<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 April 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
April 2, 2000 1-4639
------------- ------
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
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(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 8, 2000: 27,837,698.
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
ended April 2, 2000, and April 4, 1999 3
Condensed Consolidated Balance Sheets -
As of April 2, 2000, and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows - For the Three Months Ended
April 2, 2000, and April 4, 1999 5
Consolidated Statements of Comprehensive
Earnings - For the Three Months Ended
April 2, 2000, and April 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 13-18
----------
PART 2. -- OTHER INFORMATION
Item 1. Legal Proceedings 18
-----------------
Item 2. Announcements 19
-------------
Item 6. Exhibits and Reports on Form 8-K 19
--------------------------------
SIGNATURES 19
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Part 1 -- FINANCIAL INFORMATION
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Item 1. Financial Statements
- -----------------------------
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS-UNAUDITED
(In thousands, except per share amounts)
Three Months Ended
------------------
April 2, April 4,
2000 1999
--------------------
Net sales $204,466 $120,339
Costs and expenses:
Cost of goods sold 141,640 83,152
Selling, general and administrative expenses 23,232 15,861
Research and development expenses 7,867 4,659
Acquired in-process research and
development - Note C 0 12,940
Amortization of intangibles 1,045 395
------ ------
Operating earnings 30,682 3,332
Other(expense)income:
Interest expense (3,182) (1,291)
Interest income 198 251
Other (231) 936
------ -----
Total other expense (3,215) (104)
------ ------
Earnings before income taxes 27,467 3,228
Income taxes 7,691 1,065
------ -----
Earnings from continuing operations 19,776 2,163
Net loss from discontinued operations,
net of income tax benefit of $355
- Note D (529) 0
---- ------
Net earnings $ 19,247 $ 2,163
======= ======
Earnings(loss)per share - Note I
Basic:
Continuing operations $ 0.71 $ 0.08
Discontinued operations (0.02) 0
------ ------
Net earnings per share $ 0.69 $ 0.08
====== ======
Diluted:
Continuing operations $ 0.68 $ 0.07
Discontinued operations (0.02) 0
------ ------
Net earnings per share $ 0.66 $ 0.07
===== ======
Cash dividends declared per share $ 0.03 $ 0.03
Average common shares outstanding:
Basic 27,730 27,386
Diluted 29,027 28,664
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
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CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
April 2, December 31,
2000 1999*
---- -----
ASSETS (Unaudited)
Current Assets
Cash $ 22,526 $ 24,219
Accounts receivable, less allowances
(2000--$2,810; 1999--$2,628) 108,787 124,682
Inventories--Note B 74,277 78,942
Other current assets 17,576 4,869
Deferred income taxes 21,585 21,585
------- -------
Total current assets 244,751 254,297
Property, Plant and Equipment, less accumulated
depreciation(2000--$170,085; 1999--$162,192) 149,460 139,692
Other Assets
Prepaid pension expense 73,020 68,990
Investment in discontinued operations 0 9,061
Intangible assets --Note C 47,810 47,843
Other 3,498 2,769
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Total other assets 124,328 128,663
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$518,539 $522,652
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt-Note E $ 6,250 $ 5,000
Accounts payable 57,436 68,315
Accrued liabilities 71,221 81,146
------- -------
Total current liabilities 134,907 154,461
Long-term Debt--Note E 153,500 162,000
Other Long-term Obligations 9,509 9,846
Deferred Income Taxes 27,263 27,263
Postretirement Benefits 4,333 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; 48,426,804
shares issued at April 2, 2000, and 48,419,604
shares issued at December 31, 1999 197,721 193,612
Additional contributed capital 12,782 9,005
Retained earnings 263,818 245,414
Cumulative translation adjustment (106) 291
------ -------
474,215 448,322
Less cost of common stock held in treasury
2000--20,598,174 shares; 1999--20,957,649
shares 285,188 283,558
------- -------
Total shareholders' equity 189,027 164,764
------- -------
$518,539 $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.
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Part 1 -- FINANCIAL INFORMATION
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CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
(In thousands of dollars)
Three Months Ended
------------------
April 2, April 4,
2000 1999
------ ------
Cash flows from operating activities:
Net earnings $19,247 $ 2,163
Depreciation and amortization 10,234 6,347
Prepaid pension asset (4,030) (2,088)
Gain on sale of fixed assets (65) (816)
Acquired in-process research and development 0 12,940
changes in assets and liabilities net of
effects of acquisition:
Accounts receivable 15,895 (37,183)
Inventories 4,665 23
Other current assets (11,922) 2,154
Deferred income taxes (6,172) (5,172)
Accounts payable and accrued liabilities (14,277) 30,755
Other 7,269 1,790
------- ------
Total adjustments 1,597 8,750
------- ------
Net cash provided by continuing operations 20,844 10,913
Loss on disposal of discontinued operations 529 0
------- ------
Net cash provided by operating activities 21,373 10,913
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment including discontinued
operations, net 4,307 27,267
Purchase of CTS Wireless 0 (96,937)
Capital expenditures (20,516) ( 4,214)
------- ------
Net cash used in investing activities (16,209) (73,884)
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations - CTS Wireless acquisition 0 96,937
Payments of long-term obligations, net (7,250) (31,937)
Dividend payments (824) (817)
Purchases of treasury stock (3,092) (480)
Other 4,452 399
------ ------
Net cash (used in) provided by
financing activities (6,714) 64,102
Effect of exchange rate changes on cash (143) (1,035)
------ ------
Net (decrease) increase in cash (1,693) 96
Cash at beginning of year 24,219 16,273
------ ------
Cash at end of period $22,526 $16,369
======= =======
Supplemental cash flow information Cash paid during the period for:
Interest $ 2,165 $ 1,318
Income taxes--net $ 4,478 $ 3,128
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
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CTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED
(In thousands of dollars)
Three Months Ended
------------------
April 2, April 4,
2000 1999
---- ----
Net earnings $19,247 $2,163
Other comprehensive loss -
Translation adjustments (397) (629)
------- ----
Comprehensive earnings $18,850 $1,534
======= ======
See notes to condensed consolidated financial statements.
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Part 1 -- FINANCIAL INFORMATION
- -------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
April 2, 2000
NOTE A--BASIS OF PRESENTATION
The accompanying 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, notes thereto and other information included in the Company's
Annual Report on 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 and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
Certain reclassifications have been made for the years presented in the
financial statements to conform to the classifications effective in 2000.
NOTE B--INVENTORIES
The components of inventory consist of the following:
(In thousands)
April 2, December 31,
2000 1999
---- ----
Finished goods $20,646 $19,399
Work-in-process 20,357 20,288
Raw materials 33,274 39,255
------ ------
$74,277 $78,942
====== ======
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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 for 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 $105 million over
five years depending upon increased sales and profitability of CTS Wireless,
and has estimated the 1999 portion of this obligation, payable in 2000, at $7
million. 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 68.8
Current technology 10.1
Identifiable intangible assets 42.3
In-process research and development (IPR&D) 12.9
------
Total $154.0
======
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.
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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,
have been recorded as discontinued operations. During the first fiscal 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
$160 million at April 2, 2000. The Company had total bank borrowings of $118
million at April 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 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 $265 million of credit facilities
which are unsecured.
NOTE F--BUSINESS SEGMENT
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 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 assemblies represent a completed, higher-level functional
product to be used in customer end products or assemblies. These
Page 9
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NOTE F--BUSINESS SEGMENT (Continued)
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
---------- ---------- -----
First Quarter 2000
Net sales to external
customers $139,045 $65,421 $204,466
Operating earnings 24,150 6,532 30,682
Total assets $429,330 $89,209 $518,539
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
Reconciling information between reportable segments and CTS' consolidated
totals is shown in the following table:
(In thousands)
Operating Earnings First Quarter First Quarter
- ------------------ ------------- -------------
2000 1999
---- ----
Total operating earnings for
reportable segments $30,682 $16,272
Acquired in-process research
and development charge 0 (12,940)
Interest expense (3,182) (1,291)
Other (expense) income (33) 1,187
------ ------
Earnings before income taxes $27,467 $ 3,228
======= =======
Assets
Total assets for reportable segments $518,539 $422,373
Investment in discontinued operations 0 9,061
------- -------
Total assets $518,539 $431,434
======= =======
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
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NOTE G--LITIGATION AND CONTINGENCIES (Continued)
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 when required, if not earlier.
The impact, if any, of adopting SFAS 133 on CTS' consolidated financial
position, results of operations and cash flows, has not been fully determined.
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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 first quarter of 2000 and 1999.
The other dilutive securities of approximately 264,000 and 322,000 at April 2,
2000, and April 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)
Net Net
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------- ---------
First Quarter 2000:
Basic EPS $19,247 27,730 $0.69
======= ====== =====
Effect of Dilutive
Securities:
Stock options 1,033
Other 264
Diluted EPS $19,247 29,027 $0.66
======= ====== =====
First Quarter 1999:
Basic EPS $ 2,163 27,386 $0.08
======= ====== =====
Effect of Dilutive
Securities:
Stock options 956
Other 322
Diluted EPS $ 2,163 28,664 $0.07
======= ====== =====
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 April 2, 2000 to
- ---------------------------------------------------------------
December 31, 1999
- -----------------
The following table highlights changes in balance sheet items and ratios and
other information related to liquidity and capital resources:
(Dollars in thousands)
April 2, December 31, Increase
2000 1999 (Decrease)
---- ---- ----------
Cash $ 22,526 $ 24,219 $(1,693)
Accounts receivable, net 108,787 124,682 (15,895)
Inventories, net 74,277 78,942 (4,665)
Current assets 244,751 254,297 (9,546)
Accounts payable 57,436 68,315 (10,879)
Current liabilities 134,907 154,461 (19,554)
Working capital 109,844 99,836 10,008
Current ratio 1.81 1.65 0.16
Interest-bearing debt $160,000 $167,000 $(7,000)
Shareholders' equity 189,027 164,764 24,263
Interest-bearing debt
as a percent of
shareholders' equity 85% 101% (16)% pts.
Interest-bearing debt
as a percent of
capitalization 46% 50% (4)% pts.
From December 31, 1999 to April 2, 2000, the working capital of CTS
Corporation and its subsidiaries increased $10.0 million. This increase, was
principally the result of reductions in accounts payable and accrued
liabilities. The accounts payable decrease was a result of timing differences
in receipt of certain inventories for major programs. The decrease in other
current liabilities was principally related to income taxes payable. Income
taxes payable was reduced as the result of recognizing a tax benefit related
to certain non- qualified stock options granted in 1997 and exercised in the
first quarter of 2000. Under FASB 123, "Accounting for Stock-Based
Compensation," this benefit did not reduce the Company's overall tax expense
but was recognized as an increase to paid-in capital. Offsetting these
decreases in liabilities were reductions in receivables and inventories and
increases in other current assets. The reduction in receivables was primarily
due to improvement in collections and decreasing payment periods when compared
to 1999 year end.
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.
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Changes in Financial Condition: Comparison of April 2, 2000 to
- ------------------------------- ------------------------------
December 31, 1999 - Continued
- -----------------------------
Capital expenditures were $20.5 million during the first quarter, compared
with $4.2 million for first quarter 1999. These capital expenditures were
primarily for capacity expansion, technological advances and new products,
primarily for wireless communications products.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2000, cash flows provided by operating activities were
$21.4 million, with the most significant impact coming from the higher net
earnings, and along with the working capital changes discussed previously,
increased significantly over the first quarter of 1999.
Cash flows used for investing activities totaled $16.2 million through the
first quarter of 2000, including $20.5 million of capital expenditures,
partially offset by net proceeds received from the sale of property, plant and
equipment including discontinued operations of $4.3 million. In the first
quarter of 1999, cash flows used for investing activities totaled $73.9
million, consisting of $96.9 million acquisition related costs for the CTS
Wireless acquisition, $4.2 million of capital expenditures, partially offset
by $27.3 million of net proceeds from the sale of property, plant and
equipment, including discontinued operations.
Cash flows used in financing activities were $6.7 million in 2000, consisting
primarily of a net decrease in debt of $7.3 million and $3.1 million purchases
of CTS stock, partially offset by other financing activities of $4.5 million,
primarily related to the increase of stock options. In 1999, cash flows
provided by financing activities were $64.1 million, which consisted of a net
increase in debt of $65.0 million (excluding the $42.0 million of debt assumed
with the purchase of CTS Wireless).
CTS' capital expenditures for 2000 are presently expected to total
approximately $127 million, $20.5 million of which has been spent during the
first three 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 the RF
Integrated Modules to increase capacity for the oscillator products and the
necessary equipment to reduce product size as a result of customer demands in
the wireless handset industry. Also production equipment will be required for
the ceramic duplexer products to increase capacity. Expenditures are also
planned for new facilities for Wireless, in accordance with the acquisition
agreement.
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
$265.0 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 First Quarter 2000 to
- ----------------------------------------------------------------------
First Quarter 1999
- ------------------
The following table highlights changes in significant components of the
consolidated statements of earnings for the three-month periods ended April 2,
2000, and April 4, 1999.
(Dollars in thousands)
----------------------
April 2, April 4, Increase
2000 1999 (Decrease)
---- ---- ----------
Net sales $204,466 $120,339 $84,127
Gross earnings 62,826 37,187 25,639
Gross earnings as a percent
of sales 30.7% 30.9% (0.2)% pts.
Selling, general and
administrative expenses 23,232 15,861 7,371
Selling, general and
administrative expenses as
a percent of sales 11.4% 13.2% (1.8)% pts.
Research and development
expenses 7,867 4,659 3,208
Acquired in-process research
and development (IPR&D) 0 12,940 (12,940)
Operating earnings 30,682 3,332 27,350
Operating earnings, excluding
IPR&D charge 30,682 16,272 14,410
Operating earnings, excluding
IPR&D charge, as a percent
of sales 15.0% 13.5% 1.5 % pts.
Interest expense 3,182 1,291 1,891
Earnings from continuing
operations before income
taxes 27,467 3,228 24,239
Earnings from continuing
operations before income
taxes, excluding IPR&D charge 27,467 16,168 11,299
Income taxes 7,691 1,065 6,626
Income tax rate 28.0% 33.0% (5.0)% pts.
Net loss from discontinued
operations, net of income tax
benefit of $355 (529) 0 (529)
Net earnings $ 19,247 $ 2,163 $ 17,084
Net sales increased by $84.1 million, or 70% from the first quarter of 1999.
Sales increases occurred principally as a result of the inclusion of CTS
Wireless for a full quarter in 2000, compared to
Page 16
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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 First Quarter 2000 to
- ----------------------------------------------------------------------
First Quarter 1999
- ------------------
one month in first quarter 1999, complemented by the overall increase in the
electronic assemblies segment. CTS Wireless' operating results are reported
primarily as part of CTS' electronic components business segment. As a
percentage of total sales, sales of electronic components and electronic
assemblies in the first quarter of 2000 were 68% and 32%, respectively. As a
percentage of total sales, the first quarter of 1999 sales of electronic
components and electronic assemblies were 76% and 24%, respectively. Refer to
Note F - Business Segment, for a description of the Company's business
segments.
The electronic components segment experienced a $47.7 million sales increase,
or 52% from the first quarter of 1999, primarily due to the inclusion of CTS
Wireless' sales and the growing global demand for wireless telecommunications
products. Revenue increases were also realized in automotive and frequency
product lines.
The electronic assemblies segment experienced a fiscal 2000 sales increase of
$36.5 million, or 126% from the first quarter of 1999. The revenue increases
were experienced both in the wireless and the interconnect product lines. This
is primarily due to the development of the RF Integrated Modules product line
and increased demand for boxbuild assemblies for the telecommunications and
computer markets.
Gross earnings dollars increased primarily due to the inclusion of CTS
Wireless, good performance in automotive and frequency product lines, and the
overall improved electronic assembly segment products. The lower percent of
sales results principally from the inclusion of CTS Wireless and the growing
electronic assembly segment, both of which have lower margins than the CTS
traditional product lines, particularly within the electronic components
segment.
Selling, general and administrative expenses increased primarily as a result
of the inclusion of CTS Wireless. However, CTS continued to control these
expenses while filling key management positions required for planned future
growth and development.
Research and development expenses increased as a result of the inclusion of
CTS Wireless; to support programs directed to improve product performance and
miniaturization through advanced technology and integration, and new product
development in other product lines, most notably automotive.
The increase in operating earnings dollars, was principally due to the
acquisition of CTS Wireless, and the inclusion of a full quarter of earnings
in 2000 compared to one month in 1999, as well as the continuing growth in
volume and earnings in the traditional CTS products.
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 Quarter 2000 to
- ----------------------------------------------------------------------
First Quarter 1999
- ------------------
The effective tax rate decreased by 5.0 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 $0.02 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 when required, if not earlier.
The impact, if any, of adopting SFAS 133 on CTS' consolidated financial
position, results of operations and cash flows, has not been fully determined.
Year 2000 Computer Systems Compliance
- -------------------------------------
As of the filing date of this report, the impact of the Year 2000 has not had
a material adverse impact on CTS' business or results of operations. The total
cost of the Company's Year 2000 efforts was approximately $2.0 million as of
December 31, 1999. These amounts included the costs of external consultants
and for software and hardware applications. CTS did not track the internal
costs incurred for all of the hours spent on the project.
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.
Page 18
<PAGE>
Item 2. Announcements
- ----------------------
On February 18, 2000, CTS Corporation opened a branch sales office in Seoul,
South Korea to service CTS' customers, predominately focusing on its complete
product line of wireless components.
On February 23, 2000, the CTS Board elected Roger R. Hemminghaus, Chairman
Emeritus of Ultramar Diamond Shamrock Corporation and Chairman of the Federal
Reserve Bank of Dallas, as a member of the CTS Board of Directors.
On March 16, 2000, CTS opened a new Interconnect Systems facility in Tianjin,
People's Republic of China, to support the growing needs of the communications
infrastructure market.
Patrick J. Dennis was named as Senior Vice President Finance and Chief
Financial Officer as of April 10, 2000.
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: May 12, 2000
Page 19
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