Numerator) (Denominator) Per Share
================================================================================
Second Quarter 2000:
Basic EPS $20,461 27,786 $0.74
================================================================================
Effect of Dilutive
Securities:
Stock options 678
Other 261
--------------------------------------------------------------------------------
Diluted EPS $20,461 28,725 $0.71
================================================================================
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
================================================================================
First Half 2000:
Basic EPS $39,708 27,771 $1.43
================================================================================
Effect of Dilutive
Securities:
Stock options 854
Other 263
--------------------------------------------------------------------------------
Diluted EPS $39,708 28,888 $1.37
================================================================================
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
================================================================================
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 July 2, 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)
----------------------------------
July 2, December 31, Increase
2000 1999 (Decrease)
------ ----------- --------
Cash $ 21,111 $ 24,219 $ (3,108)
Accounts receivable, net 116,078 124,682 (8,604)
Inventories, net 80,224 78,942 1,282
Current assets 252,603 254,297 (1,694)
Accounts payable 69,803 68,315 1,488
Current liabilities 156,438 154,461 1,977
Working capital 96,165 99,836 (3,671)
Current ratio 1.61 1.65 (0.04)
Interest-bearing debt $155,500 $167,000 $ (11,500)
Shareholders' equity 207,107 164,764 42,343
Interest-bearing debt
as a percent of
shareholders' equity 75% 101% (26)% pts.
Interest-bearing debt
as a percent of
capitalization 43% 50% (7)% pts.
From December 31, 1999 to July 2, 2000, the working capital of CTS Corporation
and its subsidiaries decreased $3.7 million. This decrease, was principally the
result of reductions in accounts receivable. The accounts receivable decrease
was a result of improved collections, principally at the wireless operations,
offset by increases related to sales of interconnect products.
The percentage of interest-bearing debt to shareholders' equity decreased due to
the decrease in debt and increase in shareholders' equity primarily resulting
from increased earnings.
Page 13
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Changes in Financial Condition: Comparison of July 2, 2000 to
--------------------------------------------------------------
December 31, 1999 - Continued
-----------------------------
Capital expenditures were $47.7 million during the first half of 2000, compared
with $12.7 million for first half of 1999. These capital expenditures were
primarily for capacity expansion and related infrastructure improvements for
wireless communications products, both in the U.S. and Asia. Most of the planned
additional capacity is anticipated to be in place in the second half of 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the first half of 2000, cash flows provided by operating activities were
$53.2 million, compared to $15.3 million in the first half of 1999. The most
significant reasons for the increase in operating cash flow during 2000 were
higher net earnings. Cash flow in the first half of 1999 was significantly
affected by the funding of working capital requirements of CTS Wireless
following its acquisition.
Cash flows used for investing activities totaled $43.0 million through the first
half of 2000. This use of cash was primarily the result of $47.7 million of
capital expenditures, partially offset by net proceeds received from the sale of
property, plant and equipment including discontinued operations of $4.7 million.
In the first half of 1999, cash flows used for investing activities totaled
$81.5 million, consisting of $96.9 million acquisition related costs for the CTS
Wireless acquisition, $12.7 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 used in financing activities were $12.6 million in the first half of
2000, consisting primarily of a net decrease in debt of $11.5 million and $6.2
million purchases of CTS stock, offset by other financing activities, primarily
related to proceeds from the exercise of stock options. In 1999, cash flows
provided by financing activities were $66.5 million, which consisted of a net
increase in debt of $70.0 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, $47.7 million of which has been spent during the first six months of
the year. These capital expenditures are primarily for production capacity
expansion, new products and cost reduction programs. In the CTS traditional
product lines, significant expenditures are required in the interconnect,
automotive and resistor product lines for new product introduction, additional
capacity and new technology. Projected capital expenditures in 2000 for Wireless
projects include programs for RF integrated modules to increase capacity, and
for the oscillator products and the necessary equipment to reduce product size
as a result of customer demands in the wireless handset industry. Also, in order
to increase capacity, production equipment will be required for the ceramic
duplexer products.
Page 14
<PAGE>
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
$275.0 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
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Item 2. Management's Discussion and Analysis of Financial
-----------------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Changes in Results of Operations: Comparison of Second Quarter 2000 to
-----------------------------------------------------------------------
Second Quarter 1999
-------------------
The following table highlights changes in significant components of the
consolidated statements of earnings for the three-month periods ended July 2,
2000, and July 4, 1999.
(Dollars in thousands)
--------------------------------
July 2, July 4, Increase
2000 1999 (Decrease)
------ ------ ----------
Net sales $206,611 $177,825 $ 28,786
Gross earnings 64,515 52,686 11,829
Gross earnings as a percent
of sales 31.2% 29.6% 1.6% pts.
Selling, general and
administrative expenses 24,060 21,600 2,460
Selling, general and
administrative expenses as
a percent of sales 11.6% 12.1% (0.5)% pts.
Research and development
expenses 7,955 6,579 1,376
Operating earnings 31,255 23,601 7,654
Operating earnings, as
a percent of sales 15.1% 13.3% 1.8 % pts.
Interest expense 3,085 2,930 155
Earnings from continuing
operations before income
taxes 28,418 20,907 7,511
Income taxes 7,957 6,417 1,540
Income tax rate 28.0% 31.0% (3.0)% pts.
Net earnings $ 20,461 $ 14,490 $ 5,971
Net sales increased by $28.8 million, or 16% from the second 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 automotive and frequency control products.
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 Second Quarter 2000 to
-----------------------------------------------------------------------
Second Quarter 1999
-------------------
As a percentage of total sales, sales of electronic components and electronic
assemblies in the second quarter of 2000 were 66% and 34%, respectively. As a
percentage of total sales, the 1999 second quarter sales of electronic
components and electronic assemblies were 83% and 17%, respectively. Refer to
Note F - Business Segments, for a description of the Company's business
segments.
The electronic components segment experienced an $11.2 million sales decrease,
or 8% from the second quarter of 1999, primarily due to decreases in wireless
components, offset partially by increased sales of automotive and frequency
control products. Sales decreases in the components segment were related to a
drop in wireless components of one type of cellular phone, combined with delays
in a new product introduction. Additionally, there were no sales in second
quarter 2000 compared to $12.5 million in second quarter 1999 of certain CTS
Wireless end of life products.
The electronic assemblies segment experienced a second quarter 2000 sales
increase of $40.0 million, or 130% from the second quarter of 1999. The 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 dollars increased primarily due to sales volume increases in the
interconnect and frequency control product lines, and gross margin increases in
wireless products.
Selling, general and administrative expenses increased primarily due to
increases in wireless and administrative manpower, additional depreciation and
systems implementation costs related to growth.
Research and development expenses increased primarily in new wireless product
design and development, as well as new product development activities in our
automotive product lines.
The increase in operating earnings dollars, was principally due to the
continuing growth in volume and earnings of electronic assemblies and growth in
earnings for electronic components. New product introductions and the focus on
operational excellence programs resulted in improved operating margins.
The effective tax rate decreased by 3.0 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 First Half 2000 to
--------------------------------- --------------------------------
First Half 1999
---------------
The following table highlights changes in significant components of the
consolidated statements of earnings for the six-month periods ended July 2,
2000, and July 4, 1999.
(Dollars in thousands)
----------------------
July 2, July 4, Increase
2000 1999 (Decrease)
------ ------ ----------
Net sales $411,077 $298,164 $112,913
Gross earnings 127,341 89,873 37,468
Gross earnings as a percent
of sales 31.0% 30.1% 0.9% pts.
Selling, general and
administrative expenses 47,292 37,461 9,831
Selling, general and
administrative expenses as
a percent of sales 11.5% 12.6% (1.1)% pts.
Research and development
expenses 15,822 11,238 4,584
Acquired in-process research
and development (IPR&D) 0 12,940 (12,940)
Operating earnings 61,937 26,933 35,004
Operating earnings, excluding
IPR&D charge 61,937 39,873 22,064
Operating earnings excluding
IPR&D charge, as a percent
of sales 15.1% 13.4% 1.7% pts.
Interest expense 6,267 4,221 2,046
Earnings from continuing
operations before income
taxes 55,885 24,135 31,750
Earnings from continuing
operations before income
taxes, excluding IPR&D charge 55,885 37,075 18,810
Income taxes 15,648 7,482 8,166
Income tax rate 28.0% 31.0% (3.0)% pts.
Net loss from discontinued
operations, net of income tax
benefit of $355 (529) 0 (529)
Net earnings $ 39,708 $ 16,653 $ 23,055
Net sales increased by $112.9 million, or 38% from the second half of 1999.
Sales increases occurred principally as a result of growth in the electronic
assemblies segment, driven by increased boxbuild assemblies and RF integrated
modules, and the inclusion of CTS Wireless for a full six months in 2000,
compared to four months in first half 1999. As a percentage of total sales,
sales of electronic components and electronic assemblies in the first half of
2000 were 67% and 33%, respectively. As a percentage of total sales, the first
half of 1999 sales of electronic components and electronic assemblies were 80%
and 20%, respectively. Refer to Note F - Business Segments, for a description of
the Company's business segments.
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 Half 2000 to
--------------------------------- --------------------------------
First Half 1999
---------------
The electronic components segment experienced a $36.5 million sales increase in
the first half of 2000, or 15% over the first half of 1999, primarily due to the
inclusion of CTS Wireless' sales for a full six months in 2000, compared to four
months following the acquisition in 1999. Revenue increases were also realized
in automotive and frequency product lines. Sales decreases in the components
segment were related to a drop in wireless components of one type of cellular
phone combined with delays in a new product introduction. Additionally, there
were no sales in the first half of 2000 compared to $20.9 million in the first
half of 1999 of CTS certain Wireless end of life products. Total 1999 annual
sales of these products were $30 million.
The electronic assemblies segment experienced an increase in the first half of
2000 of $76.4 million, or 128% from the first half of 1999. The revenue
increases were experienced both in the interconnect and the wireless product
lines. This is primarily due to increased demand for boxbuild assemblies for the
telecommunications and computer markets, and the development of the RF
integrated modules product line.
Gross earnings dollars increased primarily due to the inclusion of wireless
products sales for a full six months and the increased sales volume of the
electronic assemblies segment products. The higher percent of sales is
principally driven by the improved margins of wireless products and the growing
electronic assemblies segment for both the RF integrated modules and
interconnect boxbuild assemblies products.
Selling, general and administrative expenses increased primarily as a result of
the inclusion of CTS Wireless for a full six months, and additional wireless and
administrative manpower, additional depreciation and systems implementation
costs related to growth.
Research and development expenses increased as a result of the inclusion of CTS
Wireless for a full six 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 dollars was primarily due to the growth in
earnings for the electronic components segment, which included wireless revenues
for a full six months, and the growth in RF integrated modules and boxbuild
assemblies.
The effective tax rate decreased by 3.0 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 sale of the discontinued operations in the first quarter of 2000,
resulting in a $.02 unfavorable impact on earnings per share.
Page 19
<PAGE>
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, has not been fully determined.
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 June 27, 2000, Jeannine M. Davis, Executive Vice President, Administration,
and Secretary, was elected to the CTS Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
Page 20
<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/Patrick J. Dennis
Jeannine M. Davis Patrick J. Dennis
Executive Vice President, Senior Vice President Finance
Administration, and and Chief Financial Officer
Secretary
(GRAPHIC OMITTED)
Dated: August 14, 2000
Page 21
