SECURITIES and EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
Commission file number 0-7304
DYNAMICS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
NEW YORK 13-0579260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830-7197
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-869-3211
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Title of Each Class Name of Each Exchange
on which Registered
Common Stock (Voting)
$.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1995:
Common Stock, $.10 Par Value--$99,171,000
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 17, 1995:
Common Stock, par value $.10 per share Shares
Voting 3,832,694
Non-Voting 4,696
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to security holders for the year ended December
31, 1994 are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 5, 1995 are incorporated by reference into Part
III of this Form 10-K.
Exhibits Index - Pages 18 and 19
<PAGE>
PART I
Item l. Business
A description of Dynamics Corporation of America ("DCA" or
"Company") and financial information about industry segments on pages 23 and 24
of the annual report to security holders for the year ended December 31, 1994,
and the classification of the Company's manufacturing divisions and subsidiary
for industry segments, including a description of each, on the inside back cover
of the annual report to security holders for the year ended December 31, 1994
are incorporated herein by reference.
Unless otherwise noted, the additional information required
pursuant to this item which follows pertains to continuing operations of the
Company.
Sources and Availability of Raw Materials
DCA is a user of steel, aluminum, copper, plastics and
electronic components. Generally, these materials are available from many
sources, domestic and offshore. Prices paid are competitive. Supplies are
normally plentiful except during national emergencies, unusually prolonged basic
industry strikes, or periods of accelerated demand for products exceeding
industry capacity.
Patents and Trademarks
Although DCA owns or is licensed under a number of domestic
and foreign patents and patent applications, management believes that no single
patent or group of patents is material to the business as a whole. The
trademarks Waring(R), Blendor(R), NuBlend(R), Acme Juicerator(R), Qualheim(TM),
Anemostat(R), Multi-Vent(R), Anemotrak(R), Envirotrak(R), and Environ(R) are
well recognized in their trading areas and signify desirable quality and value.
These trademarks should be available for Company use as long as it desires.
Backlog
The backlog of unfilled orders was approximately $31,900,000
at December 31, 1994 as compared with approximately $26,200,000 at December 31,
1993. Approximately 80% is represented by orders expected to be completed in
1995. The Power and Controlled Environmental Systems segment accounts for
approximately 63% of the unfilled orders at December 31, 1994, and backlog
continues to be significant when projecting future financial results of this
segment of the Company's business.
Customers
In general, the businesses engaged in by the Company are not
dependent upon one or a few customers. The Power and Controlled Environmental
Systems segment of the Company, in addition to its commercial activities, acts
as both a subcontractor and prime contractor for the production of air
conditioning equipment, liquid cooling equipment and trailers and shelters for
electronic equipment of which the U.S. Government is the end-user. No single
customer contributed in excess of 10% to sales in 1994. The Company derived
approximately 12% of its sales in 1993, primarily in the Power and Controlled
1
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Environmental Systems segment, from a single contractor to the U.S. Government.
Neither the Company nor the Power and Controlled Environmental Systems segment
are dependent on this customer. The remaining segments of the Company serve a
broad base of customers who are predominantly commercial in nature.
Competition
DCA normally experiences varying degrees of competition with
respect to each of its segments and with respect to particular products within
each segment.
The electrical appliances produced by the Company's Waring
Products Division experience keen competition in the consumer and commercial
segments of the market. The Company's Waring Blendor(R), NuBlend(R), Acme
Juicerator(R) and Qualheim(TM) are recognized names in their field.
The Reeves-Hoffman Division encounters strong competition for
the crystal products, oscillators and hermetic seal packages it sells due in
large part to the multiplicity of suppliers in the industry. The same is true
with respect to the heat dissipating devices sold by the Company's International
Electronic Research Corporation subsidiary.
Anemostat's air distribution, systems and door products
compete in a well supplied market with regard to quality, price and delivery.
The Company's Anemostat(R) air diffusers and vision frames and louvers for fire-
rated doors are recognized names in the industry. Sales of these products tend
to follow the expansion and contraction of the commercial construction industry.
As a supplier of specialized equipment for government,
industry and power plant use, the Ellis & Watts Division is generally required
to submit competitive bids. The mobile medical van and transportable suite
segment of the market which it serves is highly competitive among the suppliers
serving that market.
Distribution
The methods of distribution and marketing utilized by the
Company vary from division to division. In general, sales for all the Company's
segments combine some direct selling in certain market areas with appropriate
manufacturers' representatives, wholesalers, distributors and/or dealers.
Research and Development
DCA engages in a variety of research and development programs
throughout its divisions, the primary purposes of which are to improve existing
products and processes, modify current products to extend their market life and
expand markets by developing new products. Expenditures for Company sponsored
research and development amounted to $1,664,000 in 1994, $1,252,000 in 1993 and
$1,203,000 in 1992.
2
<PAGE>
Environmental Matters
The Company has been notified by the U.S. Environmental
Protection Agency ("EPA") that it is a Potentially Responsible Party ("PRP")
regarding hazardous waste cleanup at a non-Company site in Connecticut and at a
Company site in California. Certain of the PRPs at the Connecticut site have
agreed with the EPA to fund a feasibility study at the site and have sued the
Company and other PRPs who have not agreed to share the costs. A property owner
adjacent to the California site has sued the Company and others for allegedly
causing contamination of their property. The Company incurred costs of $251,000
in 1994 to fund engineering studies and conduct investigations of, and to remove
contaminants from the California site and to pay related expenses. The Company
also has received notice from a state environmental agency that it is a PRP with
respect to a non-Company site in Pennsylvania, and is a defendant in two
lawsuits seeking contribution for Superfund cleanup costs relating to two other
non-Company sites in that state.
The amount of future environmental-related expenditures and
the extent of insurance coverage is not determinable at this time and the
Company is not in a position to estimate the loss or range of loss, if any,
which may result from environmental-related matters. Based upon its knowledge of
the extent of the Company's exposure and current statutes, rules and
regulations, management believes that the anticipated costs resulting from
claims and proceedings with respect to the above mentioned sites, including
possible remediation, the extent of which is presently unknown, will not
materially affect the financial position of the Company. However, it is
possible, but unanticipated at this time, that future results of operations or
cash flows could be materially affected by an unfavorable resolution of these
matters.
In 1994 the Company expended $397,000, including the $251,000
at the California site, to manage hazardous substances, to monitor pollutants,
to test for contaminants and to provide for required removal activities, a 7%
decrease in such expenditures over the prior year. Accrued liabilities for
anticipated future costs and expenses at December 31, 1994 amounted to $105,000.
Number of Employees
DCA employed 1,081 persons at December 31, 1994.
Foreign Operations
The Company sells in foreign countries primarily through
manufacturers' representatives and agents and does not have manufacturing
operations abroad. Revenues from direct sales abroad represented approximately
15% of sales in 1994 and 9% in 1993. In addition, the Company receives revenue
from licenses and technology transfers which amounted to $157,000 in 1994,
$1,207,000 in 1993 and $244,000 in 1992. Included in the 1993 amount is income
from an initial royalty of $1,000,000 under a technology transfer agreement with
a customer in the Power and Controlled Environmental Systems segment; future
royalty amounts from that customer are dependent upon future contract awards
received by the customer.
3
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Division Held for Sale
The Company determined to discontinue operations at its
Fermont division, a manufacturer of electrical power systems for government and
commercial markets, effective as of September 30, 1991, and to put the
division's assets and business up for sale. At the time the determination was
made, Fermont was a party to a contract with the U.S. Government for the
production of 3KW engine generator sets. The contract is subject to First
Article approval of prototype 3KW units.
In July 1994, Fermont bid on a major new government generator
set contract and decided to pursue other contracts. Accordingly, commencing on
July 1, 1994, the division is no longer classified as a discontinued operation
but as a business held for sale.
In January 1995, the Government issued a 90 day stop work
order on the 3KW contract because of engine failures while testing prototype
units. The final disposition of the contract is not known at this time, but it
is possible the Government may terminate the contract.
Also in January 1995, Fermont was awarded a contract to
manufacture tactical quiet (TQ) generator sets for the U.S. Army Aviation and
Troop Command. The Government's initial delivery order issued with the award
calls for delivery of gensets for an aggregate price of $57,766,000. Shipments
are expected to begin in mid-1996 subject to First Article prototype testing and
approval in 1995. The contract provides for progress payments from the
Government and financial resources required of the Company are not expected to
be significant in the near term. (Notes 4 and 7 on pages 12 and 15 of the annual
report to security holders for the year ended December 31, 1994 are incorporated
herein by reference.)
Discontinued Operation
In December, 1992 the Company sold its 33.3% interest in
Farmhand Inc. for $1,700,000 in cash and a $500,000 long-term note. In 1994, the
terms of the note were renegotiated so that the entire principal balance,
$469,000, is due to be paid by December 31, 1995.
Investment in CTS Corporation
At December 31, 1994, the Company's holdings of the common
stock of CTS Corporation ("CTS") aggregated 2,222,100 shares. The Company's
equity ownership in CTS represents 42.9% of the outstanding stock of CTS.
The current CTS Board of Directors is comprised of five
individuals including two directors who also are officers and directors of DCA.
The Company's investment in CTS is accounted for under the equity method. CTS,
whose shares are listed on the New York Stock Exchange, designs, manufactures
and sells electronic components for the automotive, communications equipment,
data processing, defense and aerospace, instruments and controls, and consumer
electronic markets. CTS is headquartered in Elkhart, Indiana and operates
manufacturing plants in the U.S. and abroad, primarily in a single business
segment, electronic components and subsystems, in worldwide markets. (Note 6 on
page 14 of the Company's annual report to security holders for the year ended
December 31, 1994 is incorporated herein by reference.)
4
<PAGE>
Item 2. Properties
The following is a summary by industry segment of the properties occupied by the
Company.
<TABLE>
<CAPTION>
Square
Division Location Feet Type Occupancy
<S> <C> <C> <C> <C>
Executive 475 Steamboat Road 7,704 Part of Lease expiring
Greenwich, CT modern 12/31/2000
office bldg.
Electrical Appliances and Electronic Devices:
Waring New Hartford, CT 212,000 Modern 1 Fee ownership
Products story
McConnellsburg, PA 74,000 Modern 1 Fee ownership
story
Winsted, CT 55,000 Multi-story Fee ownership
I.E.R.C. Burbank, CA 37,000 2 Modern Lease expiring
bldgs; 4 1/31/2000
stories &
1 story
Burbank, CA 21,000 3 Modern Fee ownership
bldgs; one
2 stories &
two 1 story
Reeves- Carlisle, PA 94,000 Modern 1 Lease expiring
Hoffman story 2/28/99
Fabricated Metal Products and Equipment:
Anemostat Scranton, PA 270,000 Modern 1 Fee ownership
Products story
Carson, CA 76,000 Modern 1 Lease expiring
story 10/31/95
5
<PAGE>
Square
Division Location Feet Type Occupancy
Power and Controlled Environmental Systems:
Ellis & Cincinnati, OH 145,000 1 Modern Fee ownership
Watts bldg; 1
story mfg.
& 2 stories
offices
Cincinnati, OH 2,900 Modern 1 Fee ownership
story
</TABLE>
All plants are of adequate capacity and are utilized generally on a one-shift
basis except for the Burbank, California facility, portions of which are
utilized on a two-shift basis. The Winsted, CT facility of the Waring Products
Division is utilized as a records storage facility and is also available for
sale. Approximately 76,000 square feet of the Scranton, PA facility of the
Anemostat Products Division has been leased on a short-term basis.
Properties Held for Sale:
The following property, previously operated by the Company, is being held for
sale or disposition by the Company:
Yazoo City, MS 80,000 Modern 1 Lease expiring
story 3/4/98
The above property is currently subleased on a short-term basis.
The following property, which continues to be occupied and operated by the
Fermont division, is held for sale in connection with the sale of the Fermont
business.
Bridgeport, CT 97,000 2 Modern Fee Ownership
bldgs; 2
stories &
1 story
6
<PAGE>
Item 3. Legal Proceedings
With respect to claims and actions against the Company, including
environmental matters, it is the opinion of Management that they will have no
material effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Executive Officers of the Registrant
Name Age Office
Andrew Lozyniak 63 Chairman of the Board and
President
Henry V. Kensing 61 Vice President, General
Counsel and Secretary
Patrick J. Dorme 59 Vice President-Finance and
Chief Financial Officer
Richard E.Smith 46 Treasurer
The officers named above were elected to hold the offices set opposite their
respective names until the meeting of directors following the next annual
meeting of shareholders. Henry V. Kensing was elected Secretary of the
Corporation by the Board of Directors on February 23, 1994.
Except as above stated, the officers named above have served in their respective
capacities for the past five years.
There are no family relationships between any directors or executive officers of
the Company.
7
<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Range of Stock Prices and Dividend Information on page 24 of the annual
report to security holders for the year ended December 31, 1994 is incorporated
herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on page 22 of the annual report to security
holders for the year ended December 31, 1994 is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Results of Operations and
Financial Condition on pages 4 through 7 of the annual report to security
holders for the year ended December 31, 1994 is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and
its subsidiaries are included in the annual report to security holders for the
year ended December 31, 1994 and are incorporated herein by reference.
Page(s) in the
Annual Report
Consolidated Balance Sheets--As of
December 31, 1994 and 1993 8
Consolidated Statements of Income--For
the Years Ended December 31, 1994, 1993
and 1992 9
Consolidated Statements of Stockholders'
Equity--For the Years Ended December 31,
1994, 1993 and 1992 10
Consolidated Statements of Cash Flows--For
the Years Ended December 31, 1994, 1993
and 1992 11
Notes to Consolidated Financial Statements 12-20
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable
8
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Identification of directors of the registrant and information related
thereto is included in the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 5, 1995, under caption "Election of Directors",
and said information is incorporated herein by reference.
Identification of executive officers of the registrant and information
related thereto is included in Part I of this Form 10-K.
Item 11. Executive Compensation
Remuneration of directors and officers and information related thereto
is included in the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 5, 1995, under the captions "Election of
Directors", including information on the Stock Retirement Plan for Outside
Directors, and under the captions "Executive Compensation", "Pension Benefits",
"Savings and Investment Plan" and "1980 Restricted Stock and Cash Bonus Plan",
and said information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of management and of certain beneficial owners and
information related thereto is included in the definitive proxy statement for
the Annual Meeting of Shareholders to be held May 5, 1995, under the captions
"Election of Directors" and "Security Ownership of Certain Beneficial Owners",
and said information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Transactions with management and others and information related thereto
is included in the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 5, 1995, under the caption "Transactions with
Management and Others", and said information is incorporated herein by
reference.
9
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The report of independent auditors and the following consolidated
financial statements of the registrant and its subsidiaries included in
the annual report to security holders for the year ended December 31,
1994 are incorporated by reference in Item 8 above:
Consolidated Balance Sheets--As of December 31, 1994 and 1993
Consolidated Statements of Income--For the Years Ended December 31,
1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity--For the Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements
(a)(2)
and(d) The following consolidated financial statement schedules of the
registrant and its subsidiaries are included in this Form 10-K.
Page(s)
Schedule II--Valuation and Qualifying
Accounts--For the Years
Ended December 31, 1994,
1993 and 1992 15-17
10
<PAGE>
The consolidated financial statements of CTS Corporation, the
registrant's investment in which is accounted for by the equity method, are
subject to the Rules and Regulations of the Securities and Exchange Commission
and have been examined by Price Waterhouse, independent accountants for CTS
Corporation. The following consolidated financial statement information and
schedules concerning CTS Corporation, which are included in CTS Corporation's
annual report on Form 10-K for the year ended December 31, 1994, certain
consolidated financial statement schedules included in said Form 10-K and CTS
Corporation's annual report to stockholders for 1994 attached to said Form 10-K
as Exhibit 13 thereto (all of which are included as Exhibit 99 to this Form
10-K), are incorporated by reference herein.
Page(s) in CTS
Corporation's annual report
to stockholders for 1994
Consolidated Statements of Earnings --
years ended December 31, 1994,
1993 and 1992 12
Consolidated Statements of Stockholders'
Equity -- years ended December 31,
1994, 1993 and 1992 13
Consolidated Balance Sheets --
December 31, 1994 and 1993 14
Consolidated Statements of Cash Flows--
years ended December 31, 1994,
1993 and 1992 15
Notes to Consolidated Financial Statements 16-23
Report of independent accountants 24
Page(s) in CTS Corporation
annual report on Form 10-K
for the year ended
December 31, 1994
Report of independent accountants
on financial statement schedule S-2
Schedule II - Valuation and qualifying
accounts S-3
11
<PAGE>
The above financial statement information and schedules concerning CTS
Corporation incorporated herein by reference were furnished to the registrant by
CTS Corporation and were used by the registrant as the basis of recording
registrant's net income (loss) from its equity investment in CTS Corporation,
and the amounts of income (loss) included in registrant's financial statements
are based solely on the aforesaid CTS Corporation financial statement
information and schedules and report of Price Waterhouse, independent
accountants for CTS Corporation.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable, and therefore
have been omitted, or the information is included in the consolidated financial
statements, or notes thereto, of registrant or of CTS Corporation incorporated
by reference herein.
(a) (3)
and (c) Exhibits
The response to this portion of Item 14 appears on the Exhibits Index
in a separate section of this Form 10-K on pages 18 and 19.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1994.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
DYNAMICS CORPORATION OF AMERICA
/S/ Patrick J. Dorme March 29, 1995
(Signature)
Patrick J. Dorme - Vice President-
Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the date indicated.
/S/ Andrew Lozyniak March 29, 1995
Andrew Lozyniak - Chairman of the Board
and President
/S/ Henry V. Kensing March 29, 1995
Henry V. Kensing - Director, Vice President,
General Counsel and Secretary
/S/ Patrick J. Dorme March 29, 1995
Patrick J. Dorme - Director, Vice President-
Finance and Chief Financial Officer
/S/ Harold Cohan March 29, 1995
Harold Cohan - Director
/S/ Frank A. Gunther March 29, 1995
Frank A. Gunther - Director
/S/ Russell H. Knisel March 29, 1995
Russell H. Knisel - Director
/S/ Saul Sperber March 29, 1995
Saul Sperber - Director
/S/ M. Gregory Bohnsack March 29, 1995
M. Gregory Bohnsack - Corporate Controller
and Principal Accounting Officer
13
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CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders Dynamics Corporation of America
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Dynamics Corporation of America of our report dated February 22, 1995,
included in the 1994 Annual Report to Stockholders of Dynamics Corporation of
America.
Our audits also included the financial statement schedules of Dynamics
Corporation of America listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Stamford, Connecticut
February 22, 1995
14
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DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1994
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
Valuation accounts
deducted from assets
to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $ 1,428 $ 56 $ -0- $ 1,484
Allowance for
doubtful accounts $ 505 $ 33 $ (33)(a) $ 571
Allowance for cash
discounts $ 26 $ 138 $ 131(b) $ 33
Reserves not shown
elsewhere:
Reserve for
warranties $ 1,182 $ 1,006 $ 1,221(c) $ 967
Notes:
(a)-- Recoveries, net of amounts written off against allowance
provided therefor.
(b)-- Discounts charged against allowance provided therefor.
(c)-- Warranty costs incurred and charged against reserve provided
therefor.
15
<PAGE>
DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1993
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
Valuation accounts
deducted from assets
to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $1,607 $ -0- $ 179(a) $1,428
Allowance for
doubtful accounts $ 571 $ 113 $ 179(b) $ 505
Allowance for cash
discounts $ 29 $ 94 $ 97(c) $ 26
Reserves not shown
elsewhere:
Reserve for
warranties $1,672 $ 918 $1,408(d) $1,182
Notes:
(a)-- Market recoveries, net of changes to portfolio holdings.
(b)-- Bad debts, net of recoveries, written off against allowance
provided therefor.
(c)-- Discounts charged against allowance provided therefor.
(d)-- Warranty costs incurred and charged against reserve provided
therefor.
16
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DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1992
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
Valuation accounts
deducted from assets
to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $1,561 $ 46 $ -0- $1,607
Allowance for
doubtful accounts $ 560 $ 255 $ 244(a) $ 571
Allowance for cash
discounts $46 $ 139 $ 156(b) $ 29
Reserves not shown
elsewhere:
Reserve for
warranties $1,233 $1,701 $1,262(c) $1,672
Notes:
(a)-- Bad debts, net of recoveries, written off against allowance
provided therefor.
(b)-- Discounts charged against allowance provided therefor.
(c)-- Warranty costs incurred and charged against reserve provided
therefor.
17
<PAGE>
Exhibits Index
Item 14. (a) (3) and (c)
Pursuant to Regulation S-K, Item 601, following is a list of Exhibits:
(A) Exhibits incorporated by reference.
Exhibit 3 - Articles of incorporation and bylaws:
1. Bylaws, as amended, were included in the Exhibits of the
registrant's Form 10-K Annual Report for the year ended December
31, 1993.
Exhibit 4 - Instruments defining the rights of security holders:
1. The rights of common stockholders and preferred stockholders
(currently unissued) are defined in the Articles of
Incorporation referred to in Exhibit 3 and in the Form 8A for
registration of certain classes of securities (Rights and
Preferred Stock), Rights Agreement dated as of January 30, 1986,
Summary of Rights, letter to stockholders, press release and
Listing Application to the New York Stock Exchange with respect
to the Rights, all of which were included in the Exhibits of the
registrant's Form 10-Q Quarterly Report for the period ended
March 31, 1986.
Exhibit 10 - Material contracts:
Management Compensatory Plans, Contracts and Arrangements
1. 1980 Restricted Stock and Cash Bonus Plan, as amended, was
included in the registrant's definitive proxy statement for the
Annual Meeting of Shareholders on May 6, 1988.
2. Employment contracts dated February 1, 1991 with: Andrew
Lozyniak - Chairman of the Board and President, Patrick J. Dorme
- Vice President-Finance and Chief Financial Officer and Henry
V. Kensing - Vice President, General Counsel and Secretary were
included in the Exhibits of the registrant's Form 10-K Annual
Report for the year ended December 31, 1990.
3. Stock Retirement Plan for Outside Directors, as amended, was
included in the registrant's definitive proxy statement for the
Annual Meeting of Shareholders on May 1, 1992.
4. Incentive Performance Plan was included in the Exhibits of the
registrant's Form 10-K Annual Report for the year ended December
31, 1992.
5. Executive Life Insurance Policies was included in the Exhibits
of the registrant's Form 10-K Annual Report for the year ended
December 31, 1992.
6. Prescription Drug Plan for Outside Directors was included in the
Exhibits of the registrant's Form 10-K Annual Report for the
year ended December 31, 1992.
18
<PAGE>
Other
Agreement dated October 9, 1990 between Dynamics Corporation of
America and Gabelli Funds, Inc. and GAMCO Investors, Inc. was
included in the Exhibits of the registrant's Form 10-K Annual
Report for the year ended December 31, 1990.
Exhibit 21 - Subsidiaries of the registrant were included in the Exhibits
of the registrant's Form 10-K Annual Report for the year ended
December 31, 1984.
(B) Exhibits filed in or as a separate section of this report.
Page
Exhibit 13 - Annual report to security holders for the year ended
December 31, 1994. (a)
Exhibit 23 - Consent of Independent Auditors 14
Exhibit 27 - Financial Data Schedule (b)
Exhibit 99 - CTS Corporation annual report on Form 10-K for
the year ended December 31, 1994, (without Exhibits
except as noted), the Report of Independent
Accountants and the Financial Statement Schedule II
included in said Form 10-K, and CTS Corporation's
annual report to stockholders for 1994 included in
said Form 10-K as Exhibit 13 thereto. (c)
(a) Unnumbered and immediately following the final numbered page of this
report.
(b) Filed electronically only pursuant to regulations.
(c) Unnumbered and immediately following the registrant's annual report to
security holders for the year ended December 31, 1994.
19
Dynamics Corporation of America
Contents Page
President's Message 2
Management's Discussion and Analysis 4
Consolidated Balance Sheets 8
Consolidated Statements of Income 9
Consolidated Statements of Stockholders'
Equity 10
Consolidated Statements of Cash Flows 11
Notes to Consolidated Financial
Statements 12
Report of Independent Auditors 21
Selected Financial Data 22
Segments of Business 23
Range of Stock Prices and Dividend
Information 24
Divisions and
Subsidiary Inside Back Cover
Dynamics Corporation of America is a diversified manufacturer of commercial
and industrial products founded in 1924 and incorporated in New York. Its
corporate headquarters are in Greenwich, Connecticut and its shares are
listed on the New York Stock Exchange (trading symbol: DYA). The Company's
seven plants are located in California, Connecticut, Ohio and Pennsylvania.
Its five separate business units manufacture electronic components such as
heat dissipators and Zero Insertion Force (ZIF(tm)) printed circuit board
retainers, frequency control components and oscillators; commercial and
consumer appliances sold under the Waring(R), Acme Juicerator(R),
Qualheim(tm), Blendor(R), NuBlend(R) and Touchblend(tm) tradenames; air
distribution products and systems sold under the Anemostat(R), Anemotrak(R)
and Envirotrak(R) tradenames; vision frames and louvers for fire rated doors;
and air conditioning, related equipment for power plant and other
applications, and mobile vans and transportable shelters (including the
Environ(R)) for specialized electronic and medical diagnostic equipment such
as CT and MRI scanners. The Company also invests from time to time in shares
of other businesses. The Company currently holds a 42.9% stake in CTS
Corporation ("CTS"), an Indiana corporation headquartered in Elkhart whose
shares are listed on the New York Stock Exchange (trading symbol: CTS). CTS
is a manufacturer of electronic and electromechanical components and
subsystems for the automotive, communications equipment, data processing,
defense and aerospace, instruments and controls and consumer electronic
markets.
<PAGE>
President's Message
to Shareholders
In my remarks to the shareholders at the Annual Meeting last May, I pledged
our best efforts to prudently manage the assets of Dynamics Corporation of
America and thus increase the value of our shareholders' investment in our
Company. A number of those efforts bore fruit in 1994, enabling the Company
to record its best earnings since 1985 and, in response to increased
earnings, DCA's shares, which were valued in the marketplace at $15.00 per
share at December 31, 1993, increased in value by 36% to $20.375 at year-end.
The combination of the improved performance of CTS Corporation, in which DCA
has a major and increasing investment, favorable settlement of part of
Fermont's contract claim against the Government, and the outstanding results
of our International Electronic Research Corporation subsidiary contributed
to making 1994 a very good year for DCA and its shareholders.
For the year ended December 31, 1994, Dynamics Corporation of America
recorded net income of $8,732,000, or $2.25 per share, compared with net
income of $961,000, or $.24 per share, in 1993. Net income for 1994 includes
$3,334,000, or $.86 per share, of income reflecting the Company's settlement
of the preproduction portion of the proposal of its Fermont Division for an
equitable adjustment on a contract with the U. S. Government, net of related
expenses and income taxes.
The Company reported income from continuing operations for the year ended
December 31, 1994 of $5,398,000, or $1.39 per share, on sales of $96,453,000.
This compares with income from continuing operations of $2,677,000, or $.68
per share, on sales of $101,329,000 for the year ended December 31, 1993.
Included in income from continuing operations is the Company's proportionate
share of CTS Corporation's results for the year, in accordance with the
equity method of accounting required for that investment, which was
$3,618,000, or $.93 per share, more than twice the $1,619,000, or $.41 per
share, recorded in 1993.
The most notable contribution to the Company's operating earnings was made by
the IERC operation. Responding to the marketplace's need for new and
innovative products, particularly for computers, IERC dramatically increased
both the breadth of its line of heat dissipating devices and its production
capabilities. Sales almost doubled from $8.3 million in 1993 to nearly $16
million in 1994 and profitability increased over threefold as a result of the
subsidiary's installation of highly mechanized production equipment and
increased efficiency. Bookings in the year totaled $17,900,000 and its
backlog on December 31 was the highest ever at $4,500,000. IERC continues to
increase its production capacity in response to even stronger bookings in
1995 and, because it believes that this trend is likely to continue, is
increasing its resources in personnel as well as manufacturing equipment to
meet the growing demand for its products.
Unfortunately, all our efforts have not proven as successful as at IERC.
While Ellis & Watts and Anemostat contributed to the profitable year, our
Reeves-Hoffman and Waring Products Divisions sustained even greater losses
last year as compared to 1993. Steps are under way to develop new products,
improve marketing and sales efforts, marshall our technical resources to
improve yields and efficiencies, reduce costs, upgrade personnel, and, where
necessary, install new management. Based on these and further actions, and if
the projections in the 1995 Business Plans for these divisions are attained,
there is hope for substantial improvement in these two operations.
CTS Corporation achieved a significant improvement in performance in 1994
over 1993. Net sales of $269 million in 1994 were $32 million, or 13%, higher
than net sales in 1993. Net earnings in 1994 of $14.0 million, or $2.70 per
share, more than doubled 1993 net earnings of $6.6 million, or $1.27 per
share before accounting changes.
The major contributors to CTS' increased sales in 1994 were those electronic
component products sold into the automotive, data storage and data
communication segments of the market. Earnings in 1994 reflected continued
year-to-year improvement.
Joseph P. Walker, Chairman of the Board, President and Chief Executive
Officer of CTS, recently stated, "We continued in 1994 to realize the
benefits of manufacturing productivity improvements, product development,
quality improvement and cost control programs. Increased sales of automotive
products, combined with improved performance of CTS resistor network,
electrocomponent and connector product lines, have made 1994 a good year for
CTS. During the year, we continued to actively pursue new applications and
special-
<PAGE>
ized market niches for existing products, and acquired in December, 1994, the
AT&T Light Emitting Diode based Optical Data Link product which will further
add to our fiber optic capabilities."
As in 1993, DCA did not borrow any funds during the year under the Revolving
Credit Agreement with its banks and the Company again demonstrated its
continuing ability to generate positive cash flow. This cash flow enabled us
to purchase shares of DCA for approximately $1,200,000 and to purchase
additional shares of CTS Corporation, thereby increasing DCA's ownership in
CTS from 37.3% to 42.9% on expenditures of approximately $8,500,000. Cash and
cash equivalents at year-end remained a healthy $6,837,000 as compared to
$8,969,000 in 1993.
In order to be prepared for potential opportunities that may present
themselves, we entered into a new Revolving Credit facility in November 1994
and increased our credit availability from $27 million to $37 million.
We are grateful for the progress made this past year as demonstrated by the
increased profitability of the Company, its continuing ability to improve its
financial strength, and the increased value of its shares. However, as we
face the unknown opportunities and challenges of the future, we will remain
vigilant to the economic uncertainties brought about by increasing interest
rates, financial disorder related to losses in derivative investments,
collapse of the peso and deterioration of the Mexican economy, rapid
contraction of the defense industry, increasing trends of global competition,
and signs that the U.S. economy is slowing.
We know the future will continue to bring a changing and challenging economy
with opportunities for financially sound debt-free companies like DCA. While
continuing to improve our operations and expand our markets, we will search
for those opportunities which have the best potential to bring about a still
higher return on your investment in DCA.
Management sincerely thanks its many talented employees who have responded to
the opportunities presented this past year. We also thank our shareholders,
customers, suppliers, and lending institutions for their continued support of
the Company.
/s/ Andrew Lozyniak
Andrew Lozyniak
Chairman of the Board
and President
March 8, 1995
<PAGE>
Management's Discussion
and Analysis of
Results of Operations
and Financial Condition
The following discussion, unless otherwise noted, pertains to continuing
operations.
Results of Operations
(1994 compared to 1993)
Sales decreased $4,876,000 or 4.8%. Sales in the Electrical Appliances and
Electronic Devices segment increased $2,442,000 on a nearly threefold
increase in sales of heat dissipating devices for advanced micro-processors
installed in personal computers. Sales of frequency control products were
marginally higher, while sales of electrical appliances declined sharply in
the consumer domestic portion of the segment because of reduced product
placement with retailers for blender and food mixer products and
significantly lower sales of food preparation specialty products. Sales in
the Power and Controlled Environmental System segment declined $8,240,000 due
to lower sales of custom mobile products principally because of the
completion in the prior year of a multi-unit defense-related contract. Sales
of power plant products and services and mobile and transportable medical
units increased, offsetting a decline in the sales of thermal products. Sales
in the Fabricated Metal Products and Equipment segment increased $922,000 as
sales of air and door products increased due to the modest recovery in the
commercial building construction market. Systems sales declined on lower
start-up and installation revenues.
Gross profit improved $162,000 on lower sales, to 25.9% from 24.5% of sales.
Gross profit in the Electrical Appliances and Electronic Devices segment
increased as a result of the increased sales of heat dissipating devices;
however, the gross profit percentage from segment sales was slightly lower
due to the lower gross profit percentage earned on electrical appliance sales
because of product sales mix and pricing pressures. Gross profit in the Power
and Controlled Environmental Systems segment declined on sharply lower sales;
however, the gross profit percentage increased significantly on the sale of
power plant products and services, and on mobile and transportable medical
units. Gross profit in the Fabricated Metal Products and Equipment segment
increased on higher sales and favorable product mix.
Selling, general and administrative expenses decreased $1,355,000. Staff
reductions undertaken in the prior year were primarily responsible for a
$967,000 reduction in compensation and related benefits. Advertising expenses
decreased $734,000, primarily because of lower advertising expenditures for
electrical appliances. Commission expense increased $557,000 as a greater
portion of sales were commissionable. All other expenses decreased $211,000.
Other income decreased $445,000. Royalty income decreased $1,050,000 as,
unlike 1993, no royalty was earned under a technology transfer agreement with
a customer in the Power and Controlled Environmental Systems segment. Staff
reductions in 1993 resulted in a $470,000 charge. Net interest income
increased $103,000, investments in marketable securities resulted in a
$87,000 reduction in other income, while remaining other income (net)
increased $119,000.
Income taxes amounted to $967,000, increasing $350,000 principally because of
the $1,072,000 increase in income before taxes. The 1994 effective tax rate
is slightly higher than the applicable 34% Federal statutory rate primarily
because of state income taxes.
Equity in CTS Corporation
Equity in the earnings of CTS Corporation increased $1,999,000 as a result of
CTS' increase in earnings of $7,397,000 over 1993, before accounting changes,
and because the Company's proportionate share in CTS' earnings increased as
its percentage ownership of CTS common stock increased to 42.9% from 37.3%
during the year through purchases of CTS stock. In 1993 the Company recorded
a charge of $1,716,000, or $.44 per share, for its proportionate share of
CTS' net charge from its adoption of FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and FASB
Statement No. 109, "Accounting for Income Taxes."
Division Held for Sale
In May 1994, the Company agreed to accept $6,450,000 from the Government in
settlement of the preproduction portion of its proposed change order on a
contract for 3KW generator sets with the Company's Fermont Division. The
settlement, net of related expenses and income taxes, amounted to $3,334,000,
or $.86 per share, and was reported as income from discontinued operations.
Effective July 1, 1994, Fermont is no longer classified as a discontinued
operation but as a business held for sale, based upon its decision to bid on
new contracts.
<PAGE>
In January 1995, Fermont was awarded a contract by the U.S. Army for tactical
quiet (TQ) generator sets, the first order under which, valued at $57.8
million, has been received.
Liquidity and Financial Resources
Cash and cash equivalents amounted to $6,837,000 at December 31, 1994, a
decrease of $2,132,000 from the previous year end. Cash generated from
operations amounted to $9,675,000 and included $6,450,000 received from the
Government in settlement of the preproduction portion of its proposed change
order on a contract for 3KW generator sets. Cash used in investing and
financing activities amounted to $11,807,000. During the year the Company
paid $8,538,000 for 304,000 shares of CTS Corporation common stock and
$1,186,000 for 78,129 shares of the Company's common stock purchased for its
treasury. In addition, dividends amounting to $777,000 were paid to
shareholders and the Company expended $859,000 for property, plant and
equipment. The Company paid off all mortgage related debt, amounting to
$279,000, during the year, ahead of schedule, and remaining long-term debt,
amounting to $527,000 at the 1994 year end, is comprised entirely of capital
lease obligations.
During the year the Company renegotiated its Revolving Credit Facility,
increasing the available credit to $37,000,000 and the lending banks to five,
and extending the maturity for another four years. The Company did not borrow
any funds under this credit facility or from a $9,000,000 uncommitted line of
credit during the year. The entire amount of both of these credit facilities
is presently available for use by the Company.
During the year the Company's Waring Products Division voluntarily initiated
a recall of a product made in England and imported by Waring for sale in the
U.S. The Company expects to recover the costs of the recall (amounting to
$237,000 at year end) from the product's manufacturer in England.
In January 1995, Fermont was awarded a $57.8 million contract from the U.S.
Government for the production of generator sets for delivery commencing in
1996, subject to first article prototype testing and approval in 1995. The
contract provides for progress payments from the Government and financial
resources required of the Company in the near term are not expected to be
significant.
Also in January 1995, the U.S. Government issued a stop work order in
connection with the development and testing under the Fermont Division's
contract for 3KW units and it is possible that this contract may be
terminated by the Government. Any such termination is not expected to
materially impact results of operations, liquidity or financial condition.
Liquidity and financial resources are considered adequate to fund planned
Company operations, including capital expenditures and payment of dividends.
The Company intends to continue its stated policy of reviewing potential
acquisitions which it believes could enhance growth and profitability.
The Company provides deferred income taxes for transactions reported during
different years for financial reporting and for income tax reporting
purposes, as required by generally accepted accounting principles and the
Internal Revenue Code. In general, the Company has recorded deductions for
financial reporting purposes which become deductible in subsequent years for
income tax reporting purposes (timing differences). The application of
anticipated income tax rates to these deductions reported for financial
reporting purposes results in future tax benefits (deferred tax assets).
Management anticipates that the Company's deferred tax assets will be
realized based upon its expectation of future taxable income. The Company's
income from continuing operations before income taxes aggregated $9,361,000
for the three years ended December 31, 1994. Sustaining this income level
would be sufficient to realize all deferred tax assets over the statutory tax
recovery period. The Company will require taxable income of $16,626,000
($15,916,000 of ordinary income and $710,000 of capital gain income) to
realize its net deferred tax assets of $5,501,000 at December 31, 1994. Under
applicable carryback provisions of the current Internal Revenue Code,
$15,027,000 of the prior years' taxable income could be utilized to realize
deferred tax assets, including all capital related items. Although they are
not expected to be required, the Company has available various tax planning
strategies, including property sale and leaseback strategies, to supplement
taxable income from operations in order to realize deferred tax assets. The
Company in large measure controls the reversal of $6,110,000 of timing
differences and a significant portion of the remaining differences is
expected to reverse during the next five years.
The Company has been notified by the U.S. Environmental Protection Agency
("EPA") that it is a Potentially Responsible Party ("PRP") regarding
hazardous waste cleanup at a non-Company site in Connecticut
<PAGE>
and at a Company site in California. Certain of the PRPs at the Connecticut
site have agreed with the EPA to fund a feasibility study at the site and
have sued the Company and other PRPs who have not agreed to share the costs.
A property owner adjacent to the California site has sued the Company and
others for allegedly causing contamination of their property. The Company
incurred costs of $251,000 in 1994 to fund engineering studies and conduct
investigations of, and to remove contaminants from the California site and to
pay related expenses. The Company also has received notice from a state
environmental agency that it is a PRP with respect to a non-Company site in
Pennsylvania, and is a defendant in two lawsuits seeking contribution for
Superfund cleanup costs relating to two other non-Company sites in that
state.
The amount of future environmental-related expenditures and the extent of
insurance coverage is not determinable at this time and the Company is not in
a position to estimate the loss or range of loss, if any, which may result
from environmental-related matters. Based upon its knowledge of the extent of
the Company's exposure and current statutes, rules and regulations,
management believes that the anticipated costs resulting from claims and
proceedings with respect to the above mentioned sites, including possible
remediation, the extent of which is presently unknown, will not materially
affect the financial position of the Company. However, it is possible, but
unanticipated at this time, that future results of operations or cash flows
could be materially affected by an unfavorable resolution of these matters.
In 1994 the Company expended $397,000, including the $251,000 at the
California site, to manage hazardous substances, to monitor pollutants, to
test for contaminants and to provide for required removal activities, a 7%
decrease in such expenditures over the prior year. Accrued liabilities for
anticipated future costs and expenses at December 31, 1994 amounted to
$105,000.
In complying with federal, state and local environmental statutes and
regulations, the Company has altered or modified certain manufacturing
processes and expects to do so in the future. Such modifications to date have
not significantly increased capital expenditures or affected the
competitiveness of the Company.
The impact of inflation on the operations of the Company was not material.
Results of Operations
(1993 compared to 1992)
Sales decreased $8,914,000 or 8.1%. Sales in the Electrical Appliances and
Electronic Devices segment decreased $8,452,000 as sales of electrical
appliances decreased $10,364,000 with lower sales of juicer products and
blenders partially offset by increased sales of specialty consumer products.
Sales of electronic devices increased $1,912,000 as sales of new heat
dissipating devices for computer microprocessors more than doubled while
sales of frequency control devices decreased. Sales in the Fabricated Metal
Products and Equipment segment decreased $2,894,000 as air, door and systems
product sales declined due to the weak market for new industrial and
commercial construction and renovation, as well as competitive pricing. Sales
in the Power and Controlled Environmental Systems segment increased
$2,432,000 due principally to increased shipments under a multi-unit,
defense-related custom mobile order to a Government prime contractor, which
were partially offset by sales declines in power plant products.
Gross profit decreased $5,664,000 to 24.5% from 27.6% of sales. Gross profit
in the Electrical Appliances and Electronic Devices segment decreased
significantly due to lower sales of electrical appliances and lower sales and
manufacturing yields in the frequency control and hermetic seal product
lines, offset in part by the effect of increased sales of higher margined
heat dissipating devices. In the Fabricated Metal Products and Equipment
segment, gross profit decreased due to lower sales, especially of higher
margined systems products and services, and price competition. Gross profit
in the Power and Controlled Environmental Systems segment decreased due to
price competition for reduced defense procurements and a declining medical
products market for mobile vans and transportable shelters.
Selling, general and administrative expenses decreased $2,099,000 due to
lower commission, freight and sales promotion expenses in all segments of the
Company. The decrease was primarily volume related.
Other income increased $301,000. Royalty income increased $963,000 from the
initial royalty under a technology transfer agreement with a customer in the
Power and Controlled Environmental Systems segment. Staff reductions resulted
in charges of $470,000, principally for severance, in the current year. In
1992, the sale of excess property and plant resulted in a gain of $554,000.
<PAGE>
Income taxes amounted to $617,000, a decline of $547,000 principally because
of lower income before taxes. The year to year comparison of income taxes was
also affected by the favorable resolution of certain tax matters in 1992
amounting to $780,000. The 1993 effective tax rate is higher than the
applicable 34% Federal statutory rate primarily because of state income taxes
which were offset in part by non-taxable income and foreign tax credits.
The cumulative effect to January 1, 1992 of the Company's adoption of
Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting
for Income Taxes," resulted in a charge of $942,000 to 1992 earnings.
Equity in CTS Corporation
Equity in the earnings of CTS Corporation before accounting changes by CTS
increased $2,061,000 primarily as a result of CTS' increase in such earnings
of $4,669,000.
During the quarter ended March 31, 1993, the Company recorded its
proportionate share of CTS' net charge from its adoption of FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," a charge of $1,896,000, or $.49 per share, and FASB Statement No.
109, "Accounting for Income Taxes," a credit of $180,000, or $.05 per share.
These onetime, non-cash accounting changes were adopted by CTS as cumulative
effects to January 1, 1993.
The Company's equity ownership in CTS was 37.3% at year end compared to 37.2%
at the end of the previous year. The change in the equity ownership
percentage is attributable to purchases of CTS stock by the Company.
<PAGE>
Dynamics Corporation of America
Consolidated Balance Sheets
(dollar amounts in thousands)
As of December 31, 1994 1993
Assets
Current Assets:
Cash and cash equivalents $ 6,837 $ 8,969
Accounts receivable, less
allowances of $604 and $531 15,214 16,287
Inventories--Note 2 17,893 18,092
Other current assets--Note 3 3,065 1,897
Current assets of division held
for sale--Note 4 1,185 1,408
Deferred income taxes 5,418 4,542
Total Current Assets 49,612 51,195
Property, Plant and Equipment, at
cost, less accumulated
depreciation and
amortization--Notes 5 and 8 3,472 3,906
Equity Investment in CTS
Corporation--Note 6 69,291 57,037
Other Assets 1,719 1,769
Deferred Income Taxes 83 1,457
Total Assets $124,177 $115,364
Liabilities
Current Liabilities:
Current installments of long-term
debt $ 126 $ 400
Accounts payable 4,454 3,617
Accrued expenses and sundry
liabilities--Notes 4 and 7 15,648 12,602
Federal income taxes payable 2,006 2,354
Total Current Liabilities 22,234 18,973
Long-term Debt--Note 8 401 623
Other Liabilities--Note 13 1,817 2,954
Total Liabilities 24,452 22,550
Contingencies--Note 14
Stockholders' Equity--Notes 9 and
10
Preferred Stock, par value $1 per
share--authorized 894,000
shares--none issued
Series A Participating Preferred
Stock, par value $1 per
share--authorized
106,000 shares--none issued
Common Stock, par value $.10 per
share--authorized 10,600,000;
outstanding 3,846,677 and
3,889,751 shares 385 389
Paid-in Additional Capital 11,698 11,451
Retained Earnings 88,133 81,125
Deferred Compensation (491) (151)
Total Stockholders' Equity 99,725 92,814
Total Liabilities and
Stockholders' Equity $124,177 $115,364
The accompanying notes are an integral part of these statements.
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Income
(dollar amounts in thousands, except per share data)
For the Years ended December 31, 1994 1993 1992
Net sales $96,453 $101,329 $110,243
Cost of sales 71,488 76,526 79,776
Gross profit 24,965 24,803 30,467
Selling, general and administrative
expenses 22,716 24,071 26,170
2,249 732 4,297
Other income, net--Note 11 498 943 642
Income from continuing operations
before items shown below 2,747 1,675 4,939
Provision for income taxes--Note 12 967 617 1,164
Income from continuing operations
before equity in CTS Corporation 1,780 1,058 3,775
Income (loss) from equity
investment in CTS Corporation,
net of income tax charges of
$1,082, $52 and $87 3,618 1,619 (442)
Income from continuing operations 5,398 2,677 3,333
Discontinued operations:
Income from discontinued
operation, net of income tax
charge of $2,022--Note 4 3,334
Equity in loss of discontinued
unconsolidated affiliate, net of
income tax benefit of $13 (20)
Loss on disposition of
unconsolidated affiliate, net of
income tax benefit of $169 (248)
Income (loss) from discontinued
operations 3,334 (268)
Income before changes in accounting
methods 8,732 2,677 3,065
Equity in CTS' cumulative effect to
January 1, 1993 of changes in
accounting methods--Note 6 (1,716)
Cumulative effect to January 1,
1992 of change in accounting for
income taxes--Note 12 (942)
Net income $ 8,732 $ 961 $ 2,123
Income (loss) per common share:
Continuing operations $ 1.39 $ .68 $ .85
Discontinued operations .86 (.07)
Equity in CTS' cumulative effect
to January 1, 1993 of changes in
accounting methods (.44)
Cumulative effect to January 1,
1992 of change in accounting for
income taxes (.24)
Net income $ 2.25 $ .24 $ .54
The accompanying notes are an integral part of these statements.
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Stockholders' Equity
(dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Years ended December 31, 1994, 1993 and 1992
Common Paid-in Total
shares Par additional Retained Deferred stockholders'
outstanding* value capital earnings compensation equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 3,924,484 $392 $11,817 $79,766 ($ 426) $91,549
Shares issued and issuable
from treasury pursuant to
benefit plans 2,303 17 17
Shares acquired for treasury
and pursuant to benefit plans (23,752) (2) (207) (91) 19 (281)
Amortization of deferred
compensation and related tax
charges (54) 145 91
Net income 2,123 2,123
Cash dividends ($.20 per
share) (783) (783)
Balance at December 31, 1992 3,903,035 390 11,573 81,015 (262) 92,716
Shares issued and issuable
from treasury pursuant to
benefit plans and other 3,727 1 65 (32) 34
Shares acquired for treasury
and pursuant to benefit plans (17,011) (2) (183) (70) 58 (197)
Amortization of deferred
compensation and related tax
charges (4) 85 81
Net income 961 961
Cash dividends ($.20 per
share) (781) (781)
Balance at December 31, 1993 3,889,751 389 11,451 81,125 (151) 92,814
Shares issued and issuable
from treasury pursuant to
benefit plans 35,055 4 524 (507) 21
Shares acquired for treasury
and pursuant to benefit plans (78,129) (8) (274) (947) 43 (1,186)
Amortization of deferred
compensation and related tax
charges (3) 124 121
Net income 8,732 8,732
Cash dividends ($.20 per
share) (777) (777)
Balance at December 31, 1994 3,846,677 $385 $11,698 $88,133 ($ 491) $99,725
<FN>
*Net of shares held in treasury--3,328,484, 3,285,410, and 3,272,126 voting
shares at December 31, 1994, 1993 and 1992, respectively. The cumulative cost
of treasury shares at December 31, 1994 amounted to approximately $34,900.
Includes non-voting shares outstanding of 4,708 at December 31, 1994.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Cash Flows
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Operating activities:
Net income $ 8,732 $ 961 $ 2,123
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,292 1,227 1,190
Deferred income taxes 498 301 1,141
Net realized losses on current
marketable securities 121
Purchases of marketable
securities, net (534)
Loss (income) from equity
investments in unconsolidated
affiliates before income taxes (4,700) 45 388
Loss on disposition of
unconsolidated affiliate before
income tax benefit 417
Dividends from CTS 930 767 1,271
Gain on sale of property (554)
Issuance of Company Common Stock 21 34 17
Increase (decrease) in other
liabilities (1,137) (962) 952
Decrease (increase) in other
assets 1 (347) 82
Other, net 122 85 91
Changes in operating assets and liabilities:
Accounts receivable 1,073 3,404 (2,442)
Inventories 199 3,083 (670)
Other current assets (1,168) (358) 175
Accounts payable, accrued
expenses and sundry liabilities 3,937 (3,704) (3,156)
Federal income taxes payable (348) 1 (439)
Decrease (increase) in current
assets of division held for sale 223 1,042 (1,277)
Net cash provided by (used in)
operating activities 9,675 5,166 (691)
Investing activities:
Purchases of CTS common stock (8,538)
Purchases of property, plant and
equipment (859) (929) (973)
Proceeds from sale of property 966
Proceeds from disposition of
unconsolidated affiliate 1,700
Other 49 47 2
Net cash provided by (used in)
investing activities: (9,348) (882) 1,695
Financing activities:
Principal payments under capital
lease obligations and mortgages (496) (432) (406)
Purchases of treasury stock (1,186) (197) (281)
Dividends paid (777) (781) (783)
Net cash used in financing
activities (2,459) (1,410) (1,470)
Increase (decrease) in cash and
cash equivalents (2,132) 2,874 (466)
Cash and cash equivalents at
beginning of year 8,969 6,095 6,561
Cash and cash equivalents at end of
year $ 6,837 $ 8,969 $ 6,095
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Dynamics Corporation of America
Notes to Consolidated
Financial Statements
Note 1: Significant Accounting Policies
(a) The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly owned. The
investment in CTS Corporation is accounted for by the equity method of
accounting. All material intercompany transactions and accounts have been
eliminated in consolidation.
(b) Revenues are reported on contracts, principally government related, based
on the proportion of units completed to units contracted. Costs related to
such revenues are based on estimated average costs for units contracted.
(c) Inventories are stated at the lower of cost or market. Inventory costs
have been determined by the last-in, first-out (LIFO) method for
approximately 36% (1994) and 42% (1993) of inventories, excluding inventories
subject to progress billings under contracts. Costs for other inventories
have been determined principally by the first-in, first-out (FIFO) method.
(d) Depreciation is computed on the straight-line and declining balance
methods over the estimated useful lives of assets.
(e) Realized gain or loss on the sale of marketable securities is determined
using specific cost identification. The Company's current marketable
securities are considered trading securities.
(f) Research and development costs are expensed as incurred and amounted to
$1,664,000 (1994), $1,252,000 (1993) and $1,203,000 (1992).
(g) Per share data is based upon the weighted average number of common and
common equivalent shares outstanding during the periods.
(h) For purposes of the Consolidated Statements of Cash Flows, the Company
considers all investment instruments with a maturity of three months or less
at the time of purchase to be cash equivalents. The carrying amount of cash
and cash equivalents approximates fair value.
(i) Certain of the Company's products are sold with warranties, under which
the Company will repair or replace products during the designated warranty
periods. Costs associated with warranties are determined on the basis of
estimated future costs.
(j) The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its accounts receivable. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base and their
diversification across many different industries and geographic locations.
Generally, the Company does not require collateral or other security to
support customer receivables. The Company performs ongoing credit evaluations
of its customers' financial condition and requires letters of credit in some
instances.
Note 2: Inventories
1994 1993
(in thousands)
Raw materials and supplies $ 7,579 $ 7,251
Work in process 6,791 6,426
Finished goods 3,391 4,076
17,761 17,753
Inventories subject to progress
billings 666 1,189
Progress billings (534) (850)
132 339
$17,893 $18,092
The excess of current replacement cost over LIFO cost of inventories amounted
to $982,000 (1994) and $950,000 (1993).
The United States Government has liens on substantially all inventories
subject to progress billings.
Note 3: Other Current Assets
Other current assets include marketable securities at market of $631,000
(1994) and $687,000 (1993), with a cost basis of $2,115,000 (1994) and (1993).
Note 4: Division Held for Sale--Fermont Division
On September 30, 1991, the Company determined to discontinue operations at
its Fermont Division, a manufacturer of electrical power systems for
government and commercial markets, and put the assets and business up for
sale. In conjunction with the discontinuance, the Company recorded a
provision for disposition of $5,600,000 for costs estimated to be incurred
prior to Fermont's disposition, including $3,629,000 for operating losses
during the phaseout period. The provision
<PAGE>
for disposition in the Consolidated Statement of Operations in 1991 was
reduced by $1,600,000 before taxes for the favorable settlement of a court
action involving a contract for the sale of 60 KW engine generator sets to
the Government. Fermont's sales for the years ended December 31, 1994, 1993
and 1992 were $11,247,000 (including the $6,450,000 settlement referred to
below), $5,248,000, and $14,655,000, respectively.
At the time the determination was made, Fermont was a party to a contract
with the U.S. Government for the production of 3KW engine generator sets. The
contract is subject to First Article approval of prototype 3KW units. A
proposed change order was submitted to the Government in April 1992 seeking
equitable compensation for constructive changes by the Government and
associated delays in the contract. In May 1994, the Company agreed to accept
$6,450,000 from the Government in settlement of the preproduction portion of
its proposed change order. The settlement, net of related expenses and income
taxes, amounted to $3,334,000, or $.86 per share, and was reported as income
from discontinued operations in 1994. The Government contracted for further
testing of prototype units at that time.
In July 1994, Fermont bid on a major new generator set contract and decided
to pursue other contracts. Accordingly, commencing on July 1, 1994, the
division is no longer classified as a discontinued operation but as a
business held for sale. A reserve for the projected operating losses for the
ensuing twelve month period, including the estimated costs to consummate the
division's sale and adjustments for the net realizable value of the
division's assets, was provided from the remainder of the reserve established
in 1991 to discontinue the operation. Future adjustments to this reserve, if
any, will be reported as part of continuing operations.
In January 1995, the Government issued a 90 day stop work order on the 3KW
contract because of engine failures while testing prototype units. The final
disposition of the contract is not known at this time, but it is possible the
Government may terminate the contract. Such a termination, if it occurs, is
not expected to adversely impact the Company's financial results or financial
position.
Also in January 1995, Fermont was awarded a contract to manufacture tactical
quiet (TQ) generator sets for the U.S. Army Aviation and Troop Command. The
Government's initial delivery order issued with the award calls for delivery
of gensets for an aggregate price of $57,766,000. Shipments are expected to
begin in mid-1996 subject to First Article prototype approval. The contract
is a two-year requirements contract.
Current assets of the division held for sale consist primarily of accounts
receivable and inventories. Accounts payable and accrued expenses and sundry
liabilities include $677,000 and $822,000 at December 31, 1994 and 1993,
respectively, related to the division held for sale.
Note 5: Property, Plant and Equipment
(in thousands)
1994
Fixed Capital
Classification Assets Leases Total
Land and improvements $ 983 $ 983
Buildings and
improvements 8,979 $2,270 11,249
Machinery, equipment,
furniture and fixtures 22,536 651 23,187
Leasehold improvements 507 507
33,005 2,921 35,926
Less accumulated
depreciation and
amortization 29,908 2,546 32,454
$ 3,097 $ 375 $ 3,472
1993
Fixed Capital
Classification Assets Leases Total
Land and improvements $ 983 $ 983
Buildings and
improvements 8,979 $2,270 11,249
Machinery, equipment,
furniture and fixtures 21,768 651 22,419
Leasehold improvements 507 507
32,237 2,921 35,158
Less accumulated
depreciation and
amortization 28,802 2,450 31,252
$ 3,435 $ 471 $ 3,906
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Note 6: Equity Investment in CTS Corporation
The Company's holdings aggregated 2,222,100, 1,920,900 and 1,918,100 shares
of CTS Corporation ("CTS") common stock at December 31, 1994, 1993 and 1992,
respectively. The Company's equity ownership in CTS was 42.9%, 37.3% and
37.2% at December 31, 1994, 1993 and 1992, respectively. Included in Accounts
Payable at December 31, 1993 was $54,000 for purchases of CTS stock.
The market value of the Company's investment in CTS amounted to $61,663,000
and $37,938,000 at December 31, 1994 and 1993, respectively. The market value
of the Company's investment in CTS on February 22, 1995 amounted to
$68,607,000, on holdings of 2,222,100 shares. Under the Control Share
Acquisitions Chapter of the Indiana Business Corporation Law, 1,020,000 of
the Company's shares of CTS stock presently have no voting rights.
The excess of the carrying amount of the Company's investment over the
underlying equity in the net assets of CTS, net of accumulated amortization
of $7,480,000, amounted to $14,346,000 at December 31, 1994 and is being
amortized over twenty-five years (commencing in 1986) using the straight-line
method ($790,000 in 1994). At December 31, 1994, undistributed net income of
CTS included in the Company's retained earnings amounted to $2,997,000.
CTS is required to file annual and other reports, including audited annual
financial statements, with the Securities and Exchange Commission and such
reports and statements are available for review at the offices of the
Securities and Exchange Commission in Washington, D.C. The Company has relied
on CTS' financial information to compile its financial statements.
CTS operates primarily in one business segment, electronic and
electromechanical components and subsystems, in worldwide markets. Summarized
financial information derived from CTS' 1994 Annual Report to Stockholders
follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Net sales $268,707 $236,979 $227,391
Gross earnings $ 56,859 $ 47,344 $ 41,101
Earnings before
cumulative effect
of changes in
accounting
principles $ 13,967 $ 6,570 $ 1,901
Cumulative effect of
accounting change--
postretirement
benefits (5,096)
Cumulative effect of
accounting
change--income
taxes 482
Net earnings $ 13,967 $ 1,956 $ 1,901
Current assets $110,667 $ 97,266 $ 87,376
Noncurrent assets $ 96,159 $ 87,798 $ 83,397
Current liabilities $ 44,792 $ 49,888 $ 37,262
Noncurrent
liabilities $ 30,179 $ 15,973 $ 14,139
Stockholders' equity $131,855 $119,203 $119,372
The Company recognized its proportionate share, in accordance with the equity
method of accounting, of CTS' net charge from its adoption of FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," a charge of $1,896,000, or $.49 per share, and FASB Statement No.
109, "Accounting for Income Taxes," a credit of $180,000, or $.05 per share.
These onetime, non-cash accounting changes were adopted by CTS in the first
quarter of 1993 as cumulative effects to January 1, 1993.
<PAGE>
Note 7: Accrued Expenses and Sundry Liabilities
1994 1993
(in thousands)
Salaries, wages, commissions and
employee benefits $ 2,988 $ 2,680
Taxes, other than Federal income
taxes 1,398 1,183
Advertising 467 495
Insurance 1,242 616
Customer contract claims, including
price adjustments and refunds 2,800 2,800
Advances from customers 1,835 448
Warranties 967 1,182
Reserve for division held for sale 2,497 1,350
Other 1,454 1,848
$15,648 $12,602
Note 8: Long-term Debt and Credit Facilities
Long-term Debt 1994 1993
(in thousands)
Industrial revenue bonds, 7.35%
payable through 1994 $ 108
Mortgage notes, 9% payable through
1996 171
Obligations under capital leases $527 744
527 1,023
Less current portion 126 400
$401 $ 623
The 9% mortgage note was prepaid in 1994.
Capital leases generally provide that the Company pay property taxes and
operating costs. Certain capital leases contain renewal and/or purchase
options.
Minimum lease payments under capital leases total $798,000, including
$271,000 representing interest. Minimum lease payments in each year for the
next five years are: $166,000, $80,000, $50,000, $45,000 and $45,000.
The Company leases real estate and equipment under operating leases. Certain
of the leases contain renewal options and escalation clauses relating to
taxes and maintenance. Rental expense amounted to $585,000, $676,000 and
$711,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
Minimum lease payments under operating leases total $2,282,000. Minimum lease
payments in each year for the next five years are: $620,000, $470,000,
$341,000, $281,000 and $269,000.
Interest payments amounted to $73,000, $118,000 and $148,000 for the years
ended December 31, 1994, 1993 and 1992, respectively.
Credit Facilities
The Company has a Revolving Credit Agreement with banks (renegotiated in
1994) which provides a line of credit of up to $37,000,000 through November
30, 1998 at the lower of the prime rate or other rate options available at
the time of borrowing. The Company pays a commitment fee of 1/4% based on the
unused portion of the line. The Agreement provides that, at the option of the
Company, the principal outstanding at November 30, 1998 may be converted to a
four year term loan, with interest at the lower of the prime rate or other
rate options, payable in equal semi-annual principal installments. The
Agreement contains restrictions which, among other things, require the
Company to have income from continuing operations before equity in the
operating results of unconsolidated affiliates for the year and in at least
one of any two consecutive fiscal quarters. The Agreement requires
maintenance of certain financial ratios and contains other restrictive
covenants, including a restriction on payment of dividends to 50% of current
year's net income plus $3,000,000.
The Company also has an uncommitted line of credit with a bank amounting to
$9,000,000. The Company does not pay any fee for the uncommitted line and
therefore the availability of the line is at the discretion of the bank.
Outstanding letters of credit, principally related to imports and bid and
performance bond obligations, amounted to $6,932,000 at December 31, 1994.
Note 9: Stockholders' Equity
1980 Restricted Stock and Cash Bonus Plan
The Plan, prior to amendment, provided for the discretionary award or sale of
up to 400,000 shares of common stock to key executives. The shares awarded or
sold are subject to restrictions against transfer as well as repurchase
rights of the Company which, in effect, provide for the lapse of restrictions
at the rate of 20% per year beginning one year from the award or sale. In
addition, the Plan provides for a cash bonus to the participant equal to the
fair market value of the shares on the date restrictions lapse in the case of
an award, or the excess of the fair market value thereof as of such date over
the original purchase price if the shares were purchased, with a limit upon
the total bonuses paid to
<PAGE>
Notes to Consolidated
Financial Statements (continued)
any participant during the 5-year period of twice the fair market value of
the shares on the date of award or sale. The Plan was amended in 1988 to make
additional shares available for issuance to replenish the Plan for shares
awarded since its inception. At December 31, 1994, 1993, and 1992, 339,000,
370,500 and 368,700 shares, respectively, were available for award or sale
under the Plan.
In addition to the shares issued and amortization of deferred compensation
included in the Consolidated Statements of Stockholders' Equity, the Company
accrued bonuses of $272,000 (1994), $58,000 (1993) and $146,000 (1992) and
reacquired (at no cost) through forfeitures 3,000 (1994), 3,800 (1993) and
800 (1992) previously issued restricted shares pursuant to the Plan.
1986 Stock Plan for Outside Directors
The Plan provides for a portion of outside directors' compensation to be
deferred and to be paid in shares of the Company's common stock upon a
director's retirement, disability or death. Under the Plan, common stock
units (payable in shares of the Company's common stock on a one-for-one
basis) are credited to the directors based on their service as outside
directors each year. Common stock units of 547 (1994), 449 (1993) and 351
(1992) were credited to the outside directors. In 1992, 1,251 shares were
distributed under the Plan to a deceased director's estate. The total number
of units in the Plan is 4,574 at December 31, 1994.
Note 10: Preferred Stock Purchase Rights
In 1986 the Company declared a distribution to shareholders of record on
February 14, 1986 of one preferred stock purchase right for each outstanding
share of the Company's voting and non-voting common stock. Under certain
conditions, each right may be exercised to purchase one one-hundredth of a
share of a newly created series of participating preferred stock at an
exercise price of $80. The rights become exercisable ten days after a public
announcement that a party or group has acquired or obtained the right to
acquire 20% or more of the Company's common stock in a transaction not
previously approved by the Board of Directors of the Company, or after
commencement or public announcement of a tender offer for 25% or more of the
Company's common stock. The rights, which are non-voting, expire on February
14, 1996 unless extended and may be redeemed by the Company at a price of
$.05 per right at any time prior to their expiration or prior to the
acquisition by a party or group of 20% of the Company's common stock, unless
approved by the Board of Directors. The participating preferred stock to be
purchased upon exercise of the rights will be nonredeemable.
In the event the Company is acquired in a merger or other business
combination transaction after the rights become exercisable, provision shall
be made so that each holder of a right shall have the right to receive, upon
exercise thereof and payment of the then current exercise price, that number
of shares of common stock of the surviving company which at the time of such
transaction would have a market value of two times the exercise price of the
right. If the Company is the surviving company, each holder would have the
right to receive for the then current exercise price preferred stock of the
Company with a market value of two times the exercise price.
Note 11: Other Income, Net
Income (Expense): 1994 1993 1992
(in thousands)
Interest:
Income $239 $ 181 $ 123
Expense (73) (118) (148)
166 63 (25)
Dividend income 55 27
Net gains (losses) on
current marketable
securities:
Realized on sales (121)
Change in
unrealized loss (56) 180 (46)
Royalty income 157 1,207 244
Gain on sale of
property 554
Staff reduction costs (470)
Other, net 176 57 (85)
$498 $ 943 $ 642
Note 12: Income Taxes
The provision for income taxes from continuing operations consists of:
<PAGE>
1994 1993 1992
(in thousands)
Current income taxes:
Federal $ 937 $211 $ 199
State 225 77 276
Foreign 327
1,489 288 475
Deferred income tax
charges (credits):
Federal (273) 51 563
State (136) 125 126
Foreign (113) 153
(522) 329 689
$ 967 $617 $1,164
Gross income subject to foreign taxes amounted to $1,328,000 (1994) and
$1,000,000 (1993).
Deferred income tax charges (credits) result from the following:
1994 1993 1992
(in thousands)
Inventory ($ 205) ($572) ($ 167)
Employee benefits 107 (94) (167)
Accruals for division
held for sale and staff
reductions (13) 438 632
Warranties 123 152 (176)
Patent infringement
judgment 471
Deferred income (274) 372
Insurance (292)
Other, net 32 33 96
($ 522) $ 329 $ 689
A reconciliation of the Federal statutory rate to the Company's consolidated
effective tax rate from continuing operations before equity in CTS follows:
1994 1993 1992
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net
of Federal income tax
benefit 2.1 8.0 5.4
Foreign taxes 11.9 9.2
Resolution of prior years
tax matters (15.8)
Employee benefits (1.0) (3.9)
Foreign tax credits (12.3) (12.6)
Other, net .5 2.1
35.2% 36.8% 23.6%
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
1994 1993
(in thousands)
Deferred tax assets:
Warranty reserve $ 381 $ 504
Bad debt allowance 226 195
Inventory 2,025 1,820
Employee benefit plans 1,441 1,690
Investments 491 470
Reserve for division
held for sale 980 875
Reserve for customer
contract claims 625 624
Depreciation 422 375
Insurance 312 20
Other, net 202 252
7,105 6,825
Valuation allowance for
deferred tax assets (251) (335)
Total deferred tax
assets 6,854 6,490
Deferred tax liabilities:
Undistributed earnings
of CTS (1,019)
Deferred income (98) (372)
Other, net (236) (119)
Total deferred tax
liabilities (1,353) (491)
Net deferred tax assets $ 5,501 $5,999
The change in the valuation allowance for deferred tax assets increased the
provision for income taxes $22,000, $5,000 and $3,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
Deferred income taxes are provided on the Company's proportionate share of
the undistributed earnings of CTS Corporation.
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes." The effect of the
adoption of FASB Statement No. 109 on the 1992 income tax provision was not
significant. However, the cumulative effect of this change to January 1, 1992
resulted in a $942,000 charge to 1992 earnings.
Income tax payments, net of refunds, amounted to $3,611,000, $302,000 and
$1,329,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Note 13: Employee Benefit Plans
The Company has a noncontributory defined benefit retirement plan covering
substantially all of its employees. The benefits are based on the employee's
years of service and career average compensation. Pension costs are generally
funded to the extent of tax deductible amounts and during 1994 the Company
contributed $666,000 to the Plan. No contributions were required in 1993 or
1992. Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the
forthcoming year. The Company also contributes to a multi-employer plan which
provides defined retirement benefits, as required by collective bargaining
agreements.
A summary of the components of net periodic pension cost of the defined
benefit plan and the total contributions charged to pension expense for the
multi-employer plan follows:
1994 1993 1992
(in thousands)
Defined benefit plan:
Service cost--benefits
earned during the
period $ 586 $ 628 $ 726
Interest cost on
projected benefit
obligation 1,440 1,402 1,346
Actual return on plan
assets (2,085) (1,780)
Net amortization and
deferral (1,688) 520 346
Net pension charges for:
Defined benefit plan 338 465 638
Multi-employer plan 323 294 299
Net periodic pension cost $ 661 $ 759 $ 937
Net periodic pension cost for the defined benefit plan includes $39,000
(1994), $87,000 (1993) and $105,000 (1992) charged against the reserve for
division held for sale. Net periodic pension cost for the defined benefit
plan for 1992 includes $83,000 of additional charges under FASB Statement No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," relating to an early
retirement offer at one of the Company's divisions.
Assumptions used in accounting for the defined benefit plan as of December 31
were:
1994 1993 1992
Discount rate 8.50% 7.50% 7.75%
Rate of increase in
compensation levels 5.0 % 5.0 % 5.0 %
Expected long-term rate of
return on assets 9.0 % 9.0 % 9.0 %
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31, 1994 and 1993 for the
Company's defined benefit pension plan:
1994 1993
(in thousands)
Actuarial present value of
benefit obligation:
Accumulated benefit
obligation, including
vested benefits of
$15,202 and $16,744 ($ 16,715) ($ 18,681)
Effect of salary projections (1,313) (1,463)
Projected benefit obligation
for service rendered to
date (18,028) (20,144)
Plan assets at fair value 16,700 17,257
Projected benefit obligation in
excess of plan assets (1,328) (2,887)
Unrecognized net loss from past
experience different from
assumed and effect of changes
in assumptions 987 2,497
Prior service cost not yet
recognized in net periodic
pension cost 206 317
Unrecognized net asset
remaining from initial
application of FASB Statement
No. 87 (1,682) (2,072)
Accrued long-term pension cost ($ 1,817) ($ 2,145)
The 1994 change in the discount rate from 7.50% to 8.50% resulted in a
$2,560,000 decrease in the projected benefit obligation.
Plan assets are invested in cash equivalents, guaranteed investment contracts
and equity stocks, including 100,000 shares of common stock of the Company
having a market value of $2,037,500 and $1,500,000 at December 31, 1994 and
1993, respectively. Dividend payments to the Plan on Company common stock
amounted to $20,000 in both 1994 and 1993.
Information concerning the Company's share of related estimated plan benefit
obligations and assets is not available for the multi-employer plan.
<PAGE>
The Company has a Savings and Investment Plan for all full time employees not
covered by collective bargaining agreements, which qualifies as a profit
sharing plan under Section 401(k) of the Internal Revenue Code. The Company's
contributions under the Plan are based on specified percentages of employee
contributions and were $325,000 (1994), $342,000 (1993) and $316,000 (1992).
Note 14: Contingencies
The Company is a supplier to the United States Government under contracts and
subcontracts on which there are cost allocation, cost allowability and
compliance issues under examination by various agencies or departments of the
Federal government. In the course of the resolution of these issues, the
Company may be required to adjust certain prices or refund certain payments
on its government contracts and subcontracts. The Company believes that any
such price adjustments or refunds will not have a materially adverse effect
on the financial position of the Company.
In October 1994, the Company, after notifying the Consumer Products Safety
Commission, commenced a recall of approximately 2,700 electronic toasters
manufactured in the United Kingdom by a third party and distributed in the
U.S. by the Company's Waring Products Division, because of a defect in the
electronic timer on the units. The Company has advised the manufacturer that
it will seek full indemnity from the manufacturer, as provided in the
agreement between the parties, for all costs of the recall. The U.K.
manufacturer has not responded to the Company's demand for indemnification.
It is not possible to reasonably estimate the extent of the Company's
liability at this time. However, the costs of the recall are not expected to
materially affect the financial position of the Company.
The Company has been notified by the U.S. Environmental Protection Agency
("EPA") that it is a Potentially Responsible Party ("PRP") regarding
hazardous waste cleanup at a non-Company site in Connecticut and at a Company
site in California. Certain of the PRPs at the Connecticut site have agreed
with the EPA to fund a feasibility study at the site and have sued the
Company and other PRPs who have not agreed to share the costs. A property
owner neighboring the Company site in California has sued the Company and
others for allegedly causing contamination at the neighbor's property. In
addition, the Company has received notice from a state environmental agency
that it is a PRP with respect to a non-Company site in Pennsylvania, and is
also a defendant in two lawsuits seeking contribution towards the Superfund
cleanup costs relating to two other non-Company sites in that state. Based
upon its knowledge of the extent of the Company's exposure and current
statutes, rules and regulations, management believes that the anticipated
costs resulting from claims and proceedings with respect to the above
mentioned sites, including remediation, the extent and cost of which are
presently unknown, will not materially affect the financial position of the
Company.
With respect to other claims and actions against the Company, it is the
opinion of Management that such matters will not have a material effect on
the financial position of the Company.
Note 15: Industry Segments:
See Financial Information About Industry Segments on pages 23 and 24 of this
report.
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Note 16: Quarterly Financial Data (Unaudited):
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Year
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C> <C>
1994
Net sales $22,716 $23,998 $24,732 $25,007 $ 96,453
Gross profit $ 6,027 $ 6,689 $ 6,803 $ 5,446 $ 24,965
Income from continuing
operations $ 933 $ 1,733 $ 1,162 $ 1,570 $ 5,398
Net income $ 933 $ 5,067(a) $ 1,162 $ 1,570 $ 8,732
Income per share:
Income from continuing
operations $ .24 $ .45 $ .30 $ .40 $ 1.39
Net income $ .24 $ 1.31(a) $ .30 $ .40 $ 2.25
1993
Net sales $25,591 $25,719 $24,241 $25,778 $101,329
Gross profit $ 6,731 $ 6,516 $ 5,764 $ 5,792 $ 24,803
Income from continuing
operations $ 618 $ 727 $ 233 $ 1,099(c) $ 2,677
Net income (loss) ($ 1,098)(b) $ 727 $ 233 $ 1,099(c) $ 961
Income (loss) per share:
Income from continuing
operations $ .16 $ .18 $ .06 $ .28(c) $ .68
Net income (loss) ($ .28)(b) $ .18 $ .06 $ .28(c) $ .24
<FN>
(a) Includes $3,334 ($.86 per share) of income from a discontinued operation
reflecting the Company's favorable settlement of the preproduction portion of
the proposal of its Fermont Division for an equitable adjustment on a
contract with the U.S. Government.
(b) The Company recognized its proportionate share under equity accounting of
CTS' adoption of FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," a charge of $1,896 ($.49 per
share), and FASB Statement No. 109, "Accounting for Income Taxes," a credit
of $180 ($.05 pre share). These onetime, non-cash accounting changes were
adopted by CTS as cumulative effects to January 1, 1993.
(c) Increased by $608 ($.16 per share) from initial royalty under a
technology transfer agreement. Includes a charge of $286 ($.07 per share) for
staff reduction costs.
</FN>
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
[Logo: Ernst & Young LLP]
1111 Summer Street
Stamford, Connecticut 06905
Phone: 203 326 8200
Fax: 203 358 9644
To the Board of Directors and Stockholders of Dynamics Corporation of America
We have audited the accompanying consolidated balance sheets of Dynamics
Corporation of America as of December 31, 1994 and 1993, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of CTS Corporation (a corporation in
which the Company had a 42.9% interest at December 31, 1994) have been
audited by other auditors whose report, which included an explanatory
paragraph for CTS Corporation's accounting changes discussed in Note 6 to
these consolidated financial statements, has been furnished to us; insofar as
our opinion on the consolidated financial statements relates to data included
for CTS Corporation, it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Dynamics Corporation of
America at December 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 12 to the consolidated financial statements, in 1992 the
Company changed its method of accounting for income taxes. As discussed in
Note 6 to the consolidated financial statements, in 1993 CTS Corporation
changed its method of accounting for income taxes and post-retirement health
care and life insurance benefits.
/s/ Ernst & Young LLP
February 22, 1995
<PAGE>
Selected Financial Data
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net sales $ 96,453 $ 101,329 $ 110,243 $ 111,962 $ 110,306
Gross profit $ 24,965 $ 24,803 $ 30,467 $ 27,890 $ 27,146
Income from continuing
operations
before equity in CTS $ 1,780 $ 1,058(b) $ 3,775(d) $ 2,580(g) $ 1,559(i)
Income (loss) from equity
investment in continuing
operations of CTS 3,618 1,619 (442) 650 893
Income from continuing
operations 5,398 2,677 3,333 3,230 2,452
Income (loss) from
discontinued division 3,334(a) (4,071)(h) (1,550)
Equity in income (loss) of
discontinued
unconsolidated affiliate (20) (492) 201
Loss on disposition of
unconsolidated affiliate (248)(e)
Equity in CTS' cumulative
effect to January 1, 1993
of changes in accounting
methods (1,716)(c)
Cumulative effect to
January 1, 1992 of change
in accounting for income
taxes (942)(f)
Net income (loss) $ 8,732 $ 961 $ 2,123 ($ 1,333) $ 1,103
Average common shares
outstanding 3,877,106 3,902,164 3,915,224 3,914,312 3,914,682
Amounts per common share:
Income from continuing
operations $ 1.39 $ .68 $ .85 $ .83 $ .63
Net income (loss) $ 2.25 $ .24 $ .54 ($ .34) $ .28
Cash dividends $ .20 $ .20 $ .20 $ .20 $ .20
Stockholders' equity (j) $ 25.92 $ 23.86 $ 23.75 $ 23.33 $ 24.01
Total assets $ 124,177 $ 115,364 $ 120,288 $ 122,020 $ 125,999
Long-term debt $ 401 $ 623 $ 1,023 $ 1,313 $ 1,625
<FN>
(a) Income from a discontinued operation of $3,334 ($.86 per share),
reflecting the Company's favorable settlement of the preproduction portion of
the proposal of its Fermont Division for an equitable adjustment on a
contract with the U.S. Government.
(b) Increased by $608 ($.16 per share) from initial royalty income under a
technology transfer agreement. Includes a charge of $286 ($.07 per share) for
staff reduction costs.
(c) The Company recognized its proportionate share under equity accounting of
CTS' adoption of FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," a charge of $1,896 ($.49 per
share), and FASB Statement No. 109, "Accounting for Income Taxes," a credit
of $180 ($.05 per share). These onetime, non-cash accounting changes were
adopted by CTS as cumulative effects to January 1, 1993.
(d) Increased by $780 ($.20 per share) for resolution of prior years tax
matters and $349 ($.09 per share) from the sale of property.
(e) Loss on disposition of the Company's equity investment in Farmhand Inc.
($.06 per share).
(f) Cumulative effect to January 1, 1992 of a change in the Company's method
of accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109, "Accounting for Income Taxes"
($.24 per share).
(g) Includes income from a resolution of prior years' tax matters of $1,015
($.26 per share) and from a nonrefundable escrow deposit of $155 ($.04 per
share) from the decision by Halton OY of Finland not to proceed with the
purchase of the Company's Anemostat Division.
(h) Includes a charge of $2,678 ($.68 per share) for estimated operating
losses and costs during the phase out period of the Company's Fermont
Division.
(i) Increased by $448 ($.12 per share) from the reversal of an overaccrual in
the prior year for a consumer product line restructuring and related product
discontinuance and $277 ($.07 per share) from interest income on refunds of
Federal income taxes, and reduced by charges of $1,051 ($.27 per share) for
costs in connection with a patent infringement judgment, $655 ($.17 per
share) for realized and unrealized losses on the Company's current marketable
securities and $560 ($.14 per share) for a special warranty program.
(j) Based upon shares outstanding at end of period.
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the Notes to
Consolidated Financial Statements, appearing elsewhere in this Annual Report.
</FN>
</TABLE>
<PAGE>
SEGMENTS OF BUSINESS
During 1994, the Company's continuing operations were in a number of
manufacturing businesses conducted by four divisions and a subsidiary, each
of which operates as a separate unit and each of which maintains its own
sales, administration, accounting, marketing, engineering and manufacturing
operations. Corporate headquarters determines policy and provides such
services as legal counsel, accounting, financing, cash management, auditing,
insurance, public relations and long-range planning guidance.
The methods of distribution and marketing utilized by the Company vary by
operation. In general, sales for all the Company's segments combine some
direct selling in certain market areas with appropriate manufacturers'
representatives, wholesalers, distributors and/or dealers.
The operations are classified into three industry segments: electrical
appliances and electronic devices, fabricated metal products and equipment,
and power and controlled environmental systems.
Segments are grouped according to similarities in profitability, risk, growth
potential, material and labor composition of products and/or capital
requirements.
These segments accounted for the following net sales, operating results and
other financial data for each of the three years in the period ended December
31, 1994:
Financial Information About Industry Segments
Year ended December 31: 1994 1993 1992
(in thousands)
Net Sales:
Electrical Appliances and
Electronic Devices $ 56,255 $ 53,813 $ 62,265
Fabricated Metal Products
and Equipment 23,269 22,347 25,241
Power and Controlled
Environmental Systems 16,929 25,169 22,737
$ 96,453 $101,329 $110,243
Operating Profit:
Electrical Appliances and
Electronic Devices $ 3,067 $ 1,438 $ 3,619
Fabricated Metal Products
and Equipment 450 498 1,667
Power and Controlled
Environmental Systems 1,101 2,399 1,821
4,618 4,335 7,107
Corporate Expenses (2,008) (2,719) (2,451)
Interest Income
(Expense), net 159 52 (31)
Other Income (Expense),
net (22) 7 314
$ 2,747 $ 1,675 $ 4,939
Depreciation and
Amortization:
Electrical Appliances and
Electronic Devices $ 944 $ 795 $ 741
Fabricated Metal Products
and Equipment 189 255 253
Power and Controlled
Environmental Systems 135 157 187
Corporate 24 20 9
$ 1,292 $ 1,227 $ 1,190
Capital Expenditures:
Electrical Appliances and
Electronic Devices $ 768 $ 748 $ 707
Fabricated Metal Products
and Equipment 69 149 348
Power and Controlled
Environmental Systems 31 44
Corporate 22 22 29
$ 859 $ 950 $ 1,128
Identifiable Assets:
Electrical Appliances and
Electronic Devices $ 21,920 $ 23,317 $ 24,110
Fabricated Metal Products
and Equipment 8,224 8,154 8,924
Power and Controlled
Environmental Systems 11,172 10,837 15,435
Corporate 81,499 71,440 69,041
122,815 113,748 117,510
Assets of Division Held
For Sale 1,362 1,616 2,778
$124,177 $115,364 $120,288
<PAGE>
Financial Information About Industry Segments (continued)
Year ended December 31: 1994 1993 1992
(dollar amounts in thousands)
U.S. Government Sales,
direct and indirect
(occurring predominantly
in the Power and
Controlled Environmental
Systems segment),
including sales to a
single customer in
excess of 10% (1993) $ 7,340 $18,151 $13,360
Export Sales $14,025 $ 8,787 $10,137
Classes of Products representing 10% or more of Company net sales:
Electrical Appliances and
Electronic Devices:
Consumer and Commercial
Portable Electrical
Appliances 33.4% 37.0% 43.5%
Thermal Management
Components 16.5%
Fabricated Metal Products
and Equipment:
Air Distribution
Equipment and Controls 24.1% 22.1% 22.9%
Notes:
See inside back cover for the classification of the Company's present
manufacturing Divisions and Subsidiary for segment purposes and a brief
description of each.
Total revenue by industry segments includes sales to all unaffiliated
customers including the U.S. Government.
Operating profit is total revenues less operating expenses. Identifiable
assets by industry segments are those assets that are used in the Company's
operations in each industry. Corporate assets are principally cash,
receivables and marketable securities, including the Company's equity
investment in CTS Corporation, substantially all of which is held by its
wholly owned subsidiary, LTB Investment Corporation.
It should be noted that the reported information follows the pronouncements
of the Financial Accounting Standards Board and does not follow the Company's
internal allocation procedures relating to interest, other income and certain
administrative costs such as management, legal and financial. Accordingly,
the information may not be indicative of the financial results of, or
investments in, the reported segments were they independent organizations, or
useful for comparison with operations of other companies.
Range of Stock Prices and Dividend Information
The Company's Common Stock (Voting) is traded on the New York Stock Exchange
(ticker symbol: DYA). There is no market for the Non-Voting Common Shares of
the Company.
The prices of the Company's Common Stock and dividends paid during 1994 and
1993 are as follows:
New York Stock Exchange Dividends Paid
1994 1993 1994 1993
HIGH LOW HIGH LOW
1st Quarter 16 13-1/4 14-3/8 12-7/8 $.10 $.10
2nd Quarter 15-5/8 13 16-3/8 13-7/8
3rd Quarter 20-1/4 14 17 15-1/2 $.10 $.10
4th Quarter 21 17-7/8 17-3/4 14-7/8
As of February 22, 1995 there were 4,051 shareholders of record.
The Board of Directors of the Company established a semi-annual dividend
policy in January 1978 and expects to continue this policy. At its January
1984 meeting, the Board of Directors established the regular semi-annual
dividend rate of ten cents ($.10) per share. The first payment for 1995 was
made on March 1 to shareholders of record as of the close of business on
February 15, 1995.
The number of employees of the Company as of December 31, 1994 was 1,081.
<PAGE>
DCA's Manufacturing Divisions and Subsidiary
The following is the classification of the Company's present operations
for industry segment purposes and a brief description of each:
Electrical Appliances
and Electronic Devices
INTERNATIONAL ELECTRONIC
RESEARCH CORPORATION
135 West Magnolia Blvd.
Burbank, California
91502-7704
Designs and manufactures heat dissipators/sinks and the Zero Insertion Force
(ZIF(tm)) printed circuit board retainer, ZIF II using tool free concept,
thermally efficient coldwalls and enclosures using the integrated ZIF(tm) or
the machined ZIF(tm) technology approach for high performance electronic
systems, and other components related to thermal management of electronic
systems for the military/ aerospace, computer and commercial marketplace
worldwide.
REEVES-HOFFMAN DIVISION
400 West North Street
Carlisle, Pennsylvania
17013-2248
Designs and manufactures quartz crystals, crystal oscillators, crystal
filters and glass-to-metal hermetic seal packages for sales to customers
worldwide. Primary applications include telecommunications, hybrid
microcircuits, navigation, position location, medical electronics, test
equipment, microwave and satellite communications and guidance systems.
WARING PRODUCTS DIVISION
283 Main Street
New Hartford, Connecticut
06057-0319
Manufactures commercial and consumer portable electrical appliances such as
the original Blendor(R), NuBlend(R) and Touchblend(tm) blenders, mixers, can
openers, food processors, juicers, juice extractors, coffee preparation
products, ice cream makers and food dehydrators and steamers sold under the
Waring(R), Acme Juicerator(R) and Qualheim(tm) brand names for both the
domestic and export markets.
Power and Controlled
Environmental Systems
ELLIS AND WATTS DIVISION
4400 Glen Willow Lake Lane
Batavia, Ohio
45103-2356
Manufactures special air conditioning equipment, liquid cooling systems,
fluid transfer units, air handling equipment, special fans, dehydrators,
humidifiers, mobile vans and transportable suites (Environ(R)) for
specialized electronic and medical diagnostic equipment, including "CT"
Scanners, Lithotriptors and Magnetic Resonance Imaging (MRI) systems, for
government, industry, medical and power plant use.
Fabricated Metal
Products and Equipment
ANEMOSTAT PRODUCTS
DIVISION
888 North Keyser Avenue
Scranton, Pennsylvania
18504-9723
Designs, manufactures and markets a broad line of air distribution products
and systems with both pneumatic and electronic controls to meet the need for
total environmental control in laboratories, industrial buildings, commercial
buildings, and air distribution in aircraft, marine and rail equipment. Brand
names include Anemostat(R), Anemotherm(R), Multi-Vent(R), Anemotrak(R) and
Envirotrak(R). Anemostat also manufactures a line of UL(R) approved vision
frames and louvers for fire rated doors.
<PAGE>
Dynamics Corporation of America
Directors
HAROLD COHAN +*
Business Consultant
PATRICK J. DORME
Vice President-Finance and
Chief Financial Officer of the Corporation
FRANK A. GUNTHER +*
President, Highpoint Enterprises Incorporated
HENRY V. KENSING
Vice President, General Counsel and Secretary
of the Corporation
RUSSELL H. KNISEL +*
Business Consultant
ANDREW LOZYNIAK
Chairman of the Board and President
of the Corporation
SAUL SPERBER +*
Financial Advisor
Officers
ANDREW LOZYNIAK
Chairman of the Board and President
HENRY V. KENSING
Vice President, General Counsel and Secretary
PATRICK J. DORME
Vice President-Finance and
Chief Financial Officer
RICHARD E. SMITH
Treasurer
M. GREGORY BOHNSACK
Controller
+Member of Audit Committee
*Member of the Compensation Committee
Shareholders' Meeting:
The annual meeting of shareholders will be held on May 5, 1995 at 10:30 A.M.
in the Cole Auditorium of the Greenwich Library, West Putnam Avenue at
Dearfield Drive, Greenwich, Connecticut.
Stock Listing:
New York Stock Exchange Ticker Symbol: DYA NYSE-Composite Transactions
Symbol: DynaAmer
Additional Information:
A copy of the Company's annual report on Form 10-K filed with the Securities
and Exchange Commission will be furnished, without charge, on the written
request of a shareholder. Requests should be forwarded to the Company,
attention of the Secretary, 475 Steamboat Road, Greenwich, Connecticut
06830-7197
Executive Offices:
475 Steamboat Road
Greenwich, Connecticut
06830-7197
Tel. 203-869-3211
Transfer Agent and Registrar:
THE FIRST NATIONAL BANK OF BOSTON
P.O. Box 644
Mail Stop 45-02-09
Boston, Massachusetts 02102-0644
Tel. 617-575-2900
Independent Auditors:
ERNST & YOUNG LLP
1111 Summer Street
Stamford, Connecticut
06905-5571
Tel. 203-326-8200
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 6837
<SECURITIES> 0
<RECEIVABLES> 15818
<ALLOWANCES> 604
<INVENTORY> 17893
<CURRENT-ASSETS> 49612
<PP&E> 35926
<DEPRECIATION> 32454
<TOTAL-ASSETS> 124177
<CURRENT-LIABILITIES> 22234
<BONDS> 401
<COMMON> 385
0
0
<OTHER-SE> 99340
<TOTAL-LIABILITY-AND-EQUITY> 124177
<SALES> 96453
<TOTAL-REVENUES> 96453
<CGS> 71488
<TOTAL-COSTS> 71488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 2747
<INCOME-TAX> 967
<INCOME-CONTINUING> 5398
<DISCONTINUED> 3334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8732
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended December 31, 1994
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation Number)
905 West Boulevard North, Elkhart, Indiana 46514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219-293-7511
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant has: (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
X
There were 5,193,854 shares of Common Stock, without par value,
outstanding on March 10, 1995.
The aggregate market value of the voting stock held by non-affiliates
of CTS Corporation was approximately $80 million on March 10, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the CTS Corporation 1994 Annual Report for
the fiscal year ended December 31, 1994, incorporated by
reference in Part I and Part II.
(2) Portions of the 1995 Proxy Statement for annual meeting
of stockholders to be held on April 28, 1995,
incorporated by reference in Part III.
(3) Certain portions of the CTS Corporation Form 10-K for the
1987 fiscal year ended January 3, 1988, incorporated by
reference in Part IV.
(4) Certain portions of Registration Statement No. 33-27749,
effective March 23, 1989, incorporated by reference in
Part IV.
(5) Certain portions of the 1989 Proxy Statement for annual
meeting of stockholders held April 28, 1989, incorporated
by reference in Part IV.
(6) Certain portions of the CTS Corporation Form 10-K for the
1989 fiscal year ended December 31, 1989, incorporated by
reference in Part IV.
(7) Certain portions of the CTS Corporation Form 10-K for the
1991 fiscal year ended December 31, 1991, incorporated by
reference in Part IV.
(8) Certain portions of the CTS Corporation Form 10-K for the
1992 fiscal year ended December 31, 1992, incorporated by
reference in Part IV.
EXHIBIT INDEX -- PAGES 17 AND 18
<PAGE>
Part I
Item 1. Business
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
The registrant, CTS Corporation (CTS or Company), is an Indiana
corporation incorporated in 1929 as a successor to a company
started in 1896. CTS' principal executive offices are located at
905 West Boulevard North, Elkhart, Indiana 46514, telephone number
(219) 293-7511.
CTS designs, manufactures and sells electronic components. The
engineering and manufacturing of CTS products is performed at 16
facilities worldwide. CTS products are sold through sales
engineers, sales representatives, agents and distributors.
In March 1987, a settlement was announced between CTS and Dynamics
Corporation of America (DCA), terminating the sale process of the
Company and resolving all disputes between CTS and DCA.
Subsequently, the United States Supreme Court held that the Control
Share Acquisition Chapter of the Indiana Business Corporation Law
was constitutional. As a result of the Court's decision, the issue
of voting rights of 1,020,000 shares of CTS common stock acquired
by DCA in 1986 was submitted to a vote of CTS stockholders at the
1987 annual meeting. The affirmative vote of the majority of all
shares eligible to vote was necessary to grant voting rights. DCA
was not eligible to vote on the issue. The stockholders voted not
to grant voting rights to DCA on these shares. The Court's
decision did not have an impact on the voting rights in additional
shares of CTS common stock previously or subsequently acquired by
DCA. In May 1988, the settlement agreement expired pursuant to its
terms. At the end of 1994, DCA owned 2,222,100 shares (42.9%) of
CTS common stock, including the 1,020,000 shares without voting
rights.
In January 1990, the Company formally announced the closing of its
Switch Division located in Paso Robles, California. The Paso Robles
manufacturing operations were relocated to the Company's facilities
in Taiwan and Bentonville, Arkansas. During 1992, the Company
completed the sale of the Paso Robles manufacturing plant and most
of the associated real estate for $1.9 million. A pretax-tax gain
of $0.9 was realized from the sale. The manufacturing operations
for certain variable resistor and selector switch products, which
formerly were performed in Elkhart, Indiana, were also transferred
to Bentonville in 1990, to take advantage of any efficiencies to be
gained in consolidating such operations in Bentonville. The
buildings located in Elkhart which housed the plastics molding, and
element production, were vacated, with these manufacturing
operations being consolidated into the main Elkhart plant.
CTS announced in July 1990 that its facility near Glasgow,
Scotland, would be expanded in order to manufacture and sell
additional electronic products in Europe. The total capital
investment has been approximately $11 million as of December 31,
1994. Automotive throttle position sensors and precision and clock
oscillators were added to the product lines already manufactured in
Scotland. The decision to expand the Scottish facility was based
on several factors, including the excellent business climate and
skills base in Scotland and the anticipated full participation of
the United Kingdom in the European Economic Community. The
expansion of the Scotland facility represents a major effort by CTS
to serve the large and rapidly growing European market on a direct
basis.
In November 1991, construction was completed on a 53,000 square
foot manufacturing facility in Bangkok, Thailand. During 1992, the
Company idled operations at this facility. During 1994, a three-
year lease was finalized with an international computer peripheral
manufacturer for this property. The annual rental amount is
approximately U.S. $345,000.
Also during 1991, the Company significantly reduced the operating
activities at its Brownsville, Texas, facility and plans to sell
this property. A portion of the Brownsville facility is currently
under a leasing arrangement which expires in 1999, at an annual
rental amount of approximately $60,000.
The manufacturing space owned by CTS in Hong Kong, which consisted
of two floors in a multi-story building, was sold in March 1991.
One floor was leased back by CTS for the continuation of its
manufacturing operations in Hong Kong. During 1992, the Company
terminated this lease and discontinued its manufacturing operations
in Hong Kong.
During 1994, the Company purchased the assets of AT&T
Microelectronics' light emitting diode based optic data link
products business. The transaction also included sales contracts,
backlog, intellectual property, trademarks, and the design and
manufacturing technology. These products will be manufactured in
the Microelectronics West Lafayette, Indiana, facility.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
All of the Company's products are considered one industry segment.
Sales to unaffiliated customers, operating profit and identifiable
assets, by geographic area, are contained in "Note I - Business
Segment and Non-U.S. Operations," pages 21-23, of the CTS
Corporation 1994 Annual Report, and is incorporated herein by
reference.
PRINCIPAL BUSINESS AND PRODUCTS OF CTS
CTS is primarily in the business of developing, manufacturing and
selling a broad line of electronic components principally serving
the electronic needs of original equipment manufacturers (OEMs).
The Company sells classes of similar products consisting of the
following:
Automotive control devices Loudspeakers
Electronic connectors Programmable switches
Frequency control devices Resistor networks
Hybrid microcircuits Selector switches
Industrial electronics Variable resistors
Most products within these product classes are manufactured by CTS
from purchased raw materials or subassemblies. Some products sold
by CTS are purchased and resold under the Company's name.
During the past three years, five classes of similar product lines
accounted for 10% or more of consolidated revenue during one or
more years, as follows:
Percent of Consolidated Revenue
Class of Similar Products 1994 1993 1992
Automotive Control Devices 30 26 20
Electronic Connectors 17 14 17
Frequency Control Devices 15 15 17
Resistor Networks 11 14 16
Hybrid Microcircuits 10 14 11
Other 17 17 19
Total 100% 100% 100%
MARKETS
CTS estimates that its products have been sold in the following
segments of the electronics OEM and distribution markets and in the
following percentages during the preceding three fiscal years:
Percent of Consolidated Revenue
Markets 1994 1993 1992
Automotive 38 32 25
Data Processing 17 22 20
Communications Equipment 17 17 18
Defense and Aerospace 11 12 17
Instruments and Controls 9 9 12
Distribution 5 4 5
Consumer Electronics 3 4 3
Total 100% 100% 100%
Products for the automotive market include throttle position
sensors, switch assemblies for operator interface, exhaust gas
recirculation subsystems, variable resistors and switches for
automotive entertainment systems and other applications, and
loudspeakers.
Products for the data processing market include resistor networks,
frequency control devices, programmable switches and hybrid
microcircuits. Products for this market are principally used in
computers and computer peripheral equipment.
In the communications equipment market, CTS products include
frequency control devices, hybrid microcircuits, switches and
resistor networks. Products for this market are principally used
in telephone equipment and in telephone switching systems.
CTS products for the defense and aerospace market, usually procured
through government contractors or subcontractors, are electronic
connectors, hybrid microcircuits, backpanels, frequency control
devices and programmable key storage devices.
Products for the instruments and controls market include hybrid
microcircuits, variable resistors and switches. Principal end uses
are medical electronic devices and electronic testing, measuring
and servicing instruments.
In the distribution market, CTS' primary products include programmable
switches, resistor networks and frequency control devices.
In this market, standard CTS products are sold for a wide variety
of applications.
Products for the consumer electronics market, primarily variable
resistors and switches, are principally used in home entertainment
equipment and appliances.
MARKETING AND DISTRIBUTION
Sales of CTS electronic components to original equipment
manufacturers are principally by CTS sales engineers and
manufacturers' representatives. CTS maintains sales offices in
Elkhart, Indiana; Detroit, Michigan; and in the United Kingdom,
Hong Kong, Taiwan and Japan. Various regions of the United States
are serviced by sales engineers working out of their homes. The
sale of electronic components is relatively integrated such that
most of the product lines of CTS are sold through the same field
sales force. Approximately 40% of net sales in 1994 were
attributable to coverage by CTS sales engineers.
Generally, CTS sales engineers service the Company's largest
customers with application specific products. CTS sales engineers
work closely with major customers in determining customer requirements
and in designing CTS products to be provided to such
customers.
CTS uses the services of independent sales representatives and
distributors in the United States and other countries for customers
not serviced by CTS sales engineers. Sales representatives receive
commissions from CTS. During 1994, about 55% of net sales were
attributable to coverage by sales representatives. Independent
distributors purchase products from CTS for resale to customers.
In 1994, independent distributors accounted for about 5% of net
sales.
RAW MATERIALS
Generally, CTS' major raw materials are steel, copper, brass,
certain precious metals, resistive and conductive inks, passive
components and semiconductors, used in several CTS products;
ceramic materials used particularly in resistor networks and hybrid
microcircuits; synthetic quartz used in frequency control devices;
and laminate material used in printed circuit boards. These raw
materials are purchased from several vendors, and except for
certain semiconductors, CTS does not believe that it is dependent
on one or on a very few vendors. In 1994, all of these materials
were available in adequate quantities to meet CTS' production
demands.
The Company does not presently anticipate any raw material shortages
which would significantly affect production. However, the lead times
between the placement of orders for certain raw materials and actual
delivery to CTS are quite variable, and the Company may from time to
time be required to order raw materials in quantities and at prices
less than optimal to compensate for the variability of lead times for
delivery.
Precious metals prices have a significant effect on the manufacturing
cost and selling prices of many CTS products, particularly some
programmable switches, electronic connectors and resistor networks.
CTS has continuing programs to reduce the precious metals content
of several products, when consistent with customer specifications.
WORKING CAPITAL
CTS does not usually buy inventories or manufacture products
without actual or reasonably anticipated customer orders, except
for some standard, off-the-shelf distributor products. The Company
is not generally required to carry significant amounts of inven-
tories to meet rapid delivery requirements because most customer
orders are for custom products. CTS has entered into "just-in-
time" arrangements with certain major customers in order to meet
customers' just-in-time delivery needs.
CTS carries raw materials, including certain semiconductors, and
certain work-in-process and finished goods inventories which are
unique to a particular customer or to a small number of customers,
and in the event of reductions in or cancellations of orders, some
inventories are not useable or cannot be returned to vendors for
credit. CTS generally imposes charges for the reduction or
cancellation of orders by customers, and these charges are usually
sufficient to cover the financial exposure of CTS to inventories
which are unique to a customer. CTS does not customarily grant
special return privileges or payment privileges to customers,
although CTS' distributor program permits certain returns. CTS'
working capital requirements are generally cyclical but not
seasonal.
Working capital requirements are generally dependent on the overall
business level. During 1994, working capital increased
significantly to $65.9 million, as receivables and inventories
increased in response to the greater sales. Also, short-term debt
was reduced, generally being replaced by long-term obligations at
relatively more favorable borrowing rates. Cash represents a
significant part of the Company's working capital. Cash of various
non-U.S. subsidiaries was held in U.S.-denominated cash equivalents
at December 31, 1994. The cash, other than approximately $4.6
million, is generally available to the parent Company.
PATENTS, TRADEMARKS AND LICENSES
CTS maintains a program of obtaining and protecting U.S. and non-
U.S. patents and trademarks. CTS believes that the success of its
business is not materially dependent on the existence or duration
of any patent, group of patents or trademarks.
CTS licenses the manufacture of several electronic products to
companies in the United States and non-U.S. countries. In 1994
license and royalty income was less than 1% of net sales. CTS
believes that the success of its business is not materially
dependent upon any licensing arrangement where CTS is either the
licensor or licensee.
MAJOR CUSTOMERS
CTS' 15 largest customers represented about 62%, 62% and 58% of net
sales in 1994, 1993 and 1992, respectively.
Of the net sales to unaffiliated customers, approximately $49.4
million, $40.1 million and $30.7 million were derived from sales to
General Motors Corporation in 1994, 1993 and 1992, respectively.
During 1993 and 1992, $24.0 million and $19.3 million were derived
from sales to International Business Machines Corporation.
However, during 1994 sales to this customer decreased to $4.4
million. CTS is dependent upon these and other customers for a
significant percentage of its sales and profits, and the loss of
one or more of these customers or reduction of orders by one or
more of these customers could have a materially adverse effect upon
the Company.
BACKLOG OF ORDERS
Backlog of orders does not necessarily provide an accurate indica-
tion of present or future business levels for CTS. For many
electronic products, the period between receipt of orders and
delivery is relatively short. For large orders from major
customers that may constitute backlog over an extended period of
time, production scheduling and delivery are subject to change or
cancellation by the customers on relatively short notice. At the
end of 1994, the Company's backlog of orders was $82.7 million,
compared with $70.5 million at the end of 1993. This increase was
primarily attributable to increased demand from automotive
and microelectronics customers.
The backlog of orders at the end of 1994 will generally be filled
during the 1995 fiscal year.
GOVERNMENT CONTRACTS
CTS believes that about 11% of its net sales are associated with
purchases by the U.S. Government or non-U.S. governments,
principally for defense and aerospace applications. Because most
CTS products procured through government contractors and
subcontractors are for military end uses, the level of defense and
aerospace market sales by CTS is dependent upon government
budgeting and funding of programs utilizing electronic systems.
Almost all CTS sales involving government purchases are to primary
government contractors or subcontractors. CTS is usually subject
to contract provisions permitting termination of the contract,
usually with penalties payable by the government; maintenance of
specified accounting procedures; limitations on and renegotiations
of profits; priority production scheduling; and possible penalties
or fines against CTS for late delivery or substandard quality. Such
contract provisions have not previously resulted in material
uncertainties or disruptions for CTS.
COMPETITION
CTS competes with many domestic and non-U.S. manufacturers principally
on the basis of product features, price, engineering, quality,
reliability, delivery and service. Most product lines of CTS encounter
significant competition. The number of significant competitors varies
from product line to product line. No single competitor competes with
CTS in every product line, but many competitors are larger and more
diversified than CTS. Some competitors are divisions or affiliates of
customers. CTS is subject to competitive risks typical in the
electronics industry such as shorter product life cycles and new
products causing existing products to become obsolete.
Some customers have reduced or plan to reduce the number of
suppliers while increasing the volume of purchases from independent
suppliers. Most customers are demanding higher quality,
reliability and delivery standards from CTS as well as competitors.
These trends may create opportunities for CTS while also increasing
the risk of loss of business to competitors.
The Company believes that it competes most successfully in custom
products manufactured to meet specific applications of major
original equipment manufacturers.
CTS believes that it has some advantages over certain competitors
because of its ability to apply a broad range of technologies and
materials capabilities to develop products for the special
requirements of customers. CTS also believes that it has an advantage
over some competitors in its capability to sell a broad range of
products manufactured to relatively consistent standards of quality
and delivery. CTS believes that the relative breadth of its product
lines and relative consistency in quality and delivery across product
lines is an advantage to CTS in selling products to customers.
CTS believes that it is one of the largest manufacturers of
automotive throttle position sensors.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
Information about revenue from sales to unaffiliated customers,
operating profit and identifiable assets, by geographic area, is
contained in "Note I - Business Segment and Non-U.S. Operations,"
pages 21-23, of the CTS Corporation 1994 Annual Report, and is
incorporated herein by reference.
In 1994, approximately 34% of net sales to unaffiliated customers,
after eliminations, were attributable to non-U.S. operations. This
represents an increase from 28% of net sales attributable to non-
U.S. operations in 1993. About 32% of total CTS assets, after
eliminations, are non-U.S. Except for cash and equivalents, a
substantial portion of these assets cannot readily be liquidated.
CTS believes that the business risks attendant to its present non-
U.S. operations, though substantial, are normal risks for non-U.S.
businesses, including expropriation, currency controls and changes
in currency exchange rates and government regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
In 1994, 1993 and 1992, CTS spent $7.1, $5.7 and $6.1 million,
respectively, for research and development. Most CTS research and
development activities relate to new product and process developments
or the improvement of product materials. Many such research
and development activities are for the benefit of one or a limited
number of customers or potential customers.
During 1994, except for the purchase of the light emitting diode
based optic data link products assets, the Company did not enter
into any new, significant product lines, but continued to introduce
additional versions of existing products in response to present and
future customer requirements.
ENVIRONMENTAL PROTECTION LAWS
In complying with federal, state and local environmental protection
laws, CTS has modified certain manufacturing processes and expects
to continue to make additional modifications. Such modifications
that have been performed have not materially affected the capital
expenditures, earnings or competitive position of CTS.
Certain processes in the manufacture of the Company's current and
past products create hazardous waste by-products as currently
defined by federal and state laws and regulations. The Company has
been notified by the U.S. Environmental Protection Agency, state
environmental agencies and, in some cases, generator groups, that
it is or may be a Potentially Responsible Party (PRP) regarding
hazardous waste remediation at several non-CTS sites. The factual
circumstances of each site are different; the Company has
determined that its role as a PRP with respect to these sites, even
in the aggregate, will not have a material adverse effect on the
Company's business or financial condition, based on the following:
1) the Company's status as a de minimis party; 2) the large number
of other PRPs identified; 3) the identification and participation
of many larger PRPs who are financially viable; 4) defenses
concerning the nature and limited quantities of materials sent by
the Company to certain of the sites; and 5) the Company's
experience to-date in relation to the determination of its
allocable share. In addition to these non-CTS sites, the Company
has an ongoing practice of providing reserves for probable
remediation activities at certain of its manufacturing locations
and for claims and proceedings against the Company with respect to
other environmental matters. In the opinion of management, based
upon presently available information, either adequate provision for
probable costs has been made, or the ultimate costs resulting will
not materially affect the consolidated financial position or
results of operations of the Company.
There are claims against the Company with respect to environmental
matters which the Company contests. In the opinion of management,
based upon presently available information, either adequate
provision for potential costs has been made, or the costs which
ultimately might result will not materially affect the consolidated
financial position or results of operations of the Company.
EMPLOYEES
CTS employed an average of 4,056 persons during 1994. About 45% of
these persons were employed outside the United States at the end of
1994. Approximately 370 employees in the United States were
covered by collective bargaining agreements as of December 31,
1994. One of the two collective bargaining agreements covering
these employees will expire in 1995. The other agreement will
expire in 1999.
Item 2. Properties
CTS operations or facilities are at the following locations. The
owned properties are not subject to material liens or encumbrances.
Location
Elkhart, IN 521,813 Owned -
Berne, IN 248,726 Owned -
Singapore 158,926 Owned* -
Kaohsiung, Taiwan 132,887 Owned* -
Streetsville,
Ontario, Canada 111,740 Owned -
West Lafayette, IN 105,983 Owned -
Sandwich, IL 94,173 Owned -
Brownsville, TX 84,679 Owned -
Bentonville, AR 72,000 Owned -
Glasgow, Scotland 75,000 Owned -
New Hope, MN 55,000 Leased December
(Science Center Dr.) 1998
Bangkok, Thailand 53,000 Owned -
Matamoros, Mexico 50,590 Owned* -
Baldwin, WI 39,050 Owned -
Cokato, MN 36,000 Owned -
Burlington, WI 5,000 Leased March
1995
TOTAL 1,844,567
* Buildings are located on land leased under renewable leases.
The Company is currently seeking to sell some, or all, of the
Streetsville, Ontario, Canada, facility and related property, and
the Brownsville, Texas, manufacturing building. A portion of the
Brownsville facility is currently under a leasing arrangement which
expires in 1999. The annual rental income is approximately
$60,000. Also, a portion of the New Hope, Minnesota, facility is
currently under a sublease arrangement, which expires in 1998. The
annual rental income is approximately $88,400.
The Company constructed the Bangkok, Thailand, facility during
1991. This facility was idled during 1992 and was idle for all of
1993. During 1994, the Company entered a three-year lease on this
property at an annual rental amount of approximately U.S. $345,000.
The Company regularly assesses the adequacy of its manufacturing
facilities for manufacturing capacity, available labor and location
to the markets and major customers for the Company's products. CTS
also reviews the operating costs of its facilities and may from
time to time relocate facilities or certain manufacturing
activities in order to achieve operating cost reductions and
improved asset utilization and cash flow.
Item 3. Legal Proceedings
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
might ultimately result from such litigation or administrative
proceedings will not materially affect the consolidated financial
position of the Company or the results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1994, no issue was submitted to a vote
of CTS stockholders.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The principal market for CTS common stock is the New York Stock
Exchange. Information relative to the high and low trading prices
for CTS Common Stock for each quarter of the past two years and the
frequency and amount of dividends declared during the previous two
years can be located in "Stockholder Information," page 10, of the
CTS Corporation 1994 Annual Report, incorporated herein by
reference. On March 10, 1995, there were approximately 1,120
holders of record of CTS common stock.
The Company intends to continue a policy of considering dividends
on a quarterly basis. The declaration of a dividend and the amount
of any such dividend are subject to earnings, anticipated working
capital, capital expenditure and other investment requirements, the
financial condition of CTS and such other factors as the Board of
Directors deems relevant.
Item 6. Selected Financial Data
A summary of selected financial data for CTS, for each of the
previous five fiscal years, is contained in the "Five-Year
Summary," page 11, of the CTS Corporation 1994 Annual Report,
incorporated herein by reference.
Certain divestitures and closures of businesses and certain
accounting changes affect the comparability of information
contained in the "Five-Year Summary."
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Information about liquidity, capital resources and results of
operations, for the three previous fiscal years, is contained in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations (1992-1994)," pages 25-27, of the CTS
Corporation 1994 Annual Report, incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements, meeting the requirements of
Regulation S-X, and the Report of Independent Accountants, are
contained in pages 12-24 of the CTS Corporation 1994 Annual Report,
incorporated herein by reference. Quarterly per share financial
data is provided in "Stockholder Information," under the
subheadings, "Quarterly Results of Operations" and "Per Share
Data," on page 10 of the CTS Corporation 1994 Annual Report, and is
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There were no disagreements.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information responsive to Items 401(a) and 401(e) of Regulation S-K
pertaining to directors of CTS is contained in the 1995 Proxy
Statement under the caption "Election of Directors," page 6, filed
with the Securities and Exchange Commission, and is incorporated
herein by reference.
Information responsive to Item 405 of Regulation S-K pertaining to
compliance with Section 16(a) of the Securities Exchange Act of
1934 is contained in the 1995 Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of
1934," page 7, filed with the Securities and Exchange Commission,
and is incorporated herein by reference.
The individuals listed were elected as executive officers of CTS at
the annual meeting of the Board of Directors on April 29, 1994, and
are expected to serve as executive officers until the next annual
meeting of the Board of Directors, scheduled on April 28, 1995, at
which time the election of officers will be considered again by the
Board of Directors.
Name Age Position and Offices
Joseph P. Walker 56 Director, Chairman,
President and Chief
Executive Officer
Philip T. Christ 63 Group Vice President
Stanley J. Aris 54 Vice President Finance and
Chief Financial Officer
Jeannine M. Davis 46 Vice President, Secretary
and General Counsel
James L. Cummins 39 Vice President Human Resources
George T. Newhart 52 Corporate Controller
Gary N. Hoipkemier 40 Treasurer
James N. Hufford 55 Vice President Research,
Development and Engineering
Donald R. Schroeder 46 Vice President Sales and
Marketing
Joseph P. Walker has served as Chairman of the Board, President and
Chief Executive Officer of CTS since 1988. Mr. Walker is a
Director of NBD Bank, N.A.
Philip T. Christ has served as Group Vice President since 1990.
Mr. Christ served as a Senior Vice President at Simplex Time
Recorder from 1976-1986.
Stanley J. Aris has served as Vice President, Finance and Chief
Financial Officer since May 18, 1992. Prior to joining CTS, Mr.
Aris worked for two years as a business consultant. From 1989 to
1990 Mr. Aris served as Vice President, Finance of Hypres
Corporation.
Jeannine M. Davis has served as Vice President, General Counsel
and Secretary since 1988. Between 1980 and 1988, she served as
legal counsel, Assistant Secretary, Assistant General Counsel and
General Counsel of the Corporation.
James L. Cummins was elected Vice President Human Resources on
February 25, 1994. Prior to this appointment, he served as
Director, Human Resources, CTS Corporation from 1991-1994. From
1990-1991, Mr. Cummins served as Human Resources Director, CTS
Corporation Electromechanical Group and in 1991 was appointed
Assistant Human Resources Director, CTS Corporation.
George T. Newhart has served as Corporate Controller since 1989.
Prior to joining the Company in June 1989, he was Chief Financial
and Administrative Officer of the Chelsea Electronic Distribution
Group from 1987-1989.
Gary N. Hoipkemier has served as Treasurer since 1989. He served
as Chief Financial Officer of Riblet Products Corporation from
1988-1989.
James N. Hufford was elected Vice President Research, Development
and Engineering on February 17, 1995. During the four years prior
to this appointment, Mr. Hufford served as Manager and then
Director of Corporate Research, Development and Engineering for the
Corporation. From 1981 through 1991, Mr. Hufford held key
engineering positions at the Corporation's Elkhart manufacturing
facility.
Donald R. Schroeder was elected Vice President Sales and Marketing
on February 17, 1995. During the six years prior to this
appointment, Mr. Schroeder served as Business Development Manager
for innovative and new technology for the CTS Microelectronics
business unit in West Lafayette, Indiana. Prior to 1989, Mr.
Schroeder held several other management and marketing positions
with various operating units of the Corporation.
Item 11. Executive Compensation
Information responsive to Item 402 of Regulation S-K pertaining to
management remuneration is contained in the 1995 Proxy Statement in
the captions "Executive Compensation," pages 8-9 and "Director
Compensation," page 14, filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information responsive to Item 403 of Regulation S-K pertaining to
security ownership of certain beneficial owners and management is
contained in the 1995 Proxy Statement in the caption "Securities
Beneficially Owned by Principal Stockholders and Management," pages
3-5 filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Dynamics Corporation of America (DCA) owned 2,222,100 (42.9%) of
the Company's outstanding common stock as of December 31, 1994.
CTS purchased products from DCA totalling about $233,000 in 1994,
$145,000 in 1993 and $93,000 in 1992, principally consisting of
certain component parts used by CTS in the manufacture of frequency
control devices. CTS had minimal sales to DCA in 1994, and no
sales in 1993 and 1992.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) (1) and (2)
The list of financial statements and financial statement schedules
required by Item 14 (a)(1) and (2) is contained on page S-1 herein.
(a)(3) Exhibits
(3)(a) Articles of Incorporation, as amended April 16,
1973, previously filed as exhibit (3)(a) to the
Company's Form 10-K for 1987, and incorporated
herein by reference.
(3)(b) Bylaws, as amended and effective June 25, 1992,
previously filed as exhibit (3)(b) to the Company's
Form 10-K for 1992, and incorporated herein by
reference.
(10)(a) Employment agreement dated June 24, 1994, between
CTS and Joseph P. Walker, filed as exhibit (10)(a)
to the Company's Form 10-K for 1994, and
incorporated herein by reference.
(10)(b) Prototype indemnification agreement, with
Lawrence J. Ciancia, Patrick J. Dorme, Gerald H.
Frieling, Jr., Andrew Lozyniak, Joseph P. Walker,
Philip T. Christ, Stanley J. Aris, Jeannine M.
Davis, James L. Cummins, George T. Newhart and Gary
N. Hoipkemier, previously filed as exhibit (10)(b)
to the Company's Form 10-K for 1991, and
incorporated herein by reference.
(10)(c) CTS Corporation 1982 Stock Option Plan, as amended
February 24, 1989, was previously filed as exhibit
(10)(d) to the Company's Form 10-K for 1989, and is
incorporated herein by reference.
(10)(d) CTS Corporation 1986 Stock Option Plan, approved by
the stockholders at the reconvened annual meeting
on May 30, 1986. The CTS Corporation 1986 Stock
Option Plan is contained in Exhibit 4 to
Registration Statement No. 33-27749, effective
March 23, 1989, and is incorporated herein by
reference.
(10)(e) CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan, as adopted by the CTS Board of
Directors on December 16, 1988, and approved by
stockholders at the 1989 annual meeting of stock-
holders on April 28, 1989. The CTS Corporation
1988 Restricted Stock and Cash Bonus Plan is
contained in Appendix A, pages 11-15, of the 1989
Proxy Statement for the annual meeting of
stockholders held April 28, 1989, under the caption
"CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan," previously filed with the Securities
and Exchange Commission, and is incorporated herein
by reference.
(13) CTS Corporation 1994 Annual Report.
(21) Subsidiaries of CTS Corporation.
(23) Consent of Price Waterhouse to incorporation by
reference of this Annual Report on Form 10-K for
the fiscal year 1994 to Registration Statement 2-
84230 on Form S-8 and Registration Statement 33-
27749 on Form S-8.
Indemnification Undertaking
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form
S-8 Nos. 2-84230 (filed June 13, 1983) and 33-27749 (filed
March 23, 1989):
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision,
or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange
Commission such indemnification is against public
policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event
that a claim for indemnification against such
liabilities (other than the payment by the
registrant of expenses incurred or paid by a
director, officer or controlling person of the
registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
officer or controlling person in connection with
the securities being registered, the registrant
will, unless in the opinion of its counsel the
matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is
against public policy as expressed in the Act and
will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date March 17, 1995 By /S/ Stanley J. Aris
Stanley J. Aris
Vice President Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date March 17, 1995 By /S/ Lawrence J. Ciancia
Lawrence J. Ciancia,
Director
Date March 17, 1995 By /S/ Patrick J. Dorme
Patrick J. Dorme,
Director
Date March 17, 1995 By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date March 17, 1995 By /S/ Andrew Lozyniak
Andrew Lozyniak,
Director
Date March 17, 1995 By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date March 17, 1995 By /S/ George T. Newhart
George T. Newhart,
Corporate Controller
and principal accounting
officer
Date March 17, 1995 By /S/ Jeannine M. Davis
Jeannine M. Davis,
Vice President, Secretary
and General Counsel
<PAGE>
ANNUAL REPORT ON FOR 10-K
ITEM 14(a) (1) AND (2) AND ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1994
CTS CORPORATION AND SUBSIDIARIES
ELKHART, INDIANA
FORM 10-K - ITEM 14(a) (1) AND (2)
CTS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of CTS Corporation
and subsidiaries included in the annual report of the registrant to
its shareholders for the year ended December 31, 1994, are incorporated
by reference in Item 8:
Consolidated balance sheets - December 31, 1994, and
December 31, 1993
Consolidated statements of earnings - Years ended
December 31, 1994, December 31, 1993, and December 31,
1992
Consolidated statements of stockholders' equity - Years
ended December 31, 1994, December 31, 1993, and Decem-
ber 31, 1992
Consolidated statements of cash flows - Years ended
December 31, 1994, December 31, 1993, and December 31,
1992
Notes to consolidated financial statements
The following consolidated financial statement schedules of CTS
Corporation and subsidiaries, are included in item 14(d):
Page
Schedule II - Valuation and qualifying accounts S-3
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
have been omitted because they are inapplicable, not required or
the information is included in the consolidated financial state-
ments or notes thereto.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of CTS Corporation
Our audits of the consolidated financial statements referred to
in our report dated February 2, 1995, appearing within the CTS
Corporation 1994 Annual Report to Stockholders, (which report and
consolidated financial statements are incorporated by reference
in the Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
South Bend, Indiana
February 2, 1995
S-2
<PAGE>
CTS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Classification Period Expenses Accounts Deductions End of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for
doubtful receivables $709 $277 $ 0 $117 $869
Year ended December 31, 1993:
Allowance for
doubtful receivables $303 $521 $85 $200 $709
Year ended December 31, 1992:
Allowance for
doubtful receivables $420 $157 $ 7(a) $281(b) $303
<FN>
(a) Recoveries.
(b) Uncollectible accounts written off.
</FN>
</TABLE>
S-3
<PAGE>
EXHIBIT 22
CTS CORPORATION AND SUBSIDIARIES
CTS Corporation (Registrant), an Indiana corporation
Subsidiaries
CTS Corporation, a Delaware corporation
CTS Singapore, Pte. Ltd., a Republic of Singapore corporation
CTS of Panama, Inc., a Republic of Panama corporation
CTS Components Taiwan, Ltd.,(1) a Taiwan, Republic of China corporation
CTS de Mexico S.A.,1 a Republic of Mexico corporation
CTS Export Corporation, a Virgin Islands corporation
CTS of Canada, Ltd., a Province of Ontario (Canada) corporation
CTS Manufacturing (Thailand) Ltd.,(1) a Thailand corporation
CTS Electronics Hong Kong Ltd.,(1) a Republic of Hong Kong corporation
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Micro Peripherals, Inc., a California corporation
Micro Peripherals Singapore (Private) Limited, a Republic of
Singapore corporation
Corporations whose names are indented are subsidiaries of the
preceding non-indented corporations. Except as indicated, each of
the above subsidiaries is 100% owned by its parent company.
Operations of all subsidiaries and divisions are consolidated in
the financial statements filed.
(1) Less than 1% of the outstanding shares of stock is owned of record
by nominee shareholders pursuant to national laws regarding resident
or nominee ownership.
<PAGE>
STOCKHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
Earnings
Before Net
Net Gross Operating Changes in Accounting Earnings
Sales Earnings Earnings Accounting Changes (Loss)
1994
1st quarter $ 64,357 $14,127 $ 3,560 $ 2,490 $ 2,490
2nd quarter 70,618 15,633 5,525 3,889 3,889
3rd quarter 65,950 13,667 4,368 3,031 3,031
4th quarter 67,782 13,432 7,231(a) 4,557(a) 4,557(a)
$268,707 $56,859 $20,684 $13,967 $13,967
1993
1st quarter $ 60,439 $12,620 $ 2,579 $ 1,767 $(4,614) $(2,847)
2nd quarter 62,613 12,711 3,043 1,810 1,810
3rd quarter 58,107 10,285 2,189 1,063 1,063
4th quarter 55,820 11,728 3,210 1,930 1,930
$236,979 $47,344 $11,021 $ 6,570 $(4,614) $ 1,956
Per Share Data
Earnings
Before Net
Dividends Changes in Accounting Earnings
High(b) Low(b) Declared Accounting Changes (Loss)
1994
1st quarter $24.00 $19.50 $.10 $ .48 $.48
2nd quarter 26.13 21.88 .10 .75 .75
3rd quarter 29.13 24.63 .10 .59 .59
4th quarter 31.00 27.13 .15 .88 .88
$.45 $2.70 $2.70
1993
1st quarter $19.50 $17.25 $.10 $ .34 $(.89) $(.55)
2nd quarter 21.00 17.00 .10 .35 .35
3rd quarter 22.38 20.25 .10 .21 .21
4th quarter 22.00 19.13 .10 .37 .37
$.40 $1.27 $(.89) $ .38
(a) Includes reversal of $975 of litigation and customer claims reserves which
were favorably settled.
(b) The market price range of CTS Corporation common stock on the New York Stock
Exchange for each of the quarters during the last two years.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except per share amounts)
Year Ended
December 31 December 31 December 31
1994 1993 1992
Net sales $268,707 $236,979 $227,391
Cost of goods sold 211,848 189,635 186,290
Gross earnings 56,859 47,344 41,101
Selling, general and
administrative expenses 36,175 36,323 37,855
(Gain) on sale of property
and other related provisions--Note B (852)
Operating earnings 20,684 11,021 4,098
Other (expenses) income:
Interest expense (714) (980) (1,267)
Interest income 657 580 656
Other 860 (361) 334
Total other income (expenses) 803 (761) (277)
Earnings before income taxes
and cumulative effect
of changes in accounting
principles 21,487 10,260 3,821
Income taxes--Note H 7,520 3,690 1,920
Earnings before cumulative effect
of changes in accounting
principles 13,967 6,570 1,901
Cumulative effect of accounting
change - postretirement benefits
--Notes A and G (5,096)
Cumulative effect of accounting change -
income taxes--Notes A and H 482
Net earnings $ 13,967 $ 1,956 $ 1,901
Net earnings per share:
Before accounting changes $2.70 $1.27 $.37
Cumulative effect on prior
years of accounting changes (.89)
Net earnings per share $2.70 $.38 $.37
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
(In thousands of dollars)
<TABLE>
<CAPTION>
Cumulative Deferred
Common Retained Translation Compen- Treasury
Stock Earnings Adjustment sation Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 $34,472 $102,482 $1,294 $(172) $(15,591) $122,485
Net earnings 1,901 1,901
Cash dividends of $.6625 per share (3,410) (3,410)
Issued 23,400 shares on exercise of
stock options (204) 669 465
Nonemployee Directors' stock retirement plan 7 7
Currency translation adjustment (2,157) (2,157)
Issued 3,600 shares net on restricted stock
and cash bonus plan (23) (80) 103
Deferred compensation recognized 81 81
Balances at December 31, 1992 34,245 100,973 (863) (164) (14,819) 119,372
Net earnings 1,956 1,956
Cash dividends of $.40 per share (2,061) (2,061)
Nonemployee Directors' stock retirement plan 8 8
Currency translation adjustment (186) (186)
Issued 1,000 shares on restricted stock and
cash bonus plan (9) (19) 28
Stock compensation (14) 45 31
Deferred compensation recognized 83 83
Balances at December 31, 1993 34,222 100,868 (1,049) (92) (14,746) 119,203
Net earnings 13,967 13,967
Cash dividends of $.45 per share (2,329) (2,329)
Nonemployee Directors' stock retirement plan (4) 3 12 11
Currency translation adjustment 695 695
Issued 15,500 shares on restricted stock and
cash bonus plan 51 (358) 307
Issued 8,650 shares on exercise of stock options (72) 248 176
Stock compensation 1 12 13
Deferred compensation recognized 119 119
Balances at December 31, 1994 $34,198 $112,506 $ (354) $(328) $(14,167) $131,855
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS December 31 December 31
(In thousands of dollars) 1994 1993
ASSETS
Current Assets
Cash and equivalents $ 24,922 $ 23,534
Accounts receivable, less allowances
(1994--$869; 1993--$710) 35,029 30,627
Inventories
Finished goods 5,725 5,064
Work-in-process 16,531 15,344
Raw materials 19,200 15,651
Total inventories 41,456 36,059
Other current assets 3,032 1,929
Deferred income taxes--Note H 6,228 5,117
Total current assets 110,667 97,266
Property, Plant and Equipment
Buildings and land 41,945 40,669
Machinery and equipment 148,481 141,739
Total property, plant and equipment 190,426 182,408
Less accumulated depreciation 139,649 134,566
Net property, plant and equipment 50,777 47,842
Other Assets
Goodwill, less accumulated amortization
(1994--$7,010; 1993--$6,330) 5,221 5,801
Prepaid pension expense--Note G 39,408 32,845
Other 753 1,310
Total other assets 45,382 39,956
Total Assets $206,826 $185,064
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable--Note C $ 7,436 $ 12,822
Current maturities of long-term obligations 304 341
Accounts payable 12,768 11,611
Accrued salaries and wages 6,483 5,802
Accrued taxes other than income 1,577 1,823
Income taxes payable 2,288 1,406
Other accrued liabilities--Note K 13,936 16,083
Total current liabilities 44,792 49,888
Long-term Obligations--Note D 15,595 4,995
Deferred Income Taxes--Note H 9,222 5,329
Postretirement Benefits--Note G 5,362 5,649
Stockholders' Equity
Common stock-authorized 8,000,000 shares
without par value; issued 5,807,031 shares 33,870 34,130
Retained earnings 112,506 100,868
Cumulative translation adjustment (354) (1,049)
146,022 133,949
Less cost of common stock held in treasury
(1994--628,427 shares; 1993--653,607 shares) 14,167 14,746
Total stockholders' equity 131,855 119,203
Total Liabilities and Stockholders' Equity $206,826 $185,064
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
December 31 December 31 December 31
1994 1993 1992
Cash flows from operating activities:
Net earnings $13,967 $ 1,956 $ 1,901
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Cumulative effect of change
in accounting for:
Postretirement benefits 5,096
Income taxes (482)
Depreciation and amortization 11,236 12,143 11,665
Deferred income taxes 2,519 767 303
Gain on sale of property,
plant and equipment (20) (17) (944)
Translation (gain) loss (523) 384 92
Deferred compensation 122 91 88
Provision for disposition of operations 621
Change in assets and liabilities
(net of effects of
purchase of ODL)--Note B:
Accounts receivable (4,402) (2,747) 2,473
Inventories (3,297) 1,163 3,442
Prepaid pension asset (6,563) (5,986) (4,907)
Accounts payable and accrued
liabilities (38) 1,627 2,258
Income taxes payable 882 1,629 (2,040)
Other (1,328) 1,941 (2,114)
Total adjustments (1,412) 15,609 10,937
Net cash provided by
operating activities 12,555 17,565 12,838
Cash flows from investing activities:
Proceeds from sale of property,
plant and equipment 411 998 1,401
Capital expenditures (excluding ODL) (10,000) (11,696) (8,831)
Payment for purchase of ODL (5,501)
Other 129
Net cash used in investing
activities (15,090) (10,698) (7,301)
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations 15,000 2,938
Payments of long-term obligations (4,479) (6,179) (2,348)
(Decrease) increase in notes payable (6,050) 6,898 (2,319)
Stock options exercised 176 465
Dividends paid (2,067) (2,061) (3,857)
Net cash provided by (used in)
financing activities 2,580 (1,342) (5,121)
Effect of exchange rate changes on cash 1,343 (446) (92)
Net increase in cash 1,388 5,079 324
Cash at beginning of year 23,534 18,455 18,131
Cash at end of year $24,922 $23,534 $18,455
Supplemental cash flow information
Cash paid during the year for:
Interest $ 658 $ 1,076 $ 1,206
Income taxes - net 4,009 1,294 2,819
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly-
owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Inventories: Inventories are stated at the lower of cost or
market. Cost is principally determined using the first-in, first-
out method.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. Depreciation is computed over the estimated
useful lives of the assets principally on the straight-line
method.
Goodwill: The excess of cost over the fair value of net assets of
businesses acquired is amortized on the straight-line method over
the periods expected to be benefited.
Retirement Plans: The Company has various defined benefit and
defined contribution retirement plans covering a majority of its
employees. The Company's policy is to annually fund the defined
benefit pension plans at or above the minimums required under the
Employee Retirement Income Security Act of 1974 (ERISA).
Research and Development: Research and development costs,
included in cost of sales, consist of expenditures incurred during
the course of planned search and investigation aimed at discovery
of new knowledge which will be useful in developing new products
or processes, or significantly enhancing existing products or
production processes, and the implementation of such through
design, testing of product alternatives or construction of
prototypes. The Company expenses all research and development
costs as they are incurred.
Income Taxes: The Company provides deferred income taxes for
transactions reported in different periods for financial reporting
and income tax return purposes pursuant to the requirements of
Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes." The underlying differences consist
primarily of depreciation differences, pension income,
postemployment benefits, certain nondeductible accruals and
inventory reserves.
Reclassifications: Certain reclassifications have been made for
all years presented in the financial statements to conform to the
classifications adopted in 1994.
Translation of Foreign Currencies: The financial statements of
all of the Company's non-U.S. subsidiaries, except the United
Kingdom subsidiary, are remeasured into U.S. dollars using the
U.S. dollar as the functional currency with all translation
adjustments included in the determination of net income. The
assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars principally at the current
exchange rate with resulting translation adjustments made directly
to the "Cumulative translation adjustment" component of
stockholders' equity. Income statement accounts are translated at
the average rates during the period.
Financial Instruments: The Company's financial instruments
consist primarily of cash, cash equivalents, trade receivables and
payables, and obligations under notes payable and long-term debt.
In accordance with the requirements of FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments," the
Company is providing the following fair value estimates and
information regarding valuation methodologies. The carrying value
for cash and cash equivalents, and trade receivables and payables
approximates fair value based on the short-term maturities of
these instruments. The carrying value for all long-term debt
outstanding at December 31, 1994, and 1993 approximates fair value
where fair value is based on market prices for the same or similar
debt and maturities.
At December 31, 1994, the Company had forward foreign exchange
currency contracts for the sale of various currencies aggregating
$5 million. The cost of these contracts approximates fair value.
The Company occasionally uses forward exchange currency contracts
to minimize the impact of foreign currency fluctuations on the
Company's costs and expenses. These contracts have minimal credit
risk because the counterparties are well-established financial
institutions.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less from the
purchase date to be cash equivalents.
Concentration of Credit Risk: The Company sells its products to
customers primarily in the automotive, data processing,
communications equipment and defense and aerospace industries,
primarily in North America, Europe and the Pacific Rim. The
Company performs ongoing credit evaluations of its customers to
minimize credit risk. The Company generally does not require
collateral.
Accounting Changes: Effective January 1, 1993, the Company
adopted the provisions of FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and
FASB Statement No. 109, "Accounting for Income Taxes." For
postretirement benefits, the Company changed its practice from
expensing these costs as incurred to accruing these costs during
the employees' active working careers. For income taxes, the
Company changed its practice from following FASB Statement No. 96,
of the same title, which required a similar approach in computing
deferred income taxes. The primary change was to recognize
deferred tax benefits that were not recognized under FASB
Statement No. 96.
Earnings Per Share: Earnings per common share are based on the
weighted average number of shares outstanding.
NOTE B - Purchase of Assets, Sale of Property and Other Related
Provisions
During 1994, the Company acquired, in a cash transaction,
inventory and fixed assets of the Light Emitting Diode (LED)--
based Fiber Optic Data Link (ODL) product line of AT&T
Microelectronics for $5.5 million. The cost of the acquisition,
which also included order backlog on sales contracts, rights to
intellectual property, design and manufacturing technology and
trademark of the AT&T Lightwave LED-based ODL business, was
allocated among the assets purchased based on estimated fair
value, with fixed assets being reduced for the excess of fair
value over cost.
During 1992, the Company sold the assets of its tool, die and
machinery business recognizing a pretax gain of $587,000. Also,
during 1992, the Company sold its Paso Robles, California,
manufacturing plant and most of the associated real estate and
recognized a net pretax gain of $886,000. Additionally, during
1992, the Company incurred $621,000 of expense to close its
remaining Hong Kong manufacturing operations.
NOTE C - Short-term Borrowings
Short-term borrowings consist of demand notes payable to various
banks with an average interest rate of 6.6% at December 31, 1994,
4.4% at December 31, 1993, and 4.8% at December 31, 1992. The
notes were issued in connection with unsecured lines of credit
arrangements, the unused portions of which totaled $7,544,000 at
December 31, 1994. These arrangements are generally subject to
annual renewal and renegotiation, and may be withdrawn at the
banks' option.
Average daily short-term borrowings, including borrowings
denominated in non-U.S. currencies, during 1994, 1993 and 1992
were $11,776,000, $12,051,000 and $6,269,000, respectively. The
weighted average interest rates, computed by relating interest
expense to average daily short-term borrowings, were 5.5% in 1994,
4.3% in 1993 and 5.4% in 1992.
The maximum amount of short-term borrowings at the end of any
month during 1994, 1993 and 1992 was $12,977,000, $13,842,000 and
$8,334,000, respectively. The short-term borrowings outstanding
at December 31, 1992, were $5,827,000.
NOTE D - Long-term Obligations
Long-term obligations were comprised of the following:
(In thousands)
1994 1993
Long-term debt:
Five-year term loan at 8.38%, due in
1996 through 1999. $15,000
Revolving credit agreements, average
interest rates of 6.2% in 1994 and
6.1% in 1993, due in 1996 and 1997 $3,959
Other 899 1,211
15,899 5,170
Less current maturities 304 341
Total long-term debt 15,595 4,829
Other 166
Total long-term obligations $15,595 $4,995
The Company has a five-year $15,000,000 term loan with three
banks, of which $2,000,000 expires in 1996, $2,000,000 expires in
1997, $2,000,000 expires in 1998 and $9,000,000 expires in 1999.
The Company has unsecured revolving credit agreements totaling
$47,000,000 with four banks, of which $2,000,000 expires in 1996
and $45,000,000 expires in 1997. Interest rates on these
borrowings fluctuate based upon market rates. The Company pays an
average commitment fee of three-tenths percent per annum on the
revolving credit agreements. The credit agreements and term loan
require, among other things, that the Company maintain certain
minimum working capital, total liabilities to tangible net worth,
tangible net worth requirements and interest coverage.
Annual maturities of long-term debt during the four years
subsequent to 1995 are as follows: 1996--$2,203,000; 1997--
$2,196,000; 1998--$2,196,000; 1999--$9,000,000.
NOTE E - Operating Leases
The Company leases certain facilities and machinery and equipment
under noncancelable operating leases which expire at various dates
through 1999 and thereafter. Certain of these leases contain
renewal options. All leases require the Company to pay property
taxes, insurance and normal maintenance.
Total minimum rental payments under all operating leases are not
significant.
NOTE F - Stock Plans
Under the Company's stock option plans, options may be granted to
officers and key employees in the form of incentive stock options
or nonqualified stock options.
Options are granted at the fair market value on the grant date and
are exercisable generally in cumulative annual installments over a
maximum ten-year period, commencing at least one year from the
date of grant. Upon the exercise of stock options, payment may be
made using cash, shares of the Company's common stock or any
combination thereof.
Information regarding the Company's stock option plans is as
follows:
Number of Price
Shares Per Share
Outstanding at January 1, 1993 59,750 $19.75 to $25.50
Granted 11,000 19.125
Expired or canceled (26,100) 19.75 to 25.50
Outstanding at December 31, 1993 44,650 19.125 to 20.625
Granted 57,000 24.75
Exercised (8,650) 19.125 to 20.625
Expired or canceled (7,000) 19.125 to 24.75
Outstanding at December 31, 1994 86,000 19.125 to 24.75
Exercisable at December 31, 1994 22,150 19.125 to 20.625
Available for future grants at
December 31, 1994 199,739
The Company has a discretionary Restricted Stock and Cash Bonus
Plan (Plan) which reserves 400,000 shares of the Company's common
stock for sale, at market price or below, or award to key
employees. Shares awarded or sold are subject to restrictions
against transfer and repurchase rights of the Company. In
general, restrictions lapse at the rate of 20% per year beginning
one year from the award or sale. In addition, the Plan provides
for a cash bonus to the participant equal to the fair market value
of the shares on the dates restrictions lapse, in the case of an
award, or the excess of the fair market value over the original
purchase price if the shares were purchased. The total bonus paid
to any participant during the restricted period is limited to
twice the fair market value of the shares on the date of award or
sale.
Under the Plan, during 1994, 15,500 shares were awarded leaving
363,900 shares available for award or sale at December 31, 1994.
In 1993, 1,000 shares were awarded. In 1992, 6,000 shares were
awarded and 2,400 shares were forfeited due to terminations. In
addition to the shares issued and the amortization of deferred
compensation included in the Consolidated Statements of
Stockholders' Equity, the Company accrued $212,000, $68,000 and
$82,000 for additional compensation payable under the provisions
of the Plan in 1994, 1993 and 1992, respectively.
The Company has a Stock Retirement Plan for nonemployee Directors.
This retirement plan provides for a portion of the total
compensation payable to nonemployee Directors to be deferred and
paid in Company stock. Under this plan, the amount of the actual
dollar compensation was $11,100, $7,900 and $7,000 in 1994, 1993
and 1992, respectively.
NOTE G - Employee Retirement Plans
Defined benefit plans
The Company has a number of noncontributory defined benefit
pension plans (Plans) covering approximately 40% of its employees.
Plans covering salaried employees provide pension benefits that
are based on the employees' compensation prior to retirement.
Plans covering hourly employees generally provide benefits of
stated amounts for each year of service.
Net pension income for the Plans in 1994, 1993 and 1992 includes
the following components:
(In thousands)
1994 1993 1992
Service cost--benefits earned
during the year $ 2,374 $ 2,143 $ 2,375
Interest cost on projected
benefit obligation 4,769 4,632 4,670
Actual loss (return) on plan
assets 2,565 (13,622) (13,667)
Net amortization and deferral (16,271) 861 1,715
Net pension income $(6,563) $(5,986) $(4,907)
The following table details the funded status of the Plans at
December 31, 1994, and December 31, 1993:
(In thousands)
1994 1993
Actuarial present value of benefit obligations:
Vested benefits $ 58,224 $ 59,722
Nonvested benefits 2,461 2,610
Accumulated benefit obligation $ 60,685 $ 62,332
Plan assets at fair value $115,319 $121,966
Projected benefit obligation 66,775 67,282
Plan assets in excess of the projected
benefit obligation 48,544 54,684
Unrecognized prior year service cost 212 351
Unrecognized net loss (gain) 3,672 (8,883)
Unrecognized net asset (13,020) (13,307)
Prepaid pension expense $ 39,408 $ 32,845
Assumptions used in determining net pension income and the funded
status of U.S. defined benefit pension plans were as follows:
1994 1993 1992
Discount rates (funded status) 8.25% 7.25% 7.25%
Rates of increase in compensation levels
(salaried plan only) 5%-7% 5%-7% 5%-7%
Expected long-term rate of return on assets 9% 10% 10%
Net pension income is determined using assumptions as of the
beginning of each year. Funded status is determined using
assumptions as of the end of each year. Effective with the
December 31, 1994, measurement date, the discount rate, expected
long-term rate of return on assets and mortality assumptions were
revised to reflect current market and demographic conditions. As
a result of these changes, the December 31, 1994, projected
benefit obligation decreased by $2.4 million. These changes had
no effect on 1994 pension income, but will reduce 1995 pension
income by $1.2 million.
The majority of U.S. defined benefit pension plan assets are
invested in common stock, including $5,526,000 in CTS common
stock, U.S. government bonds and cash and equivalents. The
balance is invested in corporate bonds, a private equity fund,
non-U.S. bonds and convertible issues.
Because the domestic plans are fully funded, the Company made no
contributions during 1994, 1993 or 1992. Benefits paid by all
Plans during 1994, 1993 and 1992 were $4,175,000, $4,289,000 and
$3,900,000, respectively.
Pension coverage for employees of certain non-U.S. subsidiaries
is provided through separate plans. Contributions of $172,000,
$174,000 and $223,000 were made to the non-U.S. Plans in 1994,
1993 and 1992, respectively.
Defined contribution plans
The Company sponsors a 401(k) Plan and several other defined
contribution plans which cover some of its non-U.S. employees and
its domestic hourly employees not covered by a defined benefit
pension plan. Contributions and costs are generally determined
as a percentage of the covered employee's annual salary. Amounts
expensed for the 401(k) Plan and the other plans totaled
$2,506,000 in 1994, $2,532,000 in 1993 and $1,998,000 in 1992.
Postretirement health and life insurance plans
In addition to providing pension benefits, the Company provides
certain health care and life insurance programs for retired
employees. Substantially all of the Company's domestic employees
hired before December 31, 1993, become eligible for these
benefits if they reach normal retirement age while working for
the Company. Effective January 1, 1993, the Company implemented,
on the immediate recognition basis, FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," which resulted in a noncash charge of $5,096,000, net
of an income tax benefit of $3,123,000, or $.99 per share.
Summary information on the Company's plans as of December 31,
1994, and December 31, 1993, is as follows:
(In thousands)
1994 1993
Accumulated postretirement benefit obligation:
Active employees $(1,089) $(1,479)
Retirees and dependents (3,589) (5,560)
(4,678) (7,039)
Unrecognized net gain (1,910) (187)
Postretirement benefit obligation $(6,588) $(7,226)
The accumulated postretirement benefit obligation was determined
using relevant actuarial assumptions and the terms of the
Company's medical, dental and life insurance plans, including the
effects of capped Company contribution rates and discontinuance
of Company payments toward retiree health and dental insurance
effective January 1, 1996. The effect of a 1.0% annual increase
in the assumed medical inflation rate of zero would be
insignificant. Effective with the December 31, 1994, measurement
date, the discount rate and mortality assumptions were revised to
reflect current market and demographic conditions. As a
result of these changes and favorable medical claims experience,
the accumulated postretirement life obligation decreased by
approximately $800,000 and the accumulated postretirement medical
obligation decreased by approximately $700,000.
The Company funds medical and dental costs as incurred and funds
life insurance benefits through term life insurance policies.
The Company plans to continue funding these benefits on a pay-as-
you-go basis. The components of net periodic postretirement
benefit expense for 1994 and 1993 are as follows:
(In thousands)
1994 1993
Service cost--beneifts earned during period $ 43 $ 43
Interest cost on accumulated benefit obligation 511 637
Net expense $554 $680
NOTE H - Income Taxes
Effective January 1, 1993, the Company adopted the provisions of
FASB Statement No. 109, "Accounting for Income Taxes." FASB
Statement No. 109 replaced FASB Statement No. 96, of the same
title, which the Company previously used to account for income
taxes. The effect of adopting FASB Statement No. 109 is to
recognize deferred tax benefits that were not recognized under
FASB Statement No. 96. The cumulative effect of the change in
the method of accounting for income taxes as of the beginning of
1993 increased earnings by $482,000 or $.10 per share. Prior
years' financial statements have not been restated to reflect the
provisions of FASB Statement No. 109. The information disclosed
for 1992 is computed under the requirements of FASB Statement No.
96.
The components of earnings before income taxes and cumulative
effect of changes in accounting principles are comprised of the
following:
(In thousands)
1994 1993 1992
Domestic $15,391 $ 8,965 $5,151
Non-U.S. 6,096 1,295 (1,330)
Total $21,487 $10,260 $3,821
The provision for income taxes charged to earnings before
cumulative effect of changes in accounting principles is
comprised of the following:
(In thousands)
1994 1993 1992
Current:
Federal $1,998 $ 908 $ 292
State 604 375 207
Non-U.S. 2,367 2,124 1,115
Total current 4,969 3,407 1,614
Deferred:
Federal 1,268 154 648
State 400 429
Non-U.S. 883 (300) (342)
Total deferred 2,551 283 306
Total provision for income taxes $7,520 $3,690 $1,920
Significant components of the Company's deferred tax liabilities
and assets at December 31, 1994, and 1993, are:
(In thousands)
1994 1993
Depreciation $ 913 $ 270
Pensions 13,396 11,176
Other 2,192 1,013
Gross deferred tax liabilities 16,501 12,459
Postemployment benefits 2,240 2,513
Inventory reserves 2,778 1,777
Loss carryforwards 6,575 8,119
Credit carryforwards 5,705 3,764
Nondeductible accruals 3,013 3,064
Other 425 802
Gross deferred tax assets 20,736 20,039
Net deferred tax assets 4,235 7,580
Deferred tax assets valuation allowance (7,229) (8,023)
Total $(2,994) $ (443)
During 1994, the valuation allowance was increased as a result of
an increase in unutilized net operating loss carryforwards in
some taxing jurisdictions and decreased by the utilization of net
operating losses in other jurisdictions. The net decrease in the
valuation allowance was $794,000.
A reconciliation of the Company's effective income tax to the
statutory federal income tax follows:
(In thousands)
1994 1993 1992
Taxes at the U.S. statutory rate $ 7,306 $ 3,488 $1,299
State income taxes, net of federal
income tax benefit 663 531 176
Non-U.S. income taxed at rates
different than the U.S. statutory rate 1,639 1,494 1,511
Utilization of net operating loss
carryforwards and benefit of scheduled
tax credits (2,544) (1,842) (1,751)
Alternative Minimum Tax 711
Other 456 19 (26)
Provision for income taxes $ 7,520 $ 3,690 $1,920
Undistributed earnings of certain non-U.S. subsidiaries amounting
to $40,741,000 at December 31, 1994, are intended to be
permanently invested and accordingly, no provision has been made
for non-U.S. withholding taxes on these earnings. In the event
all undistributed earnings were remitted, approximately
$4,602,000 of withholding tax would be imposed.
The Company has U.S. tax basis net operating loss carryforwards
and business tax credits of approximately $4,297,000 and
$2,933,000, respectively, at December 31, 1994. All of the U.S.
net operating losses and business credit carryforwards expire
between the years 2001 and 2006. In addition, the Company has
various non-U.S. tax basis net operating losses and business
credit carryforwards of $18,673,000 and $25,000, respectively. A
portion, $2,496,000, of the non-U.S. net operating loss and
$25,000 of the business credit carryforwards expire in 1997. The
remainder of the net operating loss carryforwards has an
unlimited carryforward period. In addition, the Company has
alternative minimum tax credit carryforwards of approximately
$2,747,000, which have no expiration date.
NOTE I - Business Segment and Non-U.S. Operations
The Company's operations comprise one business segment, the
manufacturing of electronic components. Electronic components
include production and sale of resistor networks, variable
resistors, frequency control devices, electronic connectors,
hybrid microcircuits, automotive control devices, switches,
loudspeakers and industrial electronics.
Sales to a major automotive manufacturer were $49,400,000 in
1994, $40,100,000 in 1993 and $30,700,000 in 1992. Although
sales to a major computer manufacturer were only $4,400,000 in
1994, sales to the same customer were significantly higher in
1993 at $24,000,000 and in 1992, were $19,300,000.
The non-U.S. operations or facilities are located in Taiwan,
Singapore, Hong Kong, Thailand, United Kingdom, Canada and
Mexico. Net sales to unaffiliated customers from other non-U.S.
operations in the aggregate equaled 18%, 16% and 14% of the
consolidated total for each of the years 1994, 1993 and 1992,
respectively. Net sales to unaffiliated customers from the
United Kingdom operation equaled 16%, 12% and 10% of the
consolidated total for 1994, 1993 and 1992, respectively.
Net assets of subsidiaries located in non-U.S. countries as of
December 31, 1994, and December 31, 1993, are summarized as
follows:
(In thousands)
1994 1993
Net current assets $23,751 $19,910
Property, plant and equipment--net 23,342 23,899
Goodwill and other long-term assets 2,331 2,304
Long-term obligations (586) (4,699)
Deferred income taxes (1,485) (174)
Total net assets of non-U.S. subsidiaries $47,353 $41,240
Net sales by geographic area include both sales to unaffiliated
customers and transfers between geographic areas. Such transfers
are accounted for primarily on the basis of a uniform
intercompany pricing policy. Operating profit is total revenue
less operating expenses. In computing operating profit, none of
the following items have been added or deducted: general
corporate expenses, interest expense, other income and expenses
and income taxes. Identifiable assets by geographic area are
those assets that are used in the Company's operations in each
such area. The Corporate Office assets are principally property
and equipment and other noncurrent assets.
Summarized financial information concerning the geographic areas
of operation for 1994, 1993 and 1992 is shown in the following
table. The caption "Eliminations" includes intercompany sales
and other transactions which are eliminated or adjusted in
arriving at consolidated data.
Geographic Area (In thousands)
1994 1993 1992
Net Sales
Domestic:
Sales to unaffiliated customers $178,032 $170,566 $172,646
Transfers to non-U.S. area 4,179 4,484 4,469
182,211 175,050 177,115
Other Non-U.S.:
Sales to unaffiliated customers 47,896 37,868 32,743
Transfers to domestic area 7,168 10,397 15,703
55,064 48,265 48,446
United Kingdom:
Sales to unaffiliated customers 42,779 28,545 22,002
Transfers to domestic area 514 149 388
43,293 28,694 22,390
Eliminations (11,861) (15,030) (20,560)
Total net sales $268,707 $236,979 $227,391
Operating Profit
Domestic $ 18,109 $ 12,060 $ 8,237
Other Non-U.S. 3,708 4,476 2,860
United Kingdom 4,569 910 (1,313)
(Gain) on sale of property and
other related provisions (852)
26,386 17,446 10,636
Eliminations 1 (19) (51)
26,387 17,427 10,585
General corporate expenses 5,703 6,406 6,487
Operating profit 20,684 11,021 4,098
Other income (expenses)--net 803 (761) (277)
Earnings before income taxes and
cumulative effect of changes in
accounting principles $ 21,487 $ 10,260 $ 3,821
Assets Apportioned by Area
Domestic $ 86,605 $ 73,256 $ 78,747
Other Non-U.S. 43,272 54,452 48,331
United Kingdom 23,419 18,398 17,847
153,296 146,106 144,925
Eliminations (3,305) (5,047) (2,972)
149,991 141,059 141,953
Corporate assets 56,835 44,005 28,820
Total assets $206,826 $185,064 $170,773
Geographic Area
(In thousands)
1994 1993 1992
Capital Expenditures
Domestic $ 9,738 $ 7,318 $4,062
Other Non-U.S. 2,367 3,300 1,790
United Kingdom 1,296 1,078 2,979
Total $13,401 $11,696 $8,831
NOTE J - Supplemental Statement of Earnings Information
The following costs and expenses were charged to operations:
(In thousands)
1994 1993 1992
Maintenance and repairs $ 4,329 $ 3,778 $ 3,248
Depreciation of property, plant
and equipment 10,556 11,211 10,977
Amortization of intangible assets 680 932 688
Research and development costs 7,050 5,708 6,092
Rent expense 1,391 1,241 1,172
Royalties, taxes (other than payroll taxes and income taxes) and
advertising costs were each less than one percent of the total
sales for each of the three years.
NOTE K - Contingencies
Certain processes in the manufacture of the Company's current and past
products create hazardous waste by-products as currently defined by
federal and state laws and regulations. The Company has been notified
by the U.S. Environmental Protection Agency, state environmental
agencies and, in some cases, generator groups, that it is or may be a
Potentially Responsible Party (PRP) regarding hazardous waste
remediation at several non-CTS sites. The factual circumstances of
each site are different; the Company has determined that its role as a
PRP with respect to these sites, even in the aggregate, will not have
a material adverse effect on the Company's business or financial
condition, based on the following: 1) the Company's status as a de
minimis party; 2) the large number of other PRPs identified; 3) the
identification and participation of many larger PRPs who are
financially viable; 4) defenses concerning the nature and limited
quantities of materials sent by the Company to certain of the sites;
and/or 5) the Company's experience to-date in relation to the
determination of its allocable share. In addition to these non-CTS
sites, the Company has an ongoing practice of providing reserves for
probable remediation activities at certain of its manufacturing
locations and for claims and proceedings against the Company with
respect to other environmental matters. Accrued environmental costs as
of December 31, 1994, totaled $3.8 million, compared with $3.0 million
at December 31, 1993. In the opinion of management, based upon
presently available information, either adequate provision for
probable costs has been made, or the ultimate costs resulting will not
materially affect the consolidated financial position or results of
operations of the Company.
Certain claims are pending against the Company with respect to matters
arising out of the ordinary conduct of its business. In the opinion of
management, based upon presently available information, either
adequate provision for anticipated costs has been made by insurance,
accruals or otherwise, or the ultimate anticipated costs resulting
will not materially affect the Company's consolidated financial
position or results of operations.
NOTE L - Related Party Transactions
Dynamics Corporation of America (DCA) owned 2,222,100 shares (42.9%)
of the Company's outstanding common stock at December 31, 1994. In
1987, CTS shareholders voted not to grant DCA voting rights on
1,020,000 of these shares. In addition to stock ownership, as of
December 31, 1994, two representatives of DCA serve on the Company's
Board of Directors. The normal business transactions between the
Company and DCA are insignificant.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of CTS Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of CTS Corporation and its subsidiaries at December 31, 1994,
and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the Notes to Consolidated Financial Statements,
effective January 1, 1993, the Company changed its method of
accounting for income taxes by adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Also
effective January 1, 1993, the Company changed its method of
accounting for postretirement healthcare and life insurance benefits
by adopting, on an immediate recognition basis, Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Price Waterhouse LLP
South Bend, Indiana
February 2, 1995
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1992 - 1994)
Liquidity and Capital Resources
The table below highlights significant comparisons and ratios related
to liquidity and capital resources of CTS Corporation (CTS or Company)
for each of the last three years.
(In thousands)
December 31 December 31 December 31
1994 1993 1992
Net cash provided by (used in):
Operating activities $ 12,555 $ 17,565 $ 12,838
Investing activities (15,090) (10,698) (7,301)
Financing 2,580 (1,342) (5,121)
Working capital $ 65,875 $ 47,378 $ 50,114
Current ratio 2.47 1.95 2.34
Interest-bearing debt $ 23,318 $ 17,992 $ 16,359
Cash and equivalents 24,922 23,534 18,455
Net tangible worth 126,634 113,402 112,693
Ratio of interest-bearing debt
to net tangible worth .18 .16 .15
During 1994, cash flow of $12.6 million continued positive from
operating activities, primarily as a result of the significant
improvement in operating earnings. However, offsetting the
favorable impact of the higher earnings was the higher working
capital requirements to support the increased sales levels, which
reduced operating cash flow by $5.0 million from 1993.
Investing requirements increased during 1994 by $4.4 million,
primarily due to the $13.4 million of capital expenditures,
including $3.4 million for ODL fixed assets. Additionally,
financing activities increased during 1994 and were generated by
the higher sales levels and the acquisition of the ODL product line
where $2.1 million of additional expenditures were made for
inventory.
During 1993, positive cash flow from operating activities increased
by $4.7 million from 1992, primarily due to the $9.6 million
increase in sales, which resulted in a $4.7 million increase in
earnings before noncash charges for accounting changes. Cash flow
in 1992 from operating activities was also significantly favorable,
primarily due to the appropriate management of assets.
A significant noncash component of operating earnings during the
1992 to 1994 period was pension income of $6.6 million, $6.0
million and $4.9 million in 1994, 1993 and 1992, respectively. As
a result of the Company's overfunded pension position, no cash
contributions are anticipated to be required in the immediate
future to meet the Company's pension benefit obligations.
The major investment activity during the last three years was
capital expenditures, which totaled $13.4 million in 1994, $11.7
million in 1993 and $8.8 million in 1992. The major capital
expenditures in 1994 were for new products and product line
enhancements. Also during 1994, capacity increases were required
in our automotive and European connector businesses. The Company
expects to increase its capital expenditures in 1995 over 1994
levels. These capital expenditures will be generally for new
products and cost reduction programs.
In terms of financing activities, the Company negotiated a five-
year, $15.0 million long-term loan which expires in 1999. This
loan was primarily for the asset purchase and working capital needs
related to the ODL product line acquisition. The net cash used for
financing activities in 1993 primarily reflects loan renegotiations
which reduced certain non-U.S. long-term debt and increased short-
term borrowings, and additional short-term borrowings at certain
non-U.S. locations. The primary financing use of cash in 1992 was
the elective paydown of $1.7 million in debt.
Dividends paid in 1994 and 1993 were $2.1 million, while dividends
paid in 1992 were $3.9 million. In response to the 1992 decrease
in cash provided by operations, the Company reduced its annual
quarterly dividend from $.1875 to $.10 per share effective with its
February 1993 payment. However, in December 1994, the Board of
Directors, principally as a result of the Company's improving
performance, increased the quarterly dividend to $.15 per share,
effective with the February 1995 payment.
At the end of each of the last three years, cash of various non-
U.S. subsidiaries was invested in U.S.-denominated cash
equivalents. Such cash is generally available to the parent
Company. However, it is the Company's intention not to repatriate
non-U.S. earnings. If all non-U.S. earnings were repatriated,
approximately $4.6 million of withholding taxes would accrue.
At the end of 1994, CTS had $47.0 million of borrowing capacity
available under two long-term revolving credit agreements. The
U.S. revolving agreement of $45.0 million, which expires in April
1997, is the Company's primary credit vehicle and, together with
cash from operations, should adequately fund the Company's
anticipated cash needs.
Results of Operations
The table below highlights significant information with regard to
the Company's results of twelve months of operations during the past
three fiscal years.
(In thousands)
December 31 December 31 December 31
1994 1993 1992
Net sales $268,707 $236,979 $227,391
Gross earnings 56,859 47,344 41,101
Gross earnings as a percent
of sales 21.2% 20.0% 18.1%
Selling, general and
administrative expense $ 36,175 $ 36,323 $ 37,855
Selling, general and
administrative expense
as a percent of sales 13.5% 15.3% 16.6%
Gain on sale of property and
other related provisions 852
Operating earnings $ 20,684 $ 11,021 $ 4,098
Operating earnings as a
percent of sales 7.7% 4.7% 1.8%
Earnings before income taxes
and cumulative effect of
changes in accounting
principles $ 21,487 $ 10,260 $ 3,821
Income taxes 7,520 3,690 1,920
Income tax rate 35.0% 36.0% 50.2%
From 1993 to 1994, total sales increased by 13.4%, primarily as a
result of substantial increases in our automotive and European
connector businesses.
From 1992 to 1993, total sales increased by 4.2%, principally due
to increased sales in our automotive product lines, which more than
offset sales declines in our military connector and frequency
controls products.
During the three-year period 1992-1994, the percentage of overall
sales to the automotive market has increased from 25% to 38%, the
defense and aerospace market percentage has decreased from 17% to
11%, and the other market areas have remained fairly constant.
The Company's 15 largest customers represented 62% of net sales in
1994 and 1993, and 58% in 1992. One customer, a major manufacturer
of automobiles, comprised 18% of net sales in 1994, compared with
17% for 1993 and 14% for 1992. Although at a much lower level in
1994, a major manufacturer of data processing equipment comprised
10% and 8% of total net sales in 1993 and 1992, respectively.
Because most of CTS' revenues are derived from the sale of custom
products, the relative contribution to revenues of changes in unit
volume cannot be meaningfully determined. The Company's products
are usually priced with reference to expected or required profit
margins, customer expectations and market competition. Pricing for
most of the Company's electronic component products frequently
decreases over time and also fluctuates in accordance with total
industry utilization of manufacturing capacity.
During 1994, improvement was realized in gross earnings,
principally due to higher sales volume, production efficiencies and
higher absorption of manufacturing expenses. Gross earnings were
relatively similar in 1993 and 1992, giving consideration to the
respective volume levels.
During 1994, selling, general and administrative expenses, slightly
lower in dollars, also decreased as a percent of sales, principally
owing to the fixed nature of the majority of these expenses and the
continuing cost reduction programs. Also during 1994, the Company
successfully resolved approximately $1 million of outstanding legal
and customer claims, the provision for most of which had been
established in 1993. Selling, general and administrative expenses,
in dollars and as a percent of sales, decreased during 1993,
primarily as a result of the cost containment and expense reduction
programs in place during the year. A portion of the higher 1992
expenses in this area was due to problems caused by defective parts
from a supplier. Also, during 1992, the Company continued to incur
start-up costs in conjunction with its European expansion efforts.
During 1992, the Company continued to dispose of nonproductive
assets, including its closed Paso Robles, California, facility and
assets of its tooling business. These major asset sales generated
cash of $2.7 million and a net pretax gain of $1.5 million.
In 1994, the principal reason for the improved operating earnings
was the higher automotive and connector product sales, and improved
performance in the resistor networks and electrocomponents
businesses, which more than offset losses in our frequency controls
and microelectronics product lines. The primary reason for the
operating earnings increase in 1993 from 1992 was the increased
automotive product sales. During 1992, the Company suffered losses
as a result of a supplier-related defective component, which
resulted in direct expenses of approximately $2.0 million and
negatively affected our 1992 and 1993 sales. A settlement was
negotiated with this vendor in 1993 and the Company recognized a
$2.25 million recovery.
The slightly lower 1994 effective tax rate is a result of improved
earnings, generating an increase in net operating loss carryforward
utilization. This same situation contributed to the substantially
lower effective tax rate for 1993, as compared to 1992.
Additionally, several non-U.S. locations, where no tax benefit was
available, incurred losses in 1992 which resulted in the higher
1992 effective tax rate.
The effects of the 1993 accounting pronouncements FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and FASB Statement No. 109, "Accounting for
Income Taxes," have been discussed in financial statement footnotes,
Note G and Note H, respectively.
In terms of environmental issues, the Company has been notified by
the U.S. Environmental Protection Agency, as well as state agencies
and generator groups, that it is or may be a Potentially
Responsible Party regarding hazardous waste remediation at non-CTS
sites. Additionally, the Company provides reserves for probable
remediation activities at certain of its manufacturing locations.
These issues are discussed in Note K - Contingencies.
<PAGE>
<TABLE>
Five-Year Summary
(In thousands of dollars except per share data)
<CAPTION>
% of % of % of % of % of
1994 Sales 1993 Sales 1992 Sales 1991 Sales 1990 Sales
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 268707 100 236979 100 227391 100 229536 100 251044 100
Cost of goods sold 211848 78.8 189635 80 186290 81.9 189118 82.4 202115 80.5
Gross earnings 56859 21.2 47344 20 41101 18.1 40418 17.6 48929 19.5
Selling, general and
administrative
expenses 36175 13.5 36323 15.3 37855 16.6 35980 15.7 38051 15.2
(Gain) on sale of
property and other
related provisions -852 -.3 -1857 -.8 796 0.3
Operating earnings 20684 7.7 11021 4.7 4098 1.8 6295 2.7 10082 4
Other income
(expenses)--net 803 0.3 -761 -.4 -277 -.1 -51 0 -549 -.2
Earnings before
income taxes
and cumulative
effect of changes
in accounting
principles 21487 8.0 10260 4.3 3821 1.7 6244 2.7 9533 3.8
Income taxes 7520 2.8 3690 1.6 1920 0.9 2030 0.9 2193 0.9
Net earnings--
before accounting
changes 13967 5.2 6570 2.7 1901 0.8 4214 1.8 7340 2.9
Cumulative effect
on prior years of
accounting
changes (a) -4614 -1.9
Net earnings 13967 5.2 1956 0.8 1901 0.8 4214 1.8 7340 2.9
Retained earnings--
beginning of year 100868 100973 102482 102110 98629
Dividends declared -2329 -2061 -3410 -3842 -3859
Retained earnings--
end of year 112506 100868 100973 102482 102110
Average shares
outstanding 5170406 5152556 5141936 5122433 5168688
Net earnings per share:
Before accounting
changes 2.7 1.27 0.37 0.82 1.42
Cumulative effect
on prior years of
accounting
changes (a) -0.89
Net earnings 2.7 0.38 0.37 0.82 1.42
Cash dividends
per share 0.45 0.4 0.6625 0.75 0.75
Capital expenditures 13401 11696 8831 15967 11821
Depreciation and
amortization 11236 12143 11665 13102 13052
FINANCIAL POSITION
AT YEAR-END
Current assets 110667 97266 87376 91493 91152
Current liabilities 44792 49888 37262 39569 39102
Current ratio 2.5 to 1 1.9 to 1 2.3 to 1 2.3 to 1 2.3 to 1
Working capital 65875 47378 50114 51924 52050
Inventories 41456 36059 37222 40855 45389
Property, plant and
equipment--net 50777 47842 48529 53828 53207
Total assets 206826 185064 170773 176361 172525
Short-term notes
payable 7436 12822 5827 8160 7750
Long-term obligations 15595 4995 10826 11297 8858
Stockholders' equity 131855 119203 119372 122485 122298
Common shares
outstanding 5178604 5153424 5150824 5123824 5122124
Equity (book value)
per share 25.46 23.13 23.18 23.91 23.88
OTHER DATA
Stock price range
(dollars per
share to the
nearest 1/8) $31.00-$19.50 $22.38-$17.00 $24.50-$17.13 $24.00-$16.38 $23.63-$16.00
Average number
of employees 4056 3975 4335 4847 5540
Number of
stockholders
at year-end 1136 1198 1278 1343 1439
<FN>
(a) The Company adopted FASB 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and FASB 109, "Accounting for Income Taxes," as of January 1, 1993.
</FN>
</TABLE>
