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CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
1999
FORM 10-K
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999
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
Web site address: http://www.ctscorp.com
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 24,926,321 shares of Common Stock, without par value, outstanding
on March 22, 2000. The aggregate market value of the voting stock held by
non-affiliates of CTS Corporation was approximately $1,346.0 million on March
22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 2000 Proxy Statement to be filed for the
annual meeting of shareholders to be held on April 28, 2000,
incorporated by reference in Part 3.
(2) Certain portions of the CTS Corporation Form 10-K for the
fiscal year ended December 31, 1995, incorporated by
reference in Part 4.
(3) Portions of the CTS Corporation Form 8-K filed with the
Commission September 2, 1998, incorporated by reference in
Part 4.
(4) Portions of the CTS Corporation Form 14D-1 filed with the
Commission May 16, 1997, incorporated by reference in Part
4.
(5) Portions of the CTS Corporation Form 10-Q for the quarter
ended June 29, 1997 filed with the Commission on August 12,
1997, incorporated by reference in Part 4.
SEE THE EXHIBIT INDEX -- PAGES 18 - 19
PART 1
Item 1
Business News and Information
CTS BECOMES A WORLD LEADER IN WIRELESS COMPONENTS
The acquisition of the Component Products Division of Motorola, Inc. ("CTS
Wireless") in 1999 has positioned CTS Corporation as the largest manufacturer
of electronic components for wireless applications in North America and a
global leader for supplying components to the fast-growing mobile wireless
industry. CTS was established in 1896 as a provider of high-quality telephone
products. CTS was incorporated as an Indiana Corporation in February 1929, and
the principal executive offices are located in Elkhart, Indiana. CTS'
expertise in the design and manufacture of quality electronic components and
assemblies continues to provide new opportunities for growth.
CTS Corporation designs, manufactures, and sells a broad line of electronic
components and electronic assemblies, primarily serving the electronic needs
of original equipment manufacturers (OEMs). CTS' product lines serve major
markets around the world, which principally include communications equipment,
automotive and computer equipment - with a wide range of technologies and
capabilities. Manufacturing operations, sales representatives and distributors
are located throughout the United States and in many countries worldwide
providing CTS the ability to work closely with customers.
CTS' growth in 1999 was exceptional. New opportunities in the communications
market and steady growth in the automotive and computer equipment markets,
combined with CTS' strategically focused management, has positioned the
Company to be well aligned for growth into the 21st Century.
The major elements contributing to sustained growth are:
o research and development of new and technologically advanced
products to provide Total Customer Satisfaction,
o advanced manufacturing programs for continuous improvement in
quality and reliability, cost-effectiveness and delivery,
o the building of strategic supply relationships, and
o the ability to move quickly to participate in fast-growing markets.
BUSINESS SEGMENT AND PRODUCTS BY MAJOR MARKET
---------------------------------------------
CTS has two reportable business segments: electronic components and electronic
assemblies. Electronic components are products which perform the basic level
electronic function for a given product family for use in customer assemblies.
Electronic components consist principally of wireless components used in
cellular handsets, automotive sensors used in commercial or consumer vehicles,
frequency control devices such as crystals and clocks, loudspeakers, resistor
networks, switches and variable resistors. Electronic assemblies are
combinations of electronic products or electronic and mechanical products
which, apart from the assembly, may themselves be marketed as separate
stand-alone products. Such assemblies represents a completed, higher-level
functional product to be used in customer end products or assemblies. These
products consist principally of interconnect products such as backpanel and
connector assemblies used in the telecommunications industry, RF (radio
frequency) integrated modules used in cellular handsets, hybrid microcircuits
used in the healthcare market and cursor controls for computers.
Within the two business segments, products are also identified by market. CTS
products are principally sold into four primary original equipment
manufacturing markets including communications equipment, automotive, computer
equipment and other markets. Other markets include OEMs for consumer
electronics and instruments and controls.
Electronic components sales as a percent of consolidated sales were 75% of the
total sales for 1999, 67% for 1998 and 61% for 1997. Electronic assemblies
sales as a percent of consolidated sales were 25% of sales for 1999, 33% for
1998 and 39% for 1997. The following table presents sales as a percent of
total sales by segment into each segment's major markets:
Electronic Components Electronic Assemblies
--------------------- ---------------------
Markets 1999 1998 1997 1999 1998 1997
- ------- ---- ---- ---- ---- ---- ----
Communications Equipment 45% 17% 12% 10% 6% 8%
Automotive 19% 32% 31% 0 0 0
Computer Equipment 5% 9% 8% 13% 23% 25%
Other 6% 9% 10% 2% 4% 6%
Sales by Segment as a % of 75% 67% 61% 25% 33% 39%
Consolidated Sales
Sales to unaffiliated customers, operating earnings and identifiable assets,
by geographic area, are contained in "Note I - Business Segments" appearing in
the financial statements as noted in the Index appearing under Item 14 (a) (1)
and (2).
The following table identifies major products by their business segment and
markets. Many products are sold into several OEM markets.
Product Communications Automotive Computer Other
Description Equipment Market Equipment Markets
Market Market
------ ------ ------ -------
Electronic Components:
Wireless Components X
Automotive Sensors X
Quartz, Crystals and Clock
Oscillators X X X
Resistor Networks X X X X
Potentiometers X X X X
DIP/Rotary Switches X X X
Loudspeakers X X
Heat Sinks X X X
Electronic Assemblies:
Backpanels and Boxbuild
Electronic Assemblies X X X
RF Integrated Modules X
Pointing Sticks/Cursor Controls X
Hybrid Microcircuits X X
MARKETING AND DISTRIBUTION
--------------------------
CTS sales engineers and manufacturers' representatives sell CTS electronic
components and electronic assemblies to OEMs. CTS maintains sales offices in
China, Hong Kong, Japan, Scotland, Singapore, Taiwan, the United Kingdom and
the United States. Additionally, various regions of the world are serviced by
sales engineers working at independent locations. Approximately 69% of 1999
sales were attributable to coverage by CTS sales engineers. CTS sales
engineers generally service the largest customers with application specific
products. The engineers work closely with major customers in designing
products to meet or exceed customer requirements.
CTS utilizes the services of independent sales representatives and
distributors in the United States and other countries for customers not
serviced directly by CTS sales engineers. Sales representatives receive
commissions from CTS. During 1999, approximately 26% of net sales were
attributable to coverage by sales representatives. Additionally, independent
distributors purchase products from CTS for resale to customers. In 1999,
independent distributors and/or dealers accounted for approximately 5% of net
sales.
RAW MATERIALS
-------------
o Raw materials used in many CTS products include steel, copper, brass,
aluminum, certain precious metals, resistive and conductive inks,
piezoceramics, purchased passive electronic components and
semiconductors.
o Ceramic materials are used in ceramic filters and resistor networks.
o Synthetic quartz is used in surface acoustic wave filter products and
frequency control devices, including quartz, crystals and clock
oscillators.
o Molding compounds are used in automotive sensors, DIP/rotary switches
and loudspeakers.
These raw materials are purchased from several vendors, and except for certain
semiconductors, CTS does not believe that it is dependent upon one or a
limited number of vendors. In 1999, all of these materials were available in
adequate quantities to meet CTS' production demands.
CTS does not currently anticipate any raw material shortages which would slow
production. However, the lead times between the placement of orders for
certain raw materials and actual delivery to CTS may vary, and occasionally
might require the Company to order raw materials in quantities and at prices
less than optimal to compensate for the variability of lead times for
delivery.
Precious metal prices may have a significant effect on the cost and selling
price of many CTS products, particularly some ceramic filters, sensors,
switches, backpanels and boxbuild electronic assemblies, resistor networks and
hybrid microcircuits.
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. CTS is not generally required to carry
significant amounts of inventories in anticipation of rapid delivery
requirements because most customer orders are custom built. CTS has
"just-in-time" arrangements with certain major customers in order to meet
their delivery requirements.
CTS carries raw materials, including certain semiconductors, work-in-process
and finished goods inventories which are unique to particular customers, and
in the event of reductions or cancellations of orders, some inventories may
not be useable or returnable 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 or payment privileges to customers, although CTS' distributor
program permits certain returns or adjustments. CTS' working capital
requirements are generally cyclical but not seasonal.
Working capital requirements are generally dependent on the overall business
level. During 1999, working capital increased to $99.8 million, primarily due
to the increase in accounts receivable and inventories. These increases were
partially offset by increased accounts payable. A significant portion of CTS'
working capital requirements were the result of the CTS Wireless acquisition.
Cash increased primarily as a result of the CTS Wireless operating
requirements. Cash, except for approximately $7 million in foreign withholding
taxes, is generally available to the 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 acquired a significant portfolio of new patents
relating to the communications market with the acquisition of CTS Wireless.
CTS licenses the right to manufacture several electronic products to
companies in the United States and non-U.S. countries. In 1999, 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 approximately 71% of net sales in 1999,
66% of net sales in 1998, and 67% of net sales in 1997. During 1999, sales to
Motorola, Inc., accounted for 23% of total net sales, but were minimal in the
prior two years. Also during 1999, sales to Compaq Computer Corporation
amounted to 11% of total net sales as compared to 12% in 1998 and 1997. Sales
to General Motors Corporation comprised 12% of net sales in 1998 as compared
to 13% of net sales in 1997. Sales to Seagate Technology, Inc., comprised 8%
of net sales in 1998, compared to 11% in 1997.
BACKLOG OF ORDERS
-----------------
Backlog of orders may not provide an accurate indication of present or future
business levels for CTS. For many electronic components and electronic
assemblies the period between receipt of orders and expected delivery is
relatively short. Large orders from major customers may constitute backlog
over an extended period of time. Production scheduling and delivery for such
orders could be changed or canceled by the customer on relatively short
notice. At December 31, 1999, CTS' backlog of orders was $192 million
compared to $90 million at December 31, 1998. This increase is largely the
result of the Wireless acquisition (primarily electronic components), as well
as growth experienced in the frequency (electronic components), interconnect
(electronic assemblies) and resistor product lines (primarily electronic
assemblies). The backlog of orders at the end of 1999 will generally be
filled during the 2000 fiscal year.
GOVERNMENT CONTRACTS
--------------------
CTS estimates that under 1% of its net sales are associated with purchases by
the U.S. Government or non-U.S. governments. Discontinued operations did have
significant government contracts in 1998. The sale of discontinued businesses
may not have relieved CTS of all liabilities associated with its government
contracts. Such contract provisions are not expected to have any material
effect on CTS' results.
COMPETITION
-----------
CTS competes with many domestic and non-U.S. manufacturers principally on the
basis of product features, price, technology, quality, reliability, delivery
and service. Most CTS product lines encounter significant competition, and
there is increased global competition resulting from the CTS Wireless
acquisition. The number of significant competitors varies from product line
to product line. No one 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
which are the nature of the electronics industry including shorter product
life cycles and technical obsolescence.
Some customers have reduced or plan to reduce the number of suppliers while
increasing the volume of purchases. Most customers are demanding higher
quality, reliability and delivery standards from CTS as well as competitors.
These trends create opportunities for CTS, but also increase 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 OEMs.
CTS believes that it has advantages over certain competitors:
o The ability to apply a broad range of the latest technologies
and capabilities to develop products for the special requirements
of customers,
o The capability to sell a wide range of products manufactured to
consistent standards of quality and delivery,
o CTS is the largest passive component manufacturer for wireless
applications in North America and a global leader for supplying
components to the fast-growing mobile wireless industry, and
o CTS is one of the largest manufacturers of automotive throttle
position sensors in the world.
NON-U.S. REVENUES AND RISKS
---------------------------
In 1999, approximately 53% of net sales to unaffiliated customers were
attributable to non-U.S. operations, compared to 40% in 1998. The increase is
primarily due to the acquisition of CTS Wireless. At December 31, 1999,
approximately 32% of total CTS assets were non-U.S. A substantial portion of
these assets, other than cash and equivalents, cannot readily be liquidated.
CTS believes that the business risks to its non-U.S. operations, though
substantial, are normal risks for non-U.S. businesses. These risks include
currency controls and changes in currency exchange rates, longer collection
cycles, political and transportation risks, economic turmoil, government
regulations and expropriation. CTS has manufacturing facilities in Canada,
China, Mexico, Scotland, Singapore and Taiwan. The majority of the non-U.S.
operations' sales are to the United States and Europe, which Management
believes lessens any potential risk to the Company.
Information about revenue from sales to unaffiliated customers, operating
earnings and identifiable assets, by geographic area, is contained in "Note I
- Business Segments" appearing in the financial statements as noted in the
index appearing under Item 14(a) (1) and (2).
RESEARCH AND DEVELOPMENT ACTIVITIES
-----------------------------------
In 1999, 1998 and 1997, CTS spent $25.3, $13.4 and $13.1 million,
respectively, for research and development. The Company believes that a
strong commitment to research and development is required for future growth.
Most CTS research and development activities relate to developing new
products and technologies, improving product flow and adding product value to
meet the current and future needs of its customers. CTS employs approximately
500 engineers and technicians that apply engineering techniques such as
computer aided design and computer aided product manufacturing to develop and
produce prototypes. CTS provides its customers with full systems support to
ensure part quality and reliability through all phases of design, launch and
manufacturing to meet or exceed customer requirements. The 1999 efforts were
particularly focused on wireless
communications ongoing R&D activities assumed in the Wireless acquisition.
Many such research and development activities are for the benefit of one or a
limited number of customers or potential customers. The Company expenses all
research and development costs as incurred; however, costs may be fully or
partially funded by the customer.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
--------------------------------------------
In 1999, the Company incurred a $12.9 million one-time write-off for acquired
in-process research and development costs associated with the CTS Wireless
acquisition. This cost related to technologies which were being developed for
next-generation products, and represented products which were in the
development cycle that had not yet reached a level of technological
feasibility, and had no alternative future use at the acquisition date.
ENVIRONMENTAL PROTECTION LAWS
-----------------------------
In complying with federal, state and local environmental protection laws, CTS
continued to make additional modifications to manufacturing processes. Such
modifications have not materially affected the capital expenditures, earnings
or competitive position of CTS.
The manufacturing process for certain current and past products created
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. CTS 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 reaction to the determination of its
allocable share.
In addition to these non-CTS sites, CTS has an ongoing practice of providing
reserves for probable remediation activities at certain of its manufacturing
locations and for claims and proceedings against CTS with respect to other
environmental matters. 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 CTS' consolidated financial
position or results of operations.
OTHER LEGAL ISSUES
------------------
Under the terms of the sale agreement related to a certain discontinued
operation, CTS retains liability for performance and warranty obligations
under certain customer contracts. The potential liability expires in 2000.
Management does not expect that it will incur any significant costs
associated with this contingency.
Certain claims are pending against CTS with respect to matters arising out of
the ordinary conduct of its business and contracts relating to sales of
property. 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 CTS' consolidated financial position or results of
operations.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
-------------------------------------
CTS has addressed the issues associated with potential business disruptions
relating to the Year 2000 computer programming issue.
CTS formed a Company-wide Year 2000 Readiness Project (Project) to identify
and resolve Year 2000 issues. The products of CTS are not "date and time
sensitive." CTS may add date and time sensitive components to CTS products at
the direction of its customers and upon the customer's assumption of
responsibility for the Year 2000 compliance of the components selected. The
Project included the inventory of financial, manufacturing, design and other
internal systems, hardware, equipment and embedded chips in industrial
control instruments, and the assessment, remediation and testing of those
systems. All systems were inventoried, reviewed and assessed in 1998, and the
majority of systems which were not Year 2000 ready were remedied or replaced
and tested in 1998. Systems testing and certification were completed in 1999.
As part of the Project, Year 2000 Readiness Surveys were sent to significant
service providers, vendors, suppliers, customers and governmental entities
that were believed to be critical to business operations. CTS prepared
supplier contingency plans based on survey responses. CTS will continue to be
diligent in identifying and addressing potential issues which may develop in
the coming months. The Company experienced no major disruptions or system
failures, and CTS experienced no customer or supplier materially adverse
effects.
The cost to complete the program was approximately $2 million through
December 31, 1999, for outside consultants, software and hardware
applications. CTS did not track the internal costs incurred for all of the
hours spent on the project.
EMPLOYEES
---------
CTS employed 9,222 persons at December 31, 1999, and approximately 63% of
these persons were employed outside the United States at the end of 1999.
Approximately 360 CTS employees in the United States were covered by
collective bargaining agreements as of December 31, 1999. There are two
collective bargaining agreements at one location, one agreement will expire
in 2003 and the other will expire in 2005.
Item 2
------
Properties
----------
CTS has manufacturing facilities, administrative, research and development,
and sales offices in many locations. The manufacturing properties are listed
and identified with representative products. The other facilities are shown
along with the primary activity. Each property's relative size is shown in
square footage, and each location is identified as to whether it is leased or
owned.
Square Owned/
Manufacturing Facility Footage Leased Representative Products
---------------------- ------- ------ -----------------------
Albuquerque, New Mexico 267,000* Owned Wireless Components
Berne, Indiana 249,000 Owned Resistor Networks
Burbank, California 12,000 Owned Heat Sinks
Carlisle, Pennsylvania 94,000 Leased Crystals and Oscillators
Chung-Li, Taiwan 122,000 Leased Wireless Components
Dongguan, China 23,000 Leased DIP Switches and Potentiometers
Elkhart, Indiana 319,000 Owned Automotive Sensors
Glasgow, Scotland 75,000 Owned Backpanels, Boxbuild
Glasgow, Scotland 20,000 Leased and Automotive Sensors
Hudson, New Hampshire 38,000 Leased Backpanels and Boxbuild
Kaohsiung, Taiwan 133,000 Owned DIP Switches and Potentiometers
Matamoros, Mexico 51,000 Owned Loudspeakers and Sensors
Sandwich, Illinois 94,000 Owned Crystals and Oscillators
Scottsdale, Arizona 59,000 Leased Wireless Components
Singapore 159,000 Owned Crystals and Oscillators
Streetsville, Ontario, Canada 112,000 Owned Automotive Sensors
Tianjin, China 173,000 Leased Wireless Components
West Lafayette, Indiana 106,000 Owned RF Integrated Modules
-------
Total Manufacturing 2,106,000
=========
* CTS Wireless leases approximately 135,000 square feet of its Albuquerque
facility to Motorola, Inc., as part of the Joint Use and Occupancy Lease
Agreement.
(Properties Continued)
Square Owned/
Other Facilities Footage Leased Description
---------------- ------- ------ -----------
Baldwin, Wisconsin 39,000 Owned Storage Facility
Bangkok, Thailand 53,000 Owned Leased through November 2002
Brownsville, Texas 85,000 Owned Warehousing Facility
Elkhart, Indiana 93,000 Owned Administrative Offices & Research
Greenwich, Connecticut 8,000 Leased Sublet through December 2000
Kowloon, Hong Kong 600 Leased Sales Office
New Hartford, Connecticut 212,000 Owned Leased Property
Schaumburg, Illinois 44,000 Leased Administrative Offices and
Research and Development
Southfield, Michigan 1,500 Leased Sales Office
Taipei, Taiwan 1,250 Leased Sales Office
Winsted, Connecticut 55,000 Owned Storage Facility
Yokohama, Japan 1,400 Leased Sales Office
Discontinued Operations
-----------------------
Batavia, Ohio 148,000 Owned Ellis & Watts Operations
CTS regularly assesses the adequacy of its manufacturing facilities for
manufacturing capacity, available labor and location to its markets and major
customers. CTS also reviews the operating costs of its facilities and may
from time to time relocate or move a portion of its manufacturing activities
in order to reduce operating costs and improve asset utilization and cash
flow. The Batavia, Ohio property was sold on January 31, 2000.
Item 3
------
Legal Proceedings
-----------------
Contested claims involving various matters, including environmental claims
brought by governmental agencies, are being litigated by CTS, both in legal
and administrative forums. The Company is subject to normal litigation which
results from the ordinary conduct of its business operations, however,
Management is not aware of any individually significant pending litigation.
Item 4
------
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
During the fourth quarter of 1999, no matter was submitted to a vote of
security holders of the Company.
PART 2
------
Item 5
------
Stock and Dividend Information
------------------------------
The principal market for CTS common stock is the New York Stock Exchange.
Quarterly market high and low trading prices for CTS Common Stock for each
quarter of the past two years and the amount of dividends declared during the
previous two years can be located in "Shareholder Information," appearing
herein. On December 31, 1999, there were approximately 1,498 CTS common
shareholders of record.
CTS intends to continue its policy of considering dividends on a quarterly
basis. The declaration of a dividend and the amount of any such dividend is
subject to earnings, anticipated working capital, capital expenditures, other
investment requirements, the financial condition of CTS and any other factors
considered relevant by the Board of Directors.
Item 6
------
Five-Year Financial Summary
---------------------------
A summary of selected financial data for CTS for each of the previous five
years is contained in the "Five-Year Summary," appearing in the
financial statements included herein as noted in the index appearing under
Item 14 (a)(1) and (2).
Certain divestitures, closures of businesses and certain accounting
reclassifications do 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
1997-1999
---------
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 (1997-1999),"
appearing in the financial statements included herein as noted in the index
appearing under Item 14 (a)(1) and (2).
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 the CTS
Corporation 1999 Annual Report, incorporated herein. Quarterly per share
financial data is provided in "Shareholder Information," under the
subheading, "Per Share Data," appearing in the financial statements
included herein as noted in the index appearing under Item 14 (a)(1) and (2).
Item 9
------
Changes in Auditors or Disagreements
With Accountants on Accounting and Financial Disclosure
-------------------------------------------------------
There were no disagreements or changes.
PART 3
------
Item 10
-------
Directors and Executive Officers
--------------------------------
Information responsive to Items 401(a) and 401(e) of Regulation S-K
pertaining to directors of CTS is contained in the 2000 Proxy Statement,
pages 5-6, under the caption "Election of Directors" to be 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
2000 Proxy Statement, page 10, under the caption "Directors' & Officers' Stock
Ownership", to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
The individuals in the following list were elected as executive officers of
CTS at the annual meeting of the Board of Directors on April 30, 1999. They
are expected to serve as executive officers until the next annual meeting of
the Board of Directors, scheduled on April 28, 2000, at which time the
election of officers will be considered again by the Board of Directors.
List Of Officers
----------------
Name Age Position and Offices
---- --- --------------------
Joseph P. Walker 61 Director, Chairman, President
and Chief Executive Officer
William J. Kaska 58 Executive Vice President
Philip G. Semprevio 49 Executive Vice President
Jeannine M. Davis 51 Executive Vice President,
Administration, Secretary and
Interim Chief Financial Officer
Donald R. Schroeder 51 Vice President Business
Development and
Chief Technology Officer
James L. Cummins 44 Vice President Human Resources
James N. Hufford 60 Vice President Research,
Development and Engineering
George T. Newhart 57 Vice President and Corporate
Controller
Gary N. Hoipkemier 45 Treasurer
Brief History of Officers
-------------------------
Joseph P. Walker has served as Chairman of the Board, President and Chief
Executive Officer of CTS since 1988.
William J. Kaska was elected as Executive Vice President effective June 29,
1999. Mr. Kaska served as Vice President and General Manager of CTS Automotive
Products from 1992 until being named Group Vice President in 1997.
Philip G. Semprevio was elected as Executive Vice President effective June 29,
1999. In December 1998, Mr. Semprevio was elected as Group Vice President.
Prior to his joining CTS, he served as President, Justrite Manufacturing
Company, LLC, a subsidiary of Federal Signal Corporation. Mr. Semprevio worked
for CTS as Vice President and General Manager of the Electrocomponents
business unit from 1990-1994.
Jeannine M. Davis was elected as Executive Vice President Administration,
General Counsel and Secretary effective June 29, 1999. Ms. Davis was named
Interim Chief Financial Officer in November 1999. In December 1998, Ms. Davis
was named Senior Vice President, Secretary and General Counsel. Previously she
served as Vice President, Secretary and General Counsel since 1988.
(Officer History Continued)
James L. Cummins has served as Vice President Human Resources since 1994. From
1991 - 1994, he served as Director of Human Resources for CTS Corporation.
James N. Hufford served as Vice President Research, Development and
Engineering from 1995 - 1999. During the four years prior to this appointment,
Mr. Hufford served as Manager and then Director of Corporate Research,
Development and Engineering for CTS. Mr. Hufford retired effective March 3,
2000.
George T. Newhart has served as Vice President and Corporate Controller since
1998. Prior to this appointment, from 1989 - 1998, Mr. Newhart served as
Corporate Controller.
Donald R. Schroeder was elected as Vice President Business Development and
Chief Technology Officer effective January 11, 2000. From 1995 until this
appointment, Mr. Schroeder served as Vice President Sales and Marketing.
During the six years prior to this appointment, Mr. Schroeder served as
Business Development Manager for innovative and new technology for the West
Lafayette, Indiana business unit.
Gary N. Hoipkemier has served as Treasurer since 1989.
Item 11
-------
Director & Executive Compensation
---------------------------------
Information responsive to Item 402 of Regulation S-K pertaining to management
remuneration is contained in the 2000 Proxy Statement in the captions
"Director Compensation," page 8, and "Executive Compensation," pages 11 - 15,
to be filed with the Securities and Exchange Commission, and is incorporated
herein by reference.
Item 12
-------
Directors' & Officers' Stock Ownership
-------------------------------------
Information responsive to Item 403 of Regulation S-K pertaining to security
ownership of certain beneficial owners and management, is contained in the
2000 Proxy Statement in the caption "Directors' & Officers' Stock Ownership,"
page 10, to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
Item 13
-------
Certain Relationships and Related Transactions
----------------------------------------------
Mr. Profusek is a Partner and Head of the Merger Department of the law firm
of Jones, Day, Reavis & Pogue, a law firm which CTS has retained for specific
legal services and litigation, on a case by case basis, for over five years.
PART 4
------
Item 14
-------
Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
The list of financial statements and schedules required by Item 14 (a) (1)
and (2) is contained on page S-1 herein.
(a) (3) Exhibits
(3)(a) Amended and Restated Articles of Incorporation,
(incorporated by reference to Exhibit 5 to the Company's
current Report on Form 8-K, filed with the Commission on
September 2, 1998).
(3)(b) Bylaws, (Incorporated by reference to Exhibit 4 to the
Company's current Report on Form 8-K, filed with the
Commission on September 2, 1998).
(10)(a) Employment Agreement, dated as of May 9, 1997, between
the Company and Joseph P. Walker (incorporated by
reference to Exhibit (c)(2) to the Schedule 14D-1 filed
with the Commission on May 16, 1997).
(10)(b) Prototype officers and directors' indemnification
agreement (incorporated by reference to Exhibit (10) (g)
to the Company's Annual Report on Form 10-K for 1995
filed with the Commission on March 21, 1996).
(10)(c) CTS Corporation 1986 Stock Option Plan, approved by the
shareholders on May 30, 1986, as amended and restated on
May 9, 1997, (incorporated by reference to Exhibit 10(d)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1997, filed with the Commission
on August 12, 1997).
(10)(d) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan
approved by the shareholders on April 28, 1989, as
amended and restated on May 9, 1997, (incorporated by
reference to Exhibit 10(e) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 1997,
filed with the Commission on August 12, 1997).
(10)(e) CTS Corporation 1996 Stock Option Plan, approved by the
shareholders on April 26, 1996, as amended and restated
on May 9, 1997, (incorporated by reference to Exhibit
10(f) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 29, 1997, filed with the
Commission on August 12, 1997).
(10)(f) The CTS Corporation 1997 Stock Option Agreements approved
by the shareholders on October 16, 1997, filed as Exhibit
(10)(1) to the Company's 10-K for 1997.
(10)(g) Asset Sale Agreement dated December 22, 1998, and Earnout
Exhibit thereto between CTS Wireless Components, Inc. and
Motorola, Inc., under which CTS Wireless Components, Inc.
acquired the assets of Motorola's Components Products
Division.
(10)(h) Shareholders Agreement, dated as of July 17, 1997, among
the Company, Sub, WHX Corporation ("WHX") and SB
Acquisition Corp., a subsidiary of WHX (incorporated by
reference to Exhibit (c) (7) to the Schedule 13-D).
(21) Subsidiaries filed herewith.
(Part 4, Item 14 Continued)
(23) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of this Annual Report on Form 10-K for the
fiscal year 1999 to Registration Statement 333-90697 on
Form S-3, Registration Statement 33-27749 on Form S-8,
Registration Statement 333-5730 on Form S-8 and
Registration Statement 333-91339 on Form S-8.
(b) Reports on Forms 8-K
--------------------
Announcement of the February 26, 1999 acquisition of certain assets
and liabilities of the Component Products Division of Motorola
pursuant to an Asset Sale Agreement dated December 22, 1998, filed
March 11, 1999.
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. 33-27749 (filed
March 23, 1989) and 333-5730 (filed October 3, 1996) and 333-91339
(filed November 19, 1999):
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.
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 By /S/Jeannine M. Davis
Jeannine M. Davis,
Executive Vice President Administration,
Secretary and Interim 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 By /S/ Walter S. Catlow
Walter S. Catlow,
Director
Date By /S/ Lawrence J.. Ciancia
Lawrence J. Ciancia,
Director
Date By /S/ Thomas G. Cody
Thomas G. Cody,
Director
Date By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date By /S/ Roger R. Hemminghaus
Roger R. Hemminghaus,
Director
Date By /S/ Robert A. Profusek
Robert A. Profusek,
Director
Date By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date By /S/ Randall J. Weisenburger
Randall J. Weisenburger,
Director
Date By /S/ George T. Newhart
George T. Newhart,
Vice President, Corporate Controller
and principal accounting officer
Financial Highlights
(In thousands except per share data)
For the Year 1999 1998 1997
- ------------ ---- ---- ----
Net sales $677,076 $370,441 $390,602
Earnings, excluding the 1999 $8.6 million after-tax effect of acquired IPR&D 60,138 37,474 22,813
Net earnings 51,468 37,474 22,813
Average common shares outstanding -- diluted 28,589 29,228 31,952
Per share data:
Earnings -- diluted, excluding the 1999 $0.30 after-tax effect of acquired IPR&D $2.10 $1.28 $0.72
Net earnings -- diluted -- Note M 1.80 1.28 0.72
Dividends declared 0.12 0.12 0.12
Capital expenditures 32,896 21,330 22,180
At Year End
- -----------
Working capital $ 99,836 $ 35,306 $ 65,756
Long-term obligations (including current maturities) 167,000 56,000 61,206
Shareholders' equity 164,764 123,839 147,496
Equity per outstanding share 6.00 4.55 4.86
Consolidated Statements of Earnings
- -----------------------------------
(In thousands of dollars except per share amounts)
Year Ended
----------
December 31 December 31 December 31
1999 1998 1997
----------- ----------- ----------
Net sales $677,076 $370,441 $390,602
Costs and expenses:
Cost of goods sold 471,543 255,844 280,085
Selling, general and administrative expenses 80,866 51,300 45,264
Transaction-related compensation charge -- Note F 0 0 16,200
Research and development expenses 25,348 13,387 13,131
Acquired in-process research and development (IPR&D) - Note B 12,940 0 0
Amortization of intangible assets 3,583 302 2,949
------ ------ ------
Operating earnings 82,796 49,608 32,973
------ ------ ------
Other (expense) income:
Interest expense (9,944) (2,194) (2,478)
Interest income 865 1,141 2,397
Other 338 886 2,838
------ ------ ------
Total other (expense) income (8,741) (167) 2,757
------ ------ ------
Earnings before income taxes 74,055 49,441 35,730
Income taxes -- Note H 22,587 15,368 12,537
------ ------ ------
Earnings from continuing operations 51,468 34,073 23,193
------ ------ ------
Discontinued operations:
Earnings (loss) from discontinued operations, net of income tax
charge (benefit) of $2,267 in 1998 and ($253) in 1997 -- Note C 0 3,401 (380)
------ ------ -------
Net earnings $ 51,468 $ 37,474 $ 22,813
======= ======= =======
Earnings (loss) per share -- Note M
Basic:
Continuing operations $1.87 $1.22 $0.74
Discontinued operations 0 0.12 (0.01)
----- ----- -----
Net earnings per share $1.87 $1.34 $0.73
===== ===== =====
Diluted:
Continuing operations $1.80 $1.17 $0.73
Discontinued operations 0 0.11 (0.01)
----- ----- -----
Net earnings per share $1.80 $1.28 $0.72
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheets
- ---------------------------
(In thousands of dollars)
December 31, December 31,
1999 1998
----------- ----------
ASSETS
Current Assets
Cash and equivalents $ 24,219 $ 16,273
Accounts receivable, less allowances (1999 -- $2,628; 1998 -- $552) 124,682 47,043
Inventories
Finished goods 19,399 9,289
Work-in-process 20,288 10,396
Raw materials 39,255 13,637
------- ------
Total inventories 78,942 33,322
Other current assets 4,869 4,653
Deferred income taxes -- Note H 21,585 16,392
------- -------
Total current assets 254,297 117,683
Property, Plant and Equipment
Buildings and land 61,265 43,113
Machinery and equipment 240,619 161,684
------- -------
Total property, plant and equipment 301,884 204,797
Less accumulated depreciation 162,192 136,711
------- -------
Net property, plant and equipment 139,692 68,086
Other Assets
Prepaid pension expense -- Note G 68,990 69,074
Investment in discontinued operations -- Note C 9,061 35,123
Intangible assets 53,336 3,206
Accumulated amortization (5,493) (2,042)
Other 2,769 2,059
------- -------
Total other assets 128,663 107,420
------- -------
Total Assets $522,652 $293,189
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt -- Note E $ 5,000 $ 14,000
Accounts payable 68,315 17,412
Accrued salaries, wages and vacation 16,745 11,181
Accrued taxes other than income 1,536 1,651
Income taxes payable 12,187 10,229
Other accrued liabilities -- Notes D and L 50,678 27,904
------- ------
Total current liabilities 154,461 82,377
Long-term Debt -- Note E 162,000 42,000
Other long-term Obligations -- Note E 9,846 13,568
Deferred Income Taxes -- Note H 27,263 27,145
Postretirement Benefits -- Note G 4,318 4,260
Contingencies -- Note L 0 0
Shareholders' Equity
Preferred stock -- authorized 25,000,000 shares without par value; none issued -- Note J
Common stock -- authorized 75,000,000 shares without par value; 48,419,604 shares issued
at December 31, 1999, and 48,367,788 share issued at December 31, 1998 - Note J 193,612 190,347
Additional contributed capital 9,005 10,872
Retained earnings 245,414 197,285
Cumulative translation adjustment 291 806
------- -------
448,322 399,310
Less cost of common stock held in treasury (1999 -- 20,957,649 shares;
1998 -- 21,124,898 shares) -- Note K 283,558 275,471
Total shareholders' equity 164,764 123,839
------- -------
Total Liabilities and Shareholders' Equity $522,652 $293,189
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
(In thousands of dollars)
Accumulated
Other Additional
Common Retained Comprehensive Comprehensive Contributed Treasury
Stock Earnings Earnings Earnings Capital Stock Total
----- -------- -------------- ------------- ----------- -------- -----
Balances at December 31, 1996 $34,140 $144,112 $1,373 $(600) $(12,793) $166,232
Net earnings 22,813 $22,813 22,813
Cumulative translation adjustment
(net of tax benefit of $238) (679) (679) (679)
------
Comprehensive earnings 22,134
======
Cash dividends of $0.12 per share (3,756) (3,756)
Nonemployee Directors' stock retirement plan
- Note F 205 205
Issued 12,102 shares on restricted stock and
cash bonus plan--net 135 (224) 89
Issued 214,282 shares on exercise
of stock options -- net 273 558 831
Stock compensation 19 12 31
Transaction-related compensation charge 16,200 16,200
Deferred compensation recognized 241 241
Acquired 14,483,646 shares for treasury
stock--Note K (206,849) 206,849)
Issued 13,259,160 shares to former DCA
shareholders 152,227 152,227
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 186,794 163,169 694 15,822 (218,983) 147,496
Net earnings 37,474 37,474 37,474
Cumulative translation adjustment (net of
tax of $36) 112 112 112
------
Comprehensive earnings 37,586
======
Cash dividends of $0.12 per share (3,358) (3,358)
Nonemployee Directors' stock retirement plan
- Note F 54 54
Returned 10,200 shares to treasury forfeited from
restricted stock and cash bonus plan--net (9) 57 (48)
Issued 166,442 shares on exercise
of stock options -- net 503 (167) 336
Stock options acquired--Note F (5,273) (5,273)
Deferred compensation recognized 212 212
Acquired 3,535,028 shares for treasury
stock--Note K (56,273) (56,273)
Issued 266,442 shares to former DCA
shareholders 3,059 3,059
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 190,347 197,285 806 10,872 (275,471) 123,839
Net earnings 51,468 51,468 51,468
Cumulative translation adjustment (net of
tax benefit of $169) (515) (515) (515)
--------
Comprehensive earnings $ 50,953
========
Cash dividends of $0.12 per share (3,339) (3,339)
Issued 2,502 shares on nonemployee Directors'
stock retirement plan - Note F 6 349 8 363
Issued 201,000 shares on restricted stock
and cash bonus plan--net 2,151 (2,893) 742
Issued 169,547 shares on exercise
of stock options -- net 513 338 851
Stock options issued with cash bonus 58 58
Deferred compensation recognized 619 619
Acquired 205,800 shares for treasury stock
--Note K (9,175) (9,175)
Issued 51,816 shares to former DCA
shareholders 595 595
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $193,612 $245,414 $291 $9,005 $(283,558) $164,764
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows
- -------------------------------------
(In thousands of dollars)
Year Ended
----------
December 31 December 31 December 31
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 51,468 $ 37,474 $ 22,813
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net (earnings) loss from discontinued operations 0 (3,401) 380
Depreciation and amortization 33,907 19,155 16,016
Deferred income taxes (5,337) 6,176 (1,462)
Acquired in-process research and development 12,940 0 0
Transaction-related compensation charge -- Note F 0 0 16,200
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (77,639) 4,271 (1,029)
Inventories (24,853) 1,924 8,782
Prepaid pension asset (6,368) (7,336) (6,199)
Accounts payable and accrued liabilities 72,126 (7,548) 1,583
Income taxes payable 1,958 (4,088) 2,764
Other (1,348) (15) (719)
------ ----- ------
Total adjustments 5,386 9,138 36,316
------ ----- ------
Net cash provided by continuing operations 56,854 46,612 59,129
Net cash (used in) provided by discontinued operations (1,161) 6,659 (485)
------ ----- -------
Net cash provided by operating activities 55,693 53,271 58,644
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment,
including discontinued operations, net 28,646 20,691 2,973
Payment for purchase of CTS Wireless -- Note B (97,445) 0 0
DCA acquisition costs (2,932) (6,416) (71,353)
Capital expenditures (32,896) (21,330) (22,180)
------- ------- -------
Net cash used in investing activities (104,627) (7,055) (90,560)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations -
CTS Wireless acquisition 97,445 0 0
Proceeds from issuance of long-term obligations - Other 0 0 50,000
Payments of long-term obligations, net (28,445) (5,206) (8,707)
Dividends paid (3,301) (3,421) (3,768)
Purchases of treasury stock (9,175) (56,273) (10,121)
Stock options acquired 0 (5,273) 0
Other 851 288 (106)
------- ------- -------
Net cash provided by (used in) financing activities 57,375 (69,885) 27,298
Effect of exchange rate changes on cash (495) 95 (492)
------- ------- -------
Net increase (decrease) in cash 7,946 (23,574) (5,110)
Cash and equivalents at beginning of year 16,273 39,847 44,957
------- ------- -------
Cash and equivalents at end of year $ 24,219 $ 16,273 $ 39,847
Supplemental cash flow information
Cash paid during the year for:
Interest $ 9,711 $ 4,685 $ 2,649
Income taxes -- net 24,195 17,218 10,646
Noncash investing and financing activities
Common stock issued in connection with DCA acquisition $ 595 $ 3,059 $152,227
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(In thousands of dollars except share and per share data)
NOTE A - Summary of Significant Accounting Policies
- ---------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of CTS and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue Recognition: Revenues from product sales are recognized
at the time of shipment to the customer.
Cash Equivalents: CTS considers all highly liquid investments
with a maturity of three months or less from the purchase date to
be cash equivalents.
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. Useful lives for buildings and
improvements range from 10 to 45 years, and average lives are approximately 16
years. Machinery and equipment useful lives range from three to eight years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, any related gain or loss is recognized as other
income or expense.
CTS assesses the recoverability of long-lived assets, including intangible
assets, whenever adverse events or changes in circumstances or the business
climate indicates that an impairment may have occurred. If the future cash
flows (undiscounted and without interest) expected to result from the use of
the related assets are less than the carrying value of such assets, an
impairment has been incurred and a loss is recognized to reduce the carrying
value of the long-lived assets to fair value.
Retirement Plans: CTS has various defined benefit and defined contribution
retirement plans covering a majority of its employees. CTS' policy is to
annually fund the defined benefit pension plans at or above the minimum
required under the Employee Retirement Income Security Act of 1974.
Research and Development: Research and development costs 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. CTS expenses all
research and development costs as incurred.
NOTE A - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Income Taxes: CTS provides deferred income taxes for transactions
reported in different periods for financial reporting and income
tax return purposes pursuant to the requirements of FASB
Statement No. 109, "Accounting for Income Taxes."
Translation of Foreign Currencies: The financial statements of CTS' 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
remeasurement adjustments included in the determination of net earnings. The
assets and liabilities of the Company's United Kingdom subsidiary are
translated into U.S. dollars principally at the current exchange rate at
period end, with resulting translation adjustments made directly to the
"cumulative translation adjustment" component of shareholders' equity.
Statements of earnings accounts are translated at the average rates during the
period.
Financial Instruments: CTS' financial instruments consist primarily of cash,
cash equivalents, trade receivables and payables, and obligations under notes
payable and long-term debt. 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, 1999, and 1998, approximates fair
value where fair value is based on market prices for the same or similar debt
and maturities.
Concentration of Credit Risk: Trade receivables subject the Company to the
potential for credit risk with major customers. CTS sells its products to
customers principally in the communications, automotive and computer
industries, primarily in North America, Europe and the Pacific Rim. CTS
performs ongoing credit evaluations of its customers to minimize credit risk.
CTS generally does not require collateral. Sales to two major customers
accounted for approximately 23% and 11% of revenues, respectively, for the
year ended December 31, 1999, which exposes the Company to a concentration of
credit risk. Management believes the likelihood of incurring material losses
due to concentration of credit risk is remote. At December 31, 1998, CTS had
no significant concentrations of credit risk.
Stock-Based Compensation: CTS accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25,"Accounting for Stock Issued to Employees" and its related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the closing market price of CTS' stock on the date
of the grant over the amount that must be paid to acquire the stock. See Note
F for the required pro forma net income and earnings per share disclosures
required by FASB Statement No. 123.
NOTE A - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Earnings Per Share: Basic and diluted earnings per common share are reported
in conformity with FASB Statement No.128, "Earnings per Share." All prior
period earnings per share (EPS) data presented have been restated to reflect a
two-for-one stock split in 1999 (Note J). Basic earnings per share exclude any
dilution and is computed by dividing net earnings available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common stock resulted in
the issuance of common stock that shared in the earnings of CTS. Diluted
earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding during the period plus
the incremental shares that would have been outstanding upon the assumed
exercise of dilutive stock options. Refer to Note M for the reconciliation of
the numerator and denominator of the basic and diluted EPS computations.
Comprehensive Earnings: CTS reports comprehensive earnings in accordance with
FASB Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive earnings and its
components in general- purpose financial statements. The components of
comprehensive earnings for CTS include foreign translation adjustments and net
earnings. These components can be found within the Statements of Shareholders'
Equity in the columns titled "Comprehensive Earnings" and "Accumulated Other
Comprehensive Earnings."
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications have been made for
the years presented in the financial statements to conform to the
classifications adopted in 1999.
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------
NOTE B - Acquisition
- --------------------
On February 26, 1999, CTS Corporation completed the acquisition of certain
assets and liabilities of the Component Products Division of Motorola, Inc.,
hereafter referred to as "CTS Wireless." CTS Wireless designs and manufactures
electronic components and assemblies including ceramic filters, quartz
crystals, crystal oscillators, surface acoustic wave components and
piezoceramic devices, in five facilities in the USA and Asia, primarily for
the wireless communications industry.
The acquisition was accounted for under the purchase method of accounting. As
part of the acquisition, the Company paid Motorola, Inc. $94 million at the
closing and assumed approximately $49 million of debt (including pension
obligation). The Company may be obligated to pay up to an additional $105
million over five years depending upon increased sales and profitability of
CTS Wireless and has estimated the 1999 liability for this obligation at $7
million. The Company financed a substantial portion of the purchase price
through bank borrowings. CTS incurred approximately $4 million in costs
directly associated with the acquisition which are included in the overall
consideration.
The purchase price has been allocated to the assets acquired based on the
estimated fair values as follows:
(In millions)
Inventory $ 20.8
Property, plant and equipment 69.6
Current technology 10.1
Identifiable intangible assets 40.6
In-process research & development (IPR&D) 12.9
------
Total $154.0
Identifiable intangible assets include trademarks, tradenames, technology
rights, and customer lists that are amortized over 25 years. Current
technology is amortized over four years.
In-process research and development represents the value assigned to research
and development projects of CTS Wireless that were commenced but not yet
completed or reached technological feasibility at the date of acquisition and
which, if unsuccessful, have no alternative future use in research and
development activities or otherwise. As of the date of acquisition, the $12.9
million of purchase price allocated to in-process research and development
related to technologies
Note B - Acquisition (continued)
- --------------------------------
being developed for next-generation products and represents products that are
currently in the development cycle that have not yet reached a level of
technological feasibility and have no alternative future use. CTS Wireless'
in-process research and development projects were initiated to address the
rapid technological change associated with the wireless communications
industry. The incomplete projects include developing technology for the
miniaturization of components such as oscillators, quartz and ceramics. The
calculations of amounts allocated to in-process research and development
projects were based on risk- adjusted future cash flows related to the
incomplete research and development projects. The resulting cash flows were
discounted to their present value using a rate of 18%, which exceeds the
overall cost of capital for the Company.
Estimated net cash inflows from the acquired in-process technology, related to
CTS Wireless, commenced in the latter part of 1999 and are projected to
steadily decline through 2004. As of the date of acquisition, approximately
$10 million had been expended to develop these research and development
projects. The estimated cost to complete the projects is approximately $9
million to be incurred through the year 2000. Remaining efforts on the
projects are significant and include important phases of project design,
development and testing. The Company has reviewed the assumptions used in the
forecasts and continues to believe that the amount allocated to acquired
in-process research and development is reasonable.
The operating results of CTS Wireless have been included in the consolidated
statements of earnings from the date of acquisition. Pro forma results of
operations as if the acquisition of CTS Wireless had occurred at the beginning
of the periods presented, follow:
Pro forma Pro forma
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Unaudited
Net sales (In millions) $ 722 $ 676
Net earnings (In millions) $ 53 $ 28
Diluted earnings per share $1.84 $0.95
These unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired intangible assets
and increased interest expense on acquisition debt. In management's opinion,
the pro forma consolidated results of operations are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated on January 1 of each year presented, or of future operations
of the combined companies under the ownership and operation of the Company.
NOTE C - Discontinued Operations
- --------------------------------
During 1998, CTS finalized a plan to sell all of the businesses of Dynamics
Corporation of America (DCA) not strategic to CTS' electronic components and
electronic assemblies core business segments. These noncore businesses are
recorded as discontinued operations for all periods presented in the
consolidated financial statements. In 1998, CTS completed the sale of one
discontinued operation which resulted in gross proceeds of approximately $22
million.
During 1999, the divestiture of three additional discontinued operations was
completed, resulting in gross proceeds of approximately $31 million. The one
remaining discontinued operation was sold in January 2000, for approximately
$5 million, completing the disposal of all discontinued operations. The
investment in discontinued operations included in the balance sheet at
December 31, 1999, and 1998, is primarily comprised of accounts receivable,
inventory, fixed assets, accounts payable and real estate held for sale. The
Company's results for 1999 do not include any income or loss from the
discontinued operations, as any anticipated losses were included in the
Company's 1998 results. The Company does not expect any material gain or loss
in fiscal 2000 when the disposals are completed and a final accounting
performed. Operating results for discontinued operations are summarized as
follows:
Discontinued Operations 1999 1998 1997
- ----------------------- ---- ---- ----
Net Sales $21,649 $102,984 $24,549
======= ======== =======
Earnings (loss) before
income taxes 0 5,668 (633)
Income tax provision (benefit) 0 2,267 (253)
------- -------- -------
Total discontinued operations,
net of income taxes $ 0 $ 3,401 $ (380)
======= ======== =======
Note D - Short-term Borrowings
- ------------------------------
CTS had unsecured lines of credit arrangements of $20,312 at December 31,
1999. 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, were $3,017 during 1999. The weighted-average interest rate,
computed by relating interest expense to average daily short-term borrowings,
was 7.1% in 1999. There were minimal borrowings against these lines during
1998.
NOTE E- Long-term Debt and Other Long-term Obligations
- ------------------------------------------------------
Long-term debt and other long-term obligations were comprised of the
following:
1999 1998
==============================================================================
Long-term debt:
Term loan at 8.4%, due in annual
installments through 1999 $ 0 $ 9,000
Term loan at 6.82% (1999) and 6.1%
(1998), due in quarterly
installments through 2004 66,000 47,000
Revolving credit agreement,
average interest rate of 6.2%
in 1999, due in 2005 59,000 0
Industrial revenue bonds at a weighted-
average rate of 7.5%, due in 2013 42,000 0
- ------------------------------------------------------------------------------
167,000 56,000
Less current maturities 5,000 14,000
- ------------------------------------------------------------------------------
Total long-term debt $ 162,000 $42,000
==============================================================================
Other long-term obligations:
Contractual DCA employee termination
benefits, payable ratably through 2007 $ 6,423 $ 9,356
Untendered shares of DCA 3,139 3,735
Other 284 477
- ------------------------------------------------------------------------------
Total other long-term obligations $ 9,846 $ 13,568
==============================================================================
CTS has a $66,000 term loan with seven banks, which matures as
follows: 2000 - $5,000; 2001 - $10,000; 2002 - $15,000; 2003 -
$15,000 and 2004 - $21,000.
CTS also has an unsecured revolving credit agreement totaling $150.0 million
with seven banks, which expires in 2005. Interest rates on these borrowings
and the term loan fluctuate based upon LIBOR, with adjustments based on the
ratio of CTS' consolidated total indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA). The Company pays a
commitment fee that varies based on performance under certain financial
covenants applicable to the undrawn portion of the revolving credit agreement.
Currently, that fee is 0.25 percent per annum. The credit agreement and term
loans require, among other things, that the Company maintain a minimum
tangible net worth, a minimum fixed charge coverage ratio and a minimum
leverage ratio.
Debt relating to the industrial revenue bonds was assumed from Motorola, Inc.
(Note B), and is collateralized by the land, building and equipment acquired
with the bonds. Interest is payable to Motorola, Inc. semiannually.
NOTE F- Stock Plans
- -------------------
At December 31, 1999, CTS had four stock-based compensation plans, which are
described below. CTS applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. With the exception of the 1997 transaction-related
option grant, compensation cost is normally not recognized for its fixed stock
option grants as they are granted at fair market value at the grant dates. Had
compensation cost for CTS' fixed stock-based compensation plans been
determined based on the fair value method, as defined in FASB Statement No.
123, CTS' net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net earnings As reported $51,468 $37,474 $22,813
Pro forma $50,825 $37,206 $21,360
Net earnings
per share- As reported $1.80 $1.28 $0.72
diluted Pro forma $1.78 $1.28 $0.67
The pro forma information presented above includes the effect of the
difference between the intrinsic value compensation charge calculated under
APB Opinion No. 25 and the fair value amount calculated under FASB Statement
No. 123.
The effects of applying FASB Statement No. 123 in the above pro forma
disclosures are not indicative of future amounts as they do not include the
effects of awards granted prior to 1995, some of which would have had income
statement effects in 1997 and 1998 due to the fixed stock option awards
generally vesting 25% per year over a four-year period.
The weighted-average fair value of each option grant (which is amortized over
the option vesting period for purposes of determining the pro forma impact) is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1999, 1998
and 1997: dividend yield of 0.37%, 0.85% and 0.70%, respectively; expected
volatility of 19.82%, 30.49% and 19.93%, respectively; risk-free interest rate
of 5.86%, 5.30% and 5.80%, respectively and expected life of 5.2, 4.2 and 4.3
years, respectively.
CTS' 1996 Stock Option Plan (1996 Plan) provides for grants of incentive stock
options or nonqualified stock options to officers and key employees.
Under the 1996 Plan, CTS may grant options to its officers and key employees
for up to 1,200,000 shares of common stock. Options are granted under this
Plan 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 a
combination thereof, subject to certain restrictions as described in the plan
document.
Under the 1996 Plan, options to purchase a total of 603,460 shares were
outstanding as of December 31, 1999. At December 31, 1999, 245,360 of these
shares were exercisable.
During 1997, CTS granted 2,400,000 options for shares to certain officers and
key employees. These options were fully vested and are exercisable over a
ten-year period terminating May 8, 2007. Based on the value of CTS shares on
the date of the merger and the option price of $10.42 per share, a $16,200
before tax, $10,530 after tax, or $0.33 per diluted share, charge to expense
was recorded. During 1998, the Company acquired 900,000 of these shares at a
cost of $5,273. Of the 2,400,000 shares subject to option granted, 1,500,000
remain to be exercised at December 31, 1999.
NOTE F- Stock Plans (continued)
- -------------------------------
A summary of the status of fixed stock options as of December 31, 1999, 1998
and 1997, and changes during the years ended on those dates, is presented
below. All prior years' data has been restated to reflect the two-for-one
stock split distributed in August 1999.
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at begin-
ning of year 2,138,208 $10.05 2,981,084 $9.48 825,150 $ 5.35
Granted 213,700 33.61 281,000 14.09 2,400,000 10.42
Exercised (179,848) 6.46 (217,250) 5.45 (231,166) 4.73
Acquired 0 0 (900,000) 10.42 0 0
Expired or canceled (68,600) 15.51 (6,626) 10.08 (12,900) 5.20
------- ----- ------ ----- ------- ----
Outstanding at end
of year 2,103,460 $12.61 2,138,208 $10.05 2,981,084 $ 9.48
========= ====== ========= ====== ========= ======
Options exercisable
at year end 1,745,360 1,769,708 2,723,384
Weighted-average fair
value of options
granted during the
year $10.05 $4.26 $7.60
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life (Years) Price at 12/31/99 Price
- -------- ----------- ------------ --------- ----------- ---------
$ 6.230 203,960 .96 $6.23 203,960 $6.23
10.415-15.000 1,695,200 6.91 10.84 1,541,400 10.52
16.219-35.969 192,600 9.43 30.76 0 0
46.000-62.250 6,400 9.80 48.72 0 0
71.000-79.250 5,300 9.96 71.78 0 0
NOTE F- Stock Plans (continued)
- -------------------------------
CTS has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which
reserves 2,400,000 shares of the Company's common stock for sale, at market
price or below, or award to key employees. Shares sold or awarded are subject
to restrictions against transfer and repurchase rights of CTS. 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 1999, 224,000 shares were awarded, leaving 1,797,400
shares available for award or sale at December 31, 1999. Under the Plan, in
1997, 42,000 shares were awarded. In addition to the shares issued and related
amortization of deferred compensation associated with the issuances, CTS
charged to expense $3,644, $371 and $910 for additional cash compensation
payable under the formula provisions of the Plan in 1999, 1998 and 1997,
respectively.
CTS 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 CTS stock. Under this plan, the amount of
the actual dollar compensation was $363, $54 and $205 in 1999, 1998 and 1997,
respectively.
NOTE G - Employee Retirement Plans
- ----------------------------------
Defined benefit plans
- ---------------------
CTS has a number of noncontributory defined benefit pension plans (Plans)
covering approximately 27% 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.
In 1999, the Company amended the Pension Plan to include certain employees of
CTS Wireless. The Company also amended the Pension Plan to improve early
retirement subsidies and to include specific benefits for certain employees.
CTS provides other postretirement benefits consisting of life insurance
programs for retired employees. A majority of the Company's domestic employees
are eligible for life insurance benefits. The Company funds life insurance
benefits through term life insurance policies. The Company plans to continue
funding premiums on a pay-as-you-go basis.
The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the plans and other postretirement benefits.
Other
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
January 1 $124,052 $106,962 $4,506 $4,735
Service cost 5,483 3,482 42 35
Interest cost 9,574 7,830 293 296
Acquisitions/divestitures 21,269 0 0 0
Plan amendments 7,997 2,658 0 10
Actuarial loss (gain) (18,163) 9,350 (380) (244)
Benefits paid (6,465) (6,230) (331) (326)
------- ------- ------ ------
Benefit obligation at
December 31 $143,747 $124,052 $4,130 $4,506
- --------------------------------------------------------------------------------------------------------
Change in plan assets:
Assets at fair value at
January 1 $245,880 $218,294 $ 0 $ 0
Actual return on assets 104,397 33,714 0 0
Acquisitions/divestitures 14,019 0 0 0
Company contributions 392 311 331 326
Benefits paid (6,465) (6,230) (331) (326)
Administrative and other
expenses (250) (209) 0 0
------- ------- ----- ----
Assets at fair value at
December 31 $357,973 $245,880 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Reconciliation of prepaid (accrued) cost:
Funded status of the plan $214,226 $121,828 $(4,130) $ (4,506)
Unrecognized net gain (152,380) (49,983) (197) 236
Unrecognized prior service cost 10,047 2,808 9 10
Unrecognized transition asset (2,903) (5,579) 0 0
-------- ------- ------- -------
Prepaid (accrued) cost $ 68,990 $ 69,074 $(4,318) $ (4,260)
NOTE G - Employee Retirement Plans (Continued)
- ----------------------------------------------
Net pension income/postretirement expense for the Plans in 1999, 1998 and 1997
includes the following components:
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Service cost--benefits earned
during the year $ 5,483 $ 3,482 $ 2,846 $ 42 $ 35 $ 32
Interest cost on projected
benefit obligation 9,574 7,830 6,196 293 296 298
Expected return on plan assets (89,370) (29,737) (43,970) 0 0 0
Net amortization and deferral 67,945 11,089 28,729 1 (2) (12)
- --------------------------------------------------------------------------------------------------------------------------------
Net (income) expense $(6,368) ($7,336) $(6,199) $336 $329 $318
- --------------------------------------------------------------------------------------------------------------------------------
Assumptions for 1999:
Discount rate as of December 31 7.50% 6.75% 7.50% 7.50% 6.75% 7.50%
Expected return on plan assets 9.75% 9.75% 9.75% 9.75% 9.75% 9.75%
Rate of compensation increase 5%-7% 4%-7% 5%-7% 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
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.
The majority of U.S. defined benefit pension plan assets are invested in
common stock, including approximately $110 million and $26 million in CTS
common stock at December 31, 1999, and 1998, respectively. The balance is
invested in corporate bonds, U.S. government backed mortgage securities and
bonds, asset backed securities, a private equity fund, non-U.S. corporate
bonds and convertible issues.
Defined contribution plans
CTS sponsors a 401(k) Plan, as well as several other defined contribution
plans, covering certain 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 $2,821 in
1999, $2,457 in 1998 and $2,351 in 1997.
NOTE H - Income Taxes
- ---------------------
Earnings from continuing operations before income taxes consist of the
following:
1999 1998 1997
---- ---- ----
Domestic $20,770 $26,789 $ 3,656
Non-U.S. 53,285 22,652 32,074
------ ------ ------
Total $74,055 $49,441 $35,730
Significant components of income taxes are as follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------
Current:
Federal $11,736 $1,041 $2,308
State 2,975 928 1,130
Non-U.S. 13,079 7,654 9,928
------ ----- -----
Total current 27,790 9,623 13,366
------ ----- ------
Deferred:
Federal (4,585) 5,737 (540)
State (965) 902 (462)
Non-U.S. 347 (894) 173
------ ----- -----
Total deferred (5,203) 5,745 (829)
------ ----- -----
Total provision for income taxes $22,587 $15,368 $12,537
NOTE H - Income Taxes (continued)
- ---------------------------------
Significant components of CTS' deferred tax liabilities and assets at December
31, 1999, and 1998 are:
1999 1998
---- ----
Pensions $26,920 $24,180
Depreciation 2,805 2,725
Basis difference-acquired assets 1,385 5,025
Other 1,757 2,037
----- -----
Gross deferred tax liabilities 32,867 33,967
------ ------
Postretirement benefits 594 1,601
Inventory reserves 3,144 5,194
Nondeductible accruals 18,294 11,388
Nonrecurring compensation charge 3,543 3,543
Other 2,324 2,644
------ -----
Gross deferred tax assets 27,899 24,370
------ ------
Net deferred tax liabilities (4,968) (9,597)
Deferred tax asset valuation allowance (601) (1,175)
------ ------
Total $(5,569) $(10,772)
======= ========
During 1999, the valuation allowance was decreased as a result of the
utilization of certain deferred tax assets in non-U.S.
jurisdictions.
NOTE H - Income Taxes (continued)
- ---------------------------------
A reconciliation from the statutory federal income tax to the Company's
effective income tax follows:
1999 1998 1997
---- ---- ----
Taxes at the U.S. statutory rate $25,919 $ 17,304 $12,506
State income taxes, net of federal
income tax benefit 1,307 1,191 433
Non-U.S. income taxed at rates
different than the U.S. statutory rate (2,996) 98 (154)
Tax exempt earnings (995) 0 0
Utilization of net operating loss
carryforwards and benefit of
scheduled tax credits (574) (2,781) (1,552)
Nonrecurring compensation expense 0 (724) 1,006
Other (74) 280 298
------- ------- -------
Provision for income taxes $22,587 $15,368 $12,537
======= ======= =======
Undistributed earnings of certain non-U.S. subsidiaries amount to
approximately $80 million at December 31, 1999. Prior year earnings are
intended to be invested indefinitely and, accordingly, no provision has been
made for non-U.S. withholding taxes. In the event all undistributed earnings
were remitted, approximately $7 million of withholding tax would be imposed.
NOTE I - Business Segments
- --------------------------
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," requires companies to provide certain information about
their operating segments. CTS' reportable segments are based upon the nature
of products within the Company. The products comprising the reportable
segments are managed separately and have differing technology and marketing
strategies.
CTS has two reportable segments: electronic components and electronic
assemblies. Electronic components are products which perform the basic level
electronic function for a given product family for use in customer assemblies.
Electronic components consist principally of wireless components used in
cellular handsets, automotive sensors used in commercial or consumer vehicles,
frequency control devices such as crystals and clocks, loudspeakers, resistor
networks, switches and variable resistors. Electronic assemblies are
assemblies of electronic or electronic and mechanical products which, apart
from the assembly, may themselves be marketed as separate stand-alone
products. Such assembly represents a completed, higher-level functional
product to be used in customer end products or assemblies. These products
consist principally of interconnect products such as backpanel and connector
assemblies used in the telecommunications industry, RF integrated modules used
in cellular handsets, hybrid microcircuits used in the healthcare market and
cursor controls for computers.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Management
evaluates performance based upon operating earnings before interest and income
taxes.
NOTE I - Business Segments (continued)
- --------------------------------------
Summarized financial information concerning CTS' reportable segments is shown
in the following table:
Electronic Electronic
1999 Components Assemblies Total
- ---- ---------- ---------- -----
Net sales to external
customers $507,344 $169,732 $677,076
Operating earnings* 81,025 14,711 95,736
Total assets 407,822 105,769 513,591
Depreciation and
amortization 29,266 4,641 33,907
Capital expenditures $ 22,028 $ 10,868 $ 32,896
1998
Net sales to external
customers $247,719 $122,722 $370,441
Operating earnings 41,955 7,653 49,608
Total assets 199,068 58,998 258,066
Depreciation and
amortization 15,271 3,884 19,155
Capital expenditures $ 16,032 $ 5,298 $ 21,330
1997
Net sales to external
customers $237,926 $152,676 $390,602
Operating earnings** 34,253 14,920 49,173
Total assets 230,759 50,320 281,079
Depreciation and amortization 9,823 6,193 16,016
Capital expenditures $ 15,728 $ 6,452 $ 22,180
* Excludes the effect of a one-time, noncash write-off for acquired
in-process research and development (IPR&D), related to the acquisition of
CTS Wireless of $12,940.
** Excludes the effect of a one-time transaction-related
compensation charge of $16,200.
NOTE I - Business Segments (continued)
- --------------------------------------
Reconciling information between reportable segments and CTS' consolidated
totals is shown in the following table:
Pre-tax Earnings
1999 1998 1997
---- ---- ----
Total operating earnings for
reportable segments $95,736 $49,608 $49,173
Transaction-related compensation charge 0 0 (16,200)
Acquired in-process research and
development (IPR&D) (12,940) 0 0
Interest expense (9,944) (2,194) (2,478)
Interest income 865 1,141 2,397
Other income 338 886 2,838
------- ------- -------
Earnings before income taxes $74,055 $49,441 $35,730
======= ======= =======
Assets
Total assets for reportable segments $513,591 $258,066 $281,079
Investment in discontinued operations 9,061 35,123 37,117
-------- -------- --------
Total assets $522,652 $293,189 $318,196
======== ======== ========
Financial information relating to CTS' operations by geographic area was as
follows:
Net Sales 1999 1998 1997
---- ---- ----
United States (U.S.) $318,627 $221,395 $224,779
China 153,222 0 0
United Kingdom 96,807 92,784 108,145
Taiwan 59,392 8,592 10,186
Other non-U.S. 49,028 47,670 47,492
-------- -------- --------
Consolidated $677,076 $370,441 $390,602
======== ======== ========
Sales are attributed to countries based upon the origin of the sale.
Long-lived assets
United States $104,398 $41,431 $40,752
China 18,581 0 0
United Kingdom 15,583 11,543 10,387
Taiwan 36,369 2,858 3,110
Other non-U.S. 12,604 13,418 13,657
-------- ------- -------
Consolidated $187,535 $69,250 $67,906
======== ======= =======
During 1999, revenues from one customer of CTS' electronic components business
segment represents approximately $141,501, or 28%. Revenue from one customer
of CTS' electronic assemblies business segment during 1999 represents $71,986,
or 42%.
NOTE J - Capital Stock
- ----------------------
CTS adopted a Shareholder Rights Plan (the "Plan") on August 28, 1998. The
Plan was implemented by declaring a dividend, distributable to shareholders of
record on September 10, 1998, of one common share purchase right (a "Right")
for each outstanding share of common stock held at the close of business on
that date. Each Right under the Plan will initially entitle registered holders
of common stock to purchase one one-hundredth of a share of CTS' new Series A
Junior Participating Preferred Stock (Series A Preferred Stock) for a purchase
price of $125 per share, subject to adjustment. The Rights will be exercisable
only if a person or group (1) acquires 15% or more of the common stock or (2)
announces a tender offer that would result in that person or group acquiring
15% or more of the common stock. The Rights are redeemable for $0.01 per Right
(subject to adjustment) at the option of the Board of Directors. Until a Right
is exercised, the holder of the Right, as such, has no rights as a shareholder
of CTS. The Rights will expire on August 27, 2008, unless redeemed by CTS
prior to that date.
On June 24, 1999, the CTS Corporation Board of Directors declared a
two-for-one stock split in the form of a stock dividend to CTS shareholders of
record on July 12, 1999. Under the split, CTS common shareholders received a
stock dividend of one CTS share for each CTS share held. All shares
outstanding and per share amounts have been restated to reflect the stock
split.
NOTE K - Treasury Stock
- -----------------------
Common stock held in treasury at December 31, 1999, totaled 20,957,649 shares
with a cost of $283,558, compared to 21,124,898 shares with a cost of $275,471
at December 31, 1998.
On October 16, 1997, CTS reinstituted its common stock repurchase plan whereby
it may purchase shares of common stock in open market or privately negotiated
transactions. The remaining shares authorized for repurchase under the Board
of Directors' authorization dated October 30, 1987, and amended on February
23, 1990, and June 25, 1998, is approximately 430,000 shares. There can be no
assurance as to the number of shares CTS may repurchase or the timing of such
purchases.
NOTE L - Contingencies
- ----------------------
Certain processes in the manufacture of CTS' 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; CTS 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 CTS' business or financial condition, based on the
following: 1) CTS' 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 CTS to certain of the sites; and/or 5) CTS'
experience to date in relation to the determination of its allocable share. In
addition to these non-CTS sites, CTS has an ongoing practice of providing
reserves for probable remediation activities at certain of its manufacturing
locations and for claims and proceedings against CTS with respect to other
environmental matters. Accrued environmental costs as of December 31, 1999
totaled $7,696, compared with $7,100 at December 31, 1998, are included in
Other Accrued Liabilities. 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 CTS.
Under the terms of the sale agreement related to a certain discontinued
operation, CTS retains liability for performance and warranty obligations
under certain customer contracts. The potential liability expires in 2000.
Management does not expect that it will incur any significant costs associated
with this contingency.
Certain claims are pending against CTS with respect to matters arising out of
the ordinary conduct of its business and contracts relating to sales of
property. 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 CTS' consolidated financial position or results of
operations.
NOTE M - Earnings Per Share
- ---------------------------
FASB Statement No. 128, "Earnings per Share" (EPS), requires companies to
provide a reconciliation of the numerator and denominator of the basic and
diluted EPS computations. The calculation below provides net earnings, average
common shares outstanding and the resultant earnings per share for both basic
and diluted EPS for 1999, 1998 and 1997. The other dilutive securities of
approximately 308,000, 336,000 and 148,000 for the years ended December 31,
1999, 1998 and 1997, respectively, consisted primarily of shares of CTS common
stock to be issued to DCA shareholders who have not yet tendered their DCA
shares.
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
- ----------------------------------------------------------------------------------------
1999:
Basic EPS $51,468 27,498 $1.87
- ----------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock Options 783
Other 308
- ----------------------------------------------------------------------------------------
Diluted EPS $51,468 28,589 $1.80
- ----------------------------------------------------------------------------------------
1998:
Basic EPS $37,474 28,028 $1.34
- ----------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock Options 864
Other 336
- ----------------------------------------------------------------------------------------
Diluted EPS $37,474 29,228 $1.28
- ----------------------------------------------------------------------------------------
1997:
Basic EPS $22,813 31,248 $0.73
- ----------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock Options 556
Other 148
- ----------------------------------------------------------------------------------------
Diluted EPS $22,813 31,952 $0.72
- ----------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1997- 1999)
LIQUIDITY AND CAPITAL RESOURCES
The table below highlights significant comparisons and ratios related to
liquidity and capital resources of CTS for each of the last three years.
(In thousands of dollars)
December 31 December 31 December 31
1999 1998 1997
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations:
Operating activities $ 56,854 $ 46,612 $ 59,129
Investing activities (104,627) (7,055) (90,560)
Financing activities 57,375 (69,885) 27,298
========================================================================================
Cash and equivalents $ 24,219 $ 16,273 $ 39,847
Accounts receivable 124,682 47,043 51,314
Inventories, net 78,942 33,322 34,683
Current assets 254,297 117,683 146,747
Accounts payable 68,315 17,412 22,593
Accrued liabilities 81,146 50,965 53,192
Current liabilities 154,461 82,377 80,991
Working capital 99,836 35,306 65,756
Current ratio 1.65 1.43 1.81
Interest-bearing debt $167,000 $ 56,000 $ 61,206
Shareholders' equity 164,764 123,839 147,496
Interest-bearing debt
as a percent of
shareholders' equity 101% 45% 41%
Interest-bearing debt
as a percent of
capitalization 50% 31% 29%
=======================================================================================================================
Cash flow from operating activities of $56.9 million was significantly
affected by increases in inventory and accounts receivable, principally at CTS
Wireless (Wireless). A significant portion of cash was required to fund an
investment of accounts receivable at Wireless as CTS did not acquire any
accounts receivable in the Wireless acquisition. An investment in inventory
was required in both business segments to support the growth experienced in
1999.
The 1998 positive cash flow provided by operating activities from continuing
operations of $46.6 million was lower than the 1997 amount by $12.5 million,
resulting from the impact of the reductions in accounts payable and accrued
liabilities. Offsetting these decreases in liabilities, were reductions in
receivables and inventories in 1998.
The 1997 positive cash flow from operating activities from continuing
operations of $59.1 million, an improvement of $24.0 million, or 68% over
1996, was primarily a result of the substantial reduction in inventories, and
the higher operating earnings after excluding the effect of the noncash
transaction-related compensation charge of $16.2 million in 1997.
The 1999 use of $104.6 million for investing activities had two major
components. First, the Wireless acquisition required $94.0 million at the
closing plus approximately $4 million in costs directly associated with the
acquisition. Also, the Company had record-setting capital expenditures of
$32.9 million for capacity expansion in the newly acquired Wireless operation,
and for the pre-acquisition operating units (those traditional CTS product
lines which comprised the product offering prior to the Wireless acquisition).
Wireless capital expenditures for both the electronic component and electronic
assembly segments were primarily for capacity increases in the surface
acoustic wave filter products and the RF integrated modules. These
expenditures were due to the increased demand from Motorola for mobile
wireless phones, and due to the increased demand for ceramic duplexer products
from various communications customers. Capital additions were required for
interconnect products for capacity increases and to support the advanced
surface mount technology, primarily for the electronic assemblies segment.
Significant expenditures were also required for automotive sensors (electronic
components) to meet changing customer needs, and for resistor products for the
cursor control development programs in the electronic assemblies segment.
Also, during 1999, the divestiture of the non-strategic DCA units acquired in
1997 as a part of the DCA merger was essentially completed, generating $28.6
million in positive cash flow.
During 1998, cash expenditures for investing activities totaled $7.1 million.
Included in this total were $20.7 million of proceeds from the sale of
property and equipment, primarily associated with the sale of a nonstrategic
asset acquired within the DCA merger. These cash proceeds were offset by
capital expenditures of $21.3 million. Approximately one-third of these
capital expenditures was for selected capacity increases, particularly in the
molding operations within the automotive product lines (electronic
components). Production equipment for newer products was also added in our
resistor product lines (primarily electronic components).
Cash expenditures for investing activities totaled $90.6 million in 1997,
primarily as a result of the purchase of the DCA operating assets. In October
1997, the Company completed the acquisition of DCA, including the
reacquisition of 13.8 million shares (post-split basis) of CTS common stock
owned by DCA. The total purchase price of approximately $250 million included
total cash expended in connection with the DCA acquisition of $71.4 million.
Of the total cash consideration, $50.0 million was obtained from an unsecured
six-year amortizing term loan.
In addition to the acquisition programs, investment activities during the last
three years included capital expenditures of $32.9 million, $21.3 million and
$22.2 million in 1999, 1998 and 1997, respectively. During 1997, major capital
additions included capacity expansions in certain key product lines and
expenditures for new product production equipment. CTS expects to increase its
capital expenditures to approximately $127 million in 2000. These capital
expenditures will primarily be for production capacity expansion, new products
and cost reduction programs. In the pre-acquisition product lines, significant
expenditures will be required in the interconnect, automotive and resistor
product lines for new product introduction, additional capacity and new
technology. Projected capital expenditures in 2000 for Wireless projects will
include programs for the RF integrated modules capacity expansion to increase
capacity for the oscillator products and reduce product size as a result of
customer demands in the wireless handset industry for the ceramic duplexer
products to increase capacity, and for the office building move to establish a
new Wireless headquarters.
In 1999, financing activities totaled $57.4 million. This was primarily
related to the $94.0 million required for the Wireless acquisition offset by
$28.4 million of repayments made possible from sales proceeds of $28.6 million
related to discontinued operations. The Wireless acquisition required
long-term borrowing to fund this purchase, which was accomplished through a
$225.0 million bank unsecured credit facility. The facility was acquired at
LIBOR plus approximately one percent, and had an original term of six years.
During the year, this loan was paid down by $28.4 million. Also during 1999,
the Company repurchased 205,800 shares of its common stock at a total cost of
$9.2 million. Refer to Note K -- Treasury Stock, for a description of the
Company's repurchase plan.
Cash used for financing activities during 1998 amounted to $69.9 million and
was primarily used for the repurchase of a portion of the Company's
outstanding stock. During the year, 3.5 million shares (post-split basis) were
repurchased at a total cost of $56.3 million. Also included in the 1998
financing activities was the repayment of $5.2 million of long-term debt and
the acquisition of certain stock options at a cost of $5.3 million.
Financing activities during 1997 generated $27.3 million. These financing
activities primarily related to the Company's $50.0 million term loan in
connection with the acquisition of DCA, partially reduced by purchases of
treasury stock of $10.1 million and payments of long-term obligations of $8.7
million.
Dividends paid were $3.3 million, $3.4 million and $3.8 million in 1999, 1998
and 1997, respectively. Amounts decreased due to the repurchase of outstanding
shares.
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.
No provision for U.S. income taxes or withholding taxes on the undistributed
earnings at December 31, 1999, has been made because prior year earnings are
indefinitely reinvested in the subsidiaries. If all non-U.S. earnings were
repatriated, approximately $6.9 million of withholding taxes would accrue.
As described in Note B -- Acquisition, on December 22, 1998, CTS agreed to pay
Motorola, Inc. $94.0 million at closing (which occurred on February 26, 1999)
and assume approximately $49 million of Motorola obligations. In addition, CTS
may be obligated to pay up to an additional $105.0 million over five years
depending upon increased sales and profitability of Wireless. CTS financed a
substantial portion of the purchase price, and related working capital,
through borrowings under a new $225.0 million bank unsecured credit facility,
which replaced the previous $125.0 million borrowing facility. Interest on
this new facility was at an initial floating rate of LIBOR plus approximately
one percent and has a term of six years. The new debt agreement requires
principal amortization and has financial covenants consistent with the
replaced borrowing facility.
On December 10, 1999, CTS filed a shelf registration Statement Form S-3, with
the Securities and Exchange Commission. Under this shelf process, CTS has a
two-year period within which it may elect to offer up to $500.0 million in any
combination of debt securities, common stock, preferred stock or warrants.
The Company believes it has sufficient liquidity including cash generated from
operations, available credit facilities, as well as access to public and
private sources of funding through its shelf registration to support its cash
needs in fiscal 2000.
RESULTS OF OPERATIONS
- ---------------------
Business Segment Data Table
- ---------------------------
(In thousands of dollars)
Electronic Electronic
Components Assemblies
---------- ----------
1999
Sales $507,344 $169,732
Operating earnings* 81,025 14,711
Operating earnings %
of sales* 16.0% 8.7%
1998
Sales $247,719 $122,722
Operating earnings 41,955 7,653
Operating earnings %
of sales 16.9% 6.2%
1997
Sales $237,926 $152,676
Operating earnings** 34,253 14,920
Operating earnings %
of sales** 14.4% 9.8%
* Excludes the effect of a one-time, noncash write-off of $12.9
million pre-tax for acquired in-process research and development
(IPR&D) related to the acquisition of Wireless.
** Excludes the effect of a one-time transaction-related
compensation charge of $16.2 million.
Overview
- --------
Electronic components sales increased by $259.6 million, or about 105% from
1998. Although the primary reason for the increase was the result of the
Wireless acquisition and the inclusion of products for the wireless handset
and communications industry for ten months of 1999, growth was also
experienced in automotive and frequency control components. The higher volume
contributed to the 93% increase in operating earnings. Operating earnings as a
percent of sales decreased to 16% in 1999 from 17% in 1998 as a result of
wireless product sales, which have a lower margin than CTS traditional product
lines. In the electronic assemblies segment, sales and earnings increased
substantially, owing to the growth in interconnect and resistor products for
the computer and communications equipment markets.
The 1998 operating earnings from electronic components at $42.0 million
comprised the larger portion of the total earnings, primarily due to the
higher volume and generally higher margins of the products within this
segment. For this business segment, sales increased by $9.8 million, or 4%
over 1997, and the associated operating earnings increase was $7.7 million, or
an improvement as a percent of sales of 2.5 percentage points. The improvement
in both sales and earnings were primarily within the frequency product lines
with the full-year impact of the former DCA product lines and the efficiencies
realized in both our frequency and electrocomponents operations. The decline
in the electronic assemblies segment was a result of the decrease in flex
cable assembly product sales of $19.5 million and the 1997 sale of the North
American interconnect product line, which impacted 1998 by $11.3 million.
The 1997 sales of electronic components increased by $22.3 million, or 10%
over 1996, generally across all product lines. The improved 1997 operating
earnings in the amount of $6.7 million, or 24% over 1996, was driven by the
overall volume increase, and was also a result of the operating improvements
and expense control throughout the major product lines within this segment.
Also during 1997, significant improvement was realized in our electronic
assemblies segment as sales increased by $47.0 million, primarily owing to the
substantially higher sales in the disk drive and telecommunications markets.
The higher 1997 operating earnings in the electronic assemblies segment was a
direct result of the 44% volume increase generated by operating efficiencies
and facilities utilization.
Most Recent Three Fiscal Years Discussion
- -----------------------------------------
The following table highlights significant information with regard to the
Company's overall results of operations during the past three fiscal years.
(In thousands of dollars)
December 31 December 31 December 31
1999 1998 1997
----------- ----------- -----------
Net sales $ 677,076 $370,441 $390,602
Gross earnings 205,533 114,597 110,517
Gross earnings as a percent
of sales 30.4% 30.9% 28.3%
Operating earnings - before
acquired IPR&D (1999) and
transaction-related
compensation charge (1997) $ 95,736 $ 49,608 $ 49,173
Operating earnings - after
acquired IPR&D (1999) and
transaction-related
compensation charge (1997) 82,796 49,608 32,973
Earnings before income taxes 74,055 49,441 35,730
Earnings from continuing
operations 51,468 34,073 23,193
Net earnings (loss) from
discontinued operations 0 3,401 (380)
Net earnings $ 51,468 $ 37,474 $22,813
The 1999 net sales rose $306.6 million, or 83% from 1998, primarily as a
result of the Wireless acquisition in February, as shown in Note I-- Business
Segments. The largest sales increase was in the electronic
components segment in the amount of $259.6 million, or 105%. The electronic
assemblies segment also grew substantially over 1998 with sales increasing
$47.0 million, or 38%.
Net sales for 1998 were below the 1997 level by $20.2 million. The decline was
primarily due to a decrease of $19.5 million in electronic assembly products
including flex cable product sales and the sale of the North American
interconnect product line and facilities, which impacted 1998 by $11.3
million. Partially offsetting these decreases in revenue was the full-year
impact of the former DCA frequency control product lines of $11.9 million.
Electronic component sales, in 1998, increased by $9.8 million, or 4% over
1997, primarily as a result of the full-year impact of the former DCA
frequency control products of $11.9 million. Sales of the electronic
assemblies declined by $30.0 million in 1998 as a result of the decreased flex
cable product sales by $19.5 million, and the 1997 sale of our North American
interconnect product line, impacting 1998 sales by $11.3 million.
Net sales for 1997 increased by $69.3 million, or 22% over 1996. This 1997
growth occurred primarily in our automotive components and computer equipment
assemblies sold domestically and in Europe.
The sales for electronic components increased during 1997 by $22.3 million, or
10% over the 1996 level, primarily within our automotive sensors, resistor
network and frequency control product lines. Sales of electronic assemblies
improved substantially in 1997, increasing by $47.0 million, or 44%, primarily
in our flex cable assembly products and in our European sourced interconnect
products.
As a result of the 1999 Wireless acquisition, the percent of total annual
sales in the communications equipment market has increased to 55%, from the
19% in 1997. At the same time, our other two major markets served, computer
equipment and automotive, have declined as a percent of total annual sales.
Computer equipment has dropped from 33% in 1997 to 18% in 1999, while
automotive has declined from 31% in 1997 to 19% in 1999. During this
three-year comparative period, sales into the automotive market actually
increased by $8.3 million, or 7%. Sales into the computer equipment market
decreased by $8.2 million or 6%, primarily due to the significant decline in
the flex cable sales for the disk drive products within the electronic
assemblies segment.
Within the electronic components segment, sales into the communications
equipment market comprise 61% of total sales in 1999, compared to 19% in 1997,
as a result of the Wireless acquisition and the burgeoning demand for
hand-held wireless communication devices. Within the electronic assemblies
segment, sales into the communication equipment market were 39% in 1999,
compared to 19% in 1997, also a result of the rapidly growing demand for
hand-held wireless devices. Sales of electronic components into the computer
equipment market were 6% in 1999 versus 13% in 1997, although sales dollars
remained essentially the same. Electronic assemblies sold into the computer
equipment market were 53% in 1999 compared to 64% in 1997, the result of the
decline in the flex cable assembly business.
Sales of electronic components into the automotive market were 25% in 1999
versus 51% in 1997, although revenue dollars actually increased by $8.3
million, while the electronic assembly sales into this market were minimal in
both periods.
CTS' 15 largest customers represented approximately 71% of net sales in 1999,
66% of net sales in 1998 and 67% of net sales in 1997. During 1999, sales to
Motorola, Inc. accounted for 23% of total net sales, but were minimal in the
prior two years. Also during 1999, sales to Compaq Computer Corporation
amounted to 11% of total net sales as compared to 12% in 1998 and 1997. Sales
to General Motors Corporation comprised 12% of net sales in 1998 as compared
to 13% in 1997. Sales to Seagate Technology, Inc., comprised 8% of net sales
in 1998, compared to 11% in 1997.
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. CTS' products are usually priced with reference to
expected or required profit margins, customer expectations and market
competition. Pricing for most of CTS' electronic component and assembly
products frequently decreases over time and also fluctuates in accordance with
total industry utilization of manufacturing capacity.
In 1999, 1998 and 1997, improvements in gross earnings were realized over each
of the preceding years in absolute terms principally due to effective
facilities utilization and production efficiencies, the higher absorption of
fixed manufacturing overhead expenses and overall expense control. In 1999,
gross earnings were substantially improved over 1998, due principally to the
higher volume as a result of the Wireless acquisition. However, gross earnings
as a percent of sales, in 1999 were slightly under 1998, caused by the lower
margins within the Wireless product lines. The 1998 gross earnings percent of
sales was better than 1997, due to favorable sales mix resulting from our
focus on the most profitable product lines.
Selling, general and administrative expenses as a percent of sales have
remained relatively constant over the last three years, ranging from 12% in
1999, to 14% in 1998, to 12% in 1997. In 1999, as in previous years, CTS
continued to control these expenses while filling key management positions
required for the new Wireless acquisition and for planned future growth and
development.
Research and development expenses increased by $12.0 million in 1999,
primarily due to the significant ongoing R&D activities assumed in the
Wireless acquisition, as well as continuing efforts in our pre-acquisition
operations, primarily in the electronic components segment.
The 1998 research and development expenses of $13.4 million increased from
1997 by $0.3 million, as the new product development programs continued,
particularly for our automotive products included in the electronic components
segment.
During 1997, research and development expenses increased by $2.4 million, or
22% over 1996 to $13.1 million, though remaining relatively constant as a
percent of sales, as CTS continued to invest in programs for new
products and product improvements. A substantial portion of the research and
development efforts was devoted to additional products and product
enhancements within our automotive, resistor network and frequency control
products included in our electronic components business segment.
The 1999 operating earnings at $95.7 million (before the IPR&D charge) nearly
doubled from the comparable 1998 amount. This increase is due to higher
revenue and management's control over operating expenses.
The 1998 operating earnings of $49.6 million were slightly better than the
comparable amount in 1997, excluding the 1997 transaction-related compensation
charge of $16.2 million. In spite of the lower comparable revenue of over
$20.2 million for continuing operations, 1998 earnings increased as a result
of the focus on the more profitable product lines, production and facilities
efficiencies and overall expense control.
Excluding the nonrecurring compensation charge of $16.2 million related to the
DCA acquisition, 1997 operating earnings of $33.0 million increased by $15.8
million, or 47% over 1996. Contributing to this substantial earnings increase
was the overall volume increase, operating improvements and continued expense
control.
The 30.5% effective tax rate for 1999 was slightly lower than the 31% rate
from 1998, primarily resulting from greater earnings in lower tax rate
jurisdictions.
The 1998 effective tax rate of 31% decreased from 35% in 1997. This decrease
was primarily due to the utilization of net operating loss carryforwards in
non-U.S. jurisdictions. The remeasurement of the tax benefit related to a
one-time compensation charge incurred in 1997 based upon the increase in the
CTS stock price also contributed to the lower 1998 tax rates, as did the
increased earnings in the lower tax rate jurisdictions in which CTS operates.
The 1997 effective tax rate of 35% was lower than the 1996 tax rate of 37%,
principally due to the utilization of net operating loss carryforwards in
non-U.S. jurisdictions.
Environmental
- -------------
CTS 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, CTS provides reserves for probable remediation activities at
certain of its manufacturing locations. These issues are discussed in
Note L -- Contingencies.
Market Risk
- -----------
CTS is exposed to market risk, including changes in foreign currency
exchange rates and interest rates. As discussed in Note A to the
consolidated financial statements, the financial statements of all CTS'
non-U.S. subsidiaries, except the United Kingdom subidiary, are
remeasured into U.S. dollars using the U.S. dollar as the functional
currency. The market risk associated with foreign currency exchange
rates is not material in relation to CTS' consolidated financial position,
results of operations or cash flows. As such, the Company does not utilize a
significant number of derivative financial instruments to manage the exposure
in the United Kingdom or its other non-U.S.
operations.
As a part of the Company's risk management program, CTS performs sensitivity
analysis to assess potential gains and losses in earnings and changes in fair
value relating to hypothetical movements in interest rates. A 63-basis-point
increase in interest rates (approximately 10% of the Company's
weighted-average interest rate) on variable-rate debt instruments would have
an immaterial effect on the Company's 1999 and 1998 earnings before income
taxes and the fair value of debt instruments as of the end of such fiscal
years.
YEAR 2000 Computer Systems Compliance
- -------------------------------------
CTS has addressed the issues associated with potential business disruptions
relating to the Year 2000 computer programming issue.
CTS formed a Company-wide Year 2000 Readiness Project (Project) to identify
and resolve Year 2000 issues. The products of CTS operating units are not
"date and time sensitive." CTS may add date and time sensitive components to
CTS products at the direction of its customers and upon the customer's
assumption of responsibility for the Year 2000 compliance of the components
selected. The Project included the inventory of financial, manufacturing,
design and other internal systems, hardware, equipment and embedded chips in
industrial control instruments, and the assessment, remediation and testing of
those systems. All systems were inventoried, reviewed and assessed in 1998,
and the majority of systems which were not Year 2000 ready were remedied or
replaced and tested in 1998. Systems testing and certification were completed
in 1999.
As part of the Project, Year 2000 Readiness Surveys were sent to significant
service providers, vendors, suppliers, customers and governmental entities
that are believed to be critical to business operations. CTS prepared supplier
contingency plans based on survey responses. CTS will continue to be diligent
in identifying and addressing potential issues which may develop in the coming
months. The Company experienced no major disruptions or system failures, and
CTS experienced no customer or supplier materially adverse effects.
The cost to complete the program was approximately $2 million through December
31, 1999, for outside consultants, software and hardware applications. CTS did
not track the internal costs incurred for all of the hours spent on the
project.
Shareholder Information
(In thousands of dollars except per share data)
Quarterly Results of Operations
-------------------------------
(Unaudited)
Earnings Earnings
from from
Net Gross Operating Continuing Discontinued Net
Sales Earnings Earnings Operations Operations Earnings
----- -------- -------- ---------- ---------- --------
1999
- ----
1st quarter(a) $120,339 $ 37,187 $ 3,332 $ 2,163 $ 0 $ 2,163
2nd quarter 177,825 52,686 23,601 14,490 0 14,490
3rd quarter 180,203 54,967 25,928 15,949 0 15,949
4th quarter 198,709 60,693 29,935 18,866 0 18,866
------- ------ ------ ------ ------ ------
$677,076 $205,533 $82,796 $51,468 $ 0 $51,468
1998
1st quarter $ 94,041 $ 26,367 $10,323 $ 7,378 $1,334 $ 8,712
2nd quarter 99,293 31,219 13,379 8,900 766 9,666
3rd quarter 83,777 26,341 11,543 7,804 394 8,198
4th quarter 93,330 30,670 14,363 9,991 907 10,898
------- ------ ------ ------ ----- ------
$370,441 $114,597 $49,608 $34,073 $3,401 $37,474
Per Share Data (b)
(Unaudited)
-----------
Earnings from
Earnings from Discontinued
Continuing Operations Operations Net Earnings
--------------------- ------------- ------------
Dividends
High(c) Low(c) Declared Basic Diluted Basic Diluted Basic Diluted
------- ------ -------- ----- ------- ----- ------- ----- -------
1999
1st quarter (a) $25.50 $20.44 $0.03 $0.08 $0.07 $ 0 $ 0 $0.08 $0.07
2nd quarter 35.44 22.81 0.03 0.53 0.51 0 0 0.53 0.51
3rd quarter 60.00 34.75 0.03 0.58 0.56 0 0 0.58 0.56
4th quarter 86.25 38.75 0.03 0.68 0.66 0 0 0.68 0.66
---- ---- ---- ---- ---- ---- ----
$0.12 $1.87 $1.80 $ 0 $ 0 $1.87 $1.80
1998
1st quarter $17.44 $13.63 $0.03 $0.25 $0.24 $0.04 $0.04 $0.29 $0.28
2nd quarter 19.00 13.82 0.03 0.32 0.30 0.03 0.03 0.35 0.33
3rd quarter 16.44 13.22 0.03 0.28 0.28 0.02 0.01 0.30 0.29
4th quarter 21.94 11.82 0.03 0.37 0.35 0.03 0.03 0.40 0.38
---- ---- ---- ---- ---- ---- ----
$0.12 $1.22 $1.17 $0.12 $0.11 $1.34 $1.28
(a) The first quarter of 1999 results include a one-time, noncash write-off of
$12.9 million pre-tax, $8.6 million after-tax, or $.30 per diluted share,
for acquired in-process research and development(IPR&D), related to the
acquisition of CTS Wireless.
(b) Per share data reflects the effect of a two-for-one stock split, which was
distributed in August 1999.
(c) The market prices of CTS common stock presented reflect the highest and
lowest prices on the New York Stock Exchange for each quarter of the
last two years.
Five-Year Summary
- -----------------
(In thousands of dollars except per share and other data)
% of % of % of % of % of
1999 Sales 1998 Sales 1997 Sales 1996 Sales 1995 Sales
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Summary of Operations
- ---------------------
Net sales $677,076 100.0 $370,441 100.0 $390,602 100.0 $321,297 100.0 $300,157 100.0
Cost of goods sold 471,543 69.6 255,844 69.1 280,085 71.7 233,801 72.8 225,353 75.1
Selling, general and administrative expenses 80,866 12.0 51,300 13.8 45,264 11.6 42,621 13.3 38,629 12.9
Transaction-related compensation charge 0 0 0 0 16,200 4.1 0 0 0 0
Research and development expenses 25,348 3.8 13,387 3.6 13,131 3.4 10,743 3.3 8,004 2.7
Acquired in-process research and development
(IPR&D) 12,940 1.9 0 0 0 0 0 0 0 0
Amortization of intangible assets 3,583 0.5 302 0.1 2,949 0.8 712 0.2 683 0.2
------ --- ------ ---- ------ --- ------ ---- ------ ---
Operating earnings 82,796 12.2 49,608 13.4 32,973 8.4 33,420 10.4 27,488 9.1
Other (expense) income --net (8,741) (1.3) (167) (0.1) 2,757 0.7 182 0.1 196 0.1
------ ---- ---- ---- ----- --- --- --- --- ---
Earnings before income taxes 74,055 10.9 49,441 13.3 35,730 9.1 33,602 10.5 27,684 9.2
Income taxes 22,587 3.3 15,368 4.1 12,537 3.2 12,432 3.9 10,520 3.5
------ --- ------ --- ------ --- ------ --- ------ ---
Earnings from continuing operations 51,468 7.6 34,073 9.2 23,193 5.9 21,170 6.6 17,164 5.7
Discontinued Operations:
Net earnings (loss) from discontinued
operations 0 0 3,401 0.9 (380) (0.1) 0 0 0 0
-------- ---- -------- ---- ------- ---- ------- ---- ------- ---
Net earnings 51,468 7.6 37,474 10.1 22,813 5.8 21,170 6.6 17,164 5.7
Retained earnings--beginning of year 197,285 163,169 144,112 126,546 112,506
Dividends declared (3,339) (3,358) (3,756) (3,604) (3,124)
-------- -------- -------- ------- -------
Retained earnings--end of year $245,414 $197,285 $163,169 $144,112 $126,546
======== ======== ======== ======= =======
Earnings (loss) per share:
Basic:
Continuing operations $1.87 $1.22 $0.74 $0.68 $0.55
Discontinued operations 0 0.12 (0.01) 0 0
---- ---- ----- ---- ----
Net earnings per share $1.87 $1.34 $0.73 $0.68 $0.55
Diluted:
Continuing operations $1.80 $1.17 $0.73 $0.67 $0.55
Discontinued operations 0 0.11 (0.01) 0 0
---- ---- ----- ---- ----
Net earnings per share $1.80 $1.28 $0.72 $0.67 $0.55
Average basic shares outstanding (000's) 27,498 28,028 31,248 31,336 31,204
Average diluted shares outstanding (000's) 28,589 29,228 31,952 31,532 31,312
Cash dividends per share $0.12 $0.12 $0.12 $0.12 $0.10
Capital expenditures 32,896 21,330 22,180 17,210 11,181
Depreciation and amortization 33,907 19,155 16,016 12,491 11,683
Financial Position at Year End
Current assets $254,297 $117,683 $146,747 $138,201 $126,113
Current liabilities 154,461 82,377 80,991 51,391 50,962
Current ratio 1.6 to 1 1.4 to 1 1.8 to 1 2.7 to 1 2.5 to 1
Working capital $99,836 $35,306 $65,756 $86,810 $75,151
Inventories 78,942 33,322 34,683 38,761 38,885
Property, plant and equipment--net 139,692 68,086 66,511 56,103 50,696
Total assets 522,652 293,189 318,196 249,372 227,127
Short-term notes payable 0 0 0 0 6,685
Long-term debt 162,000 42,000 56,000 11,214 13,385
Shareholders' equity 164,764 123,839 147,496 166,232 146,253
Common shares outstanding (000's) 27,462 27,243 30,356 31,350 31,304
Equity (book value) per share $6.00 $4.55 $4.86 $5.30 $4.67
Other Data
Stock price range $86.25-$20.44 $21.94-$11.82 $18.63-$6.79 $7.84-$6.00 $6.29-$4.57
Average number of employees 7,662 4,105 3,954 3,815 4,007
Number of shareholders at year end 1,498 1,379 1,404 986 1,062
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) AND (2) AND ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1999
CTS CORPORATION AND SUBSIDIARIES
ELKHART, INDIANA
FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d)
CTS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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, 1999, are referenced in Item 8
and incorporated herein:
Consolidated balance sheets - December 31, 1999, and
December 31, 1998
Consolidated statements of earnings - Years ended December 31, 1999,
December 31, 1998 and December 31, 1997
Consolidated statements of shareholders' equity - Years ended
December 31, 1999, December 31, 1998 and December 31, 1997
Consolidated statements of cash flows - Years ended December 31,
1999, December 31, 1998 and December 31, 1997
Notes to consolidated financial statements
The following consolidated financial statement schedule of CTS Corporation
and subsidiaries, is 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 statements or notes thereto.
S-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of CTS Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) and (2) on page S-1 present fairly, in all
material respects, the financial position of CTS Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under item 14(d) on page S-1
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
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.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 26, 2000
S-2
CTS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(In thousands of dollars)
Additions (Reductions)
----------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Classification Period Expenses Accounts Deductions(1) End of Period
-------------- ------ -------- -------- ------------- -------------
Year ended December 31, 1999:
Allowance for
doubtful receivables $552 $2,081 $11 $16 $2,628
Year ended December 31, 1998:
Allowance for $692 $(79) $ 0 $61 $ 552
doubtful receivables
Year ended December 31, 1997:
Allowance for
doubtful receivables $622 $ 74 $ 0 $ 4 $ 692
(1) Uncollectible accounts written off.
S-3
EXHIBIT 21
----------
CTS CORPORATION AND SUBSIDIARIES
--------------------------------
CTS Corporation (Registrant), an Indiana corporation
Subsidiaries:
-------------
CTS Corporation (Delaware), a Delaware corporation
CTS of Panama, Inc., a Republic of Panama corporation
CTS Components Taiwan, Ltd., 1 a Taiwan, Republic of China corporation
CTS Singapore Pte., Ltd., a Republic of Singapore corporation
CTS Electro de Matamoros, S.A., 1 a Republic of Mexico corporation
CTS Export Corporation, a Virgin Islands corporation
CTS Japan, Inc., a Japan corporation
CTS International B.V., a Netherlands 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 Hong Kong corporation
CTS (Tianjin) Electronics Company, Ltd., a Peoples' Republic of
China corporation
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Wireless Components, Inc., a Delaware corporation
Dynamics Corporation of America, a New York corporation
International Electronic Research Corporation, a California
corporation
LTB Investment Corporation, a Delaware corporation
Corporations whose names are indented are subsidiaries of the preceding
non-indented corporations. Except as indicated, each of the above subsidiaries
is wholly-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.
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333- 90697) and Form S-8 (No. 33-27749, No.
333-5730 and No. 333-91339) of CTS Corporation of our report dated January 26,
2000 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 28, 2000