UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____________ to ________________
Commission File Number 1-4639
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CTS CORPORATION
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(Exact name of registrant as specified in its charter)
Indiana 35-0225010
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
905 West Boulevard North
Elkhart, IN 46514
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (574)293-7511
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______
-------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of July 22, 2002: 33,561,243.
Page 1
CTS CORPORATION AND SUBSIDIARIES
--------------------------------
INDEX
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Page
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Earnings (Loss) - For the Three Months
and Six Months ended June 30, 2002 and
July 1, 2001 3
Condensed Consolidated Balance Sheets -
As of June 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash
Flows - For the Six Months Ended
June 30, 2002 and July 1, 2001 5
Consolidated Statements of Comprehensive
Earnings (Loss) - For the Three Months and Six Months
Ended June 30, 2002 and July 1, 2001 6
Notes to Condensed Consolidated Financial
Statements 7-13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14-21
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 21
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matter to a Vote of
Security Holders 21-22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
Page 2
Part 1 -- FINANCIAL INFORMATION
Item 1. Financial Statements
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)-UNAUDITED
(In thousands of dollars, except per share amounts)
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
Net sales $117,725 $143,723 $230,318 $320,711
Costs and expenses:
Cost of goods sold 96,616 120,845 186,531 257,268
Selling, general and administrative
expenses 16,563 21,064 31,880 46,084
Research and development expenses 6,021 7,488 13,154 17,268
Restructuring and impairment
charges--Note C -- 14,011 -- 14,011
-------- -------- ------- --------
Operating loss (1,475) (19,685) (1,247) (13,920)
Other (expense) income:
Interest expense (2,882) (3,233) (5,552) (6,599)
Interest income 86 169 168 349
Other 706 (149) 532 (465)
-------- ------- ------- -------
Total other expense (2,090) (3,213) (4,852) (6,715)
-------- ------- ------- -------
Loss before income taxes (3,565) (22,898) (6,099) (20,635)
Income tax benefit (892) (5,725) (1,525) (5,159)
-------- ------- ------- -------
Net loss $(2,673) $(17,173) $(4,574) $(15,476)
======== ======== ======= ========
Net loss per share - Note J
Basic $(0.08) $(0.62) $(0.14) $(0.56)
----- ------ ------ ------
Diluted $(0.08) $(0.62) $(0.14) $(0.56)
----- ------ ------ ------
Cash dividends declared per share $ 0.03 $ 0.03 $ 0.06 $ 0.06
----- ------ ------ ------
Average common shares outstanding:
Basic 33,300 27,697 32,556 27,684
Diluted 33,300 27,697 32,556 27,684
See notes to condensed consolidated financial statements.
Page 3
Part 1 -- FINANCIAL INFORMATION (Cont'd)
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, December 31,
2002 2001*
ASSETS (Unaudited)
- ------ ----------- -----------
Current Assets
Cash $ 15,047 $13,255
Accounts receivable, less allowances
(2002--$1,538; 2001--$1,470) 73,329 81,563
Inventories-Note B 43,094 50,149
Other current assets 6,021 4,371
Deferred income taxes 51,734 51,336
-------- ------
Total current assets 189,225 200,674
Property, plant and equipment, less
accumulated depreciation (2002--$232,775;
2001--$207,212)
178,941 191,958
Other Assets
Prepaid pension asset 109,971 102,196
Intangible assets-Note F 42,029 44,004
Assets held for sale-Note E 20,076 21,940
Other 6,749 7,159
-------- --------
Total other assets 178,825 175,299
-------- --------
$546,991 $567,931
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt-Note G $ -- $27,500
Accounts payable 47,044 50,842
Accrued liabilities 57,235 75,515
--------- -------
Total current liabilities 104,279 153,857
Long-term debt-Note G 120,007 125,013
Other long-term obligations 7,129 7,274
Deferred income taxes 39,606 38,914
Shareholders' equity
Preferred stock-authorized 25,000,000
shares without par value; none issued -- --
Common stock-authorized 75,000,000 shares
without par value; 50,210,646 shares
issued at June 30, 2002, and 48,531,936
shares issued at December 31, 2001 238,255 213,947
Additional contributed capital 23,403 24,153
Retained earnings 270,404 276,988
Accumulated other comprehensive loss (1,317) (1,702)
-------- -------
530,745 513,386
Cost of common stock held in treasury
2002--16,649,403 shares; 2001--17,630,192 (254,775) (270,513)
-------- -------
Total shareholders' equity 275,970 242,873
======== -------
$546,991 $567,931
======== =======
*The balance sheet at December 31, 2001, has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
Page 4
Part 1 -- FINANCIAL INFORMATION (Cont'd)
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
(In thousands of dollars)
Six Months Ended
----------------
June 30, July 1,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(4,574) $(15,476)
Depreciation and amortization 22,853 26,000
Deferred income taxes -- (402)
Prepaid pension asset (7,775) (7,525)
Restructuring and impairment charges -- 14,011
Changes in assets and liabilities:
Accounts receivable 8,234 47,579
Inventories 7,055 25,134
Other current assets (2,059) 1,072
Accounts payable and accrued liabilities (20,504) (66,658)
Other (552) 359
-------- --------
Total adjustments 7,252 39,570
-------- --------
Net cash provided by operations 2,678 24,094
-------- --------
Cash flows from investing activities:
Capital expenditures (7,992) (56,234)
Other 1,757 (2,450)
-------- ---------
Net cash used in investing activities (6,235) (58,684)
Cash flows from financing activities:
Payments of long-term obligations (58,556) (5,000)
Proceeds from issuance of long-term obligations 26,050 34,000
Net change in short-term borrowings -- 4,611
Dividend payments (1,926) (1,678)
Proceeds from issuance of common stock 39,087 --
Other 112 508
-------- --------
Net cash provided by financing activities 4,767 32,441
Effect of exchange rate changes on cash 582 175
-------- --------
Net increase (decrease) in cash 1,792 (1,974)
Cash at beginning of year 13,255 20,564
-------- --------
Cash at end of period $ 15,047 $ 18,590
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest $3,674 $7,331
Income taxes $2,210 $8,265
See notes to condensed consolidated financial statements.
Page 5
Part 1 -- FINANCIAL INFORMATION (Cont'd)
CTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) - UNAUDITED
(In thousands of dollars)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(2,673) $(17,173) $(4,574) $(15,476)
Other comprehensive earnings (loss):
Cumulative translation adjustments 1,182 (130) 772 (1,110)
Deferred loss on forward contract (137) -- (387) --
------- ---------- ------- --------
Comprehensive loss $(1,628) $(17,303) $(4,189) $(16,586)
======= ======== ======= =========
See notes to condensed consolidated financial statements.
Page 6
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30,2002
NOTE A--BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements have been
prepared by CTS Corporation ("CTS" or "the Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The consolidated interim
financial statements should be read in conjunction with the financial
statements, notes thereto and other information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
The accompanying unaudited consolidated interim financial statements reflect, in
the opinion of management, all adjustments (consisting of normal recurring
items) necessary for a fair statement, in all material respects, of the
financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions 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. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
year.
Certain reclassifications have been made for the periods presented in the
financial statements to conform to the classifications adopted in 2002.
NOTE B--INVENTORIES
The components of inventory consist of the following:
($ in thousands)
June 30, December 31,
2002 2001
---- ----
Finished goods $16,556 $19,660
Work-in-process 8,545 8,747
Raw materials 17,993 21,742
------- -------
$43,094 $50,149
======= =======
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES
In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment
charges, $14.0 million in the second quarter and $26.0 million in the fourth
quarter. The restructuring plan actions were designed to enable the Company to
operate more efficiently in the then-existing environment and, at the same time,
position the Company for success when the economy improves. Major
Page 7
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd)
actions under the restructuring plan include closing its Chung-Li, Taiwan,
facility in the fourth quarter of 2001 and a decision to dispose of its Longtan,
Taiwan, building. The plan also covers ceasing production at its Sandwich,
Illinois; and Carlisle, Pennsylvania, facilities in 2002 and discontinuing the
manufacture of intermediate frequency surface acoustical wave ("IF SAW")
filters. IF SAW filter production was stopped at the end of the second quarter
of 2001. Amounts included in the Condensed Consolidated Statement of Earnings
(Loss) relating to the manufacture of IF SAW filters were insignificant in 2001.
The restructuring plan provides that production formerly completed at its
Chung-Li, Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities be
transferred to other existing CTS manufacturing locations. CTS completed a
substantial portion of these consolidations and transfers in fiscal 2001 and the
remainder are expected to be completed during the summer of 2002.
The following table displays the restructuring activity and restructuring
reserve balances as of December 31, 2001 and June 30, 2002:
Workforce Other
Reductions Exit Costs Total
---------- ---------- -----
($ in millions)
Second quarter charge $6.4 $2.0 $8.4
Fourth quarter charge 3.2 0.4 3.6
--- ----- ----
Total 2001 restructuring charge 9.6 2.4 12.0
Items paid in 2001 (6.8) (1.4) (8.2)
--- --- ---
Reserve balance at December 31, 2001 2.8 1.0 3.8
Items paid in first six months of 2002 (1.2) (0.5) (1.7)
--- --- ---
Reserve balance at June 30, 2002 $1.6 $0.5 $2.1
=== === ===
The $12.0 million restructuring in 2001 charge relates to facility
consolidations, including plant closures and product consolidations. Included in
this amount is $9.6 million of severance benefits associated with the separation
of approximately 1,500 employees. Approximately 12% of the employees severed
were managerial employees and 88% were nonmanagement employees. As of June 30,
2002, $8.0 million of severance benefits, relating to approximately 1,300
employees, had been paid. Of the remaining $2.4 million of other exit costs,
which consists primarily of costs associated with the closing of the plants,
$1.9 million has been paid as of June 30, 2002.
The restructuring plan also includes $31.0 million of asset impairment charges.
Approximately $26.9 million of the impairment charge is the adjustment needed to
reduce certain assets held for sale to their estimated fair value. See further
discussion in Note E, "Assets Held for Sale." An additional $1.2 million relates
to the write-off of leasehold improvements, primarily at its Chung-Li, Taiwan,
facility. The remaining $2.9 million relates to impairment of certain intangible
assets associated with obsolete products and technology acquired in the
acquisition of the Component Products Division of Motorola (see Note D,
"Acquisition").
Page 8
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd)
CTS also recognized pension plan curtailment gains of approximately $3.0 million
in 2001 resulting from plant closure under the restructuring plan.
During the first six months of 2002, CTS recorded, in cost of sales, $1.2
million of one-time charges, consisting primarily of equipment relocation and
other employee-related costs relating to restructuring activities. During the
first six months of 2001, CTS recorded $7.5 million of restructuring-related
one-time charges, primarily related to inventory writedowns and other
employee-related costs, in cost of goods sold.
CTS continues to assess its product lines, facilities, methods of operations and
processes to determine the appropriateness for expected market conditions going
forward and to assess actions that might be taken to improve results. The
Company could incur charges if changes are implemented as a result of these
assessments.
NOTE D--ACQUISITION
In 1999, CTS Corporation acquired certain assets and liabilities of the
Component Products Division ("CTS Wireless") of Motorola, Inc. ("Motorola"). The
acquisition was accounted for under the purchase method of accounting. As part
of the purchase agreement, CTS may be obligated to pay additional amounts in
2003 and 2004, depending upon increased sales and profitability of CTS Wireless
in 2002 and 2003. No amounts were due to Motorola in 2002 under the calculations
for 2001. The maximum remaining potential payment under the acquisition
agreement was $34.8 million at June 30, 2002.
NOTE E--ASSETS HELD FOR SALE
Assets held for sale at June 30, 2002 and at December 31, 2001, are comprised of
facilities, primarily the Longtan, Taiwan, building, and equipment that have
been removed from service and are to be disposed of pursuant to the
restructuring activities commenced in fiscal year 2001. Refer to Note C,
"Restructuring and Impairment Charges." The Company completed an assessment in
the fourth quarter of 2001 of the carrying value of its assets in light of then
existing and expected market conditions. The review highlighted certain assets
for which no production demand or use currently existed or was forecasted to
exist before economic obsolescence of the asset. In accordance with Financial
Accounting Standard Board ("FASB") Financial Accounting Standard ("FAS") No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," an impairment loss was recorded to reduce these assets to their
estimated fair value. These assets are recorded at amounts not in excess of what
management currently expects to receive upon sale, less cost of disposal.
However, the amounts the Company will ultimately realize are dependent on
numerous factors, some of which are beyond management's ability to control, and
could differ materially from the amounts currently recorded. Management cannot
determine when the sale of these assets will be completed. The assets to be
disposed of are held by both the electronic components and electronic assemblies
segments.
Page 9
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE F--Intangible Assets
CTS recorded approximately $2.0 million and $3.4 million of intangible asset
amortization in the six month period ended June 30, 2002 and July 1, 2001,
respectively. The components of intangible assets as of June 30, 2002, include
the following:
Gross Weighted
Carrying Accumulated Average
($ in thousands) Amount Amortization Life
------ ------------ ----
Amortized intangible assets:
Customer Lists $36,405 $(3,382) 30
Patents 10,319 (2,924) 10
Technology 12,014 (10,966) 4
Other 300 (250) 8
------- ------- ----
Total $59,038 (17,522) __21
------- ------- ----
Unamortized intangible assets:
Goodwill 513 --
--- -------
Total intangibles $59,551 (17,522)
======= =======
NOTE G--LONG-TERM DEBT
CTS' amended credit agreement consists of a revolving credit facility commitment
totaling $115 million, expiring in December 2003. The outstanding balance was
$53.0 million at June 30, 2002.
The credit agreement categorized all debt existing on December 20, 2001, as
senior to any future debt. The debt is collaterized by substantially all U.S.
assets and a pledge of 65% of the stock of certain non-U.S. subsidiaries.
Interest rates on these borrowings fluctuate based upon LIBOR, with adjustments
based on the ratio of CTS' consolidated senior indebtedness to consolidated
earnings before interest, taxes, depreciation and amortization. CTS pays a
commitment fee that varies based on performance under certain financial
covenants applicable to the undrawn portion of the revolving credit agreement.
At June 30, 2002, that fee was 0.5 percent per annum. The credit agreement
requires, among other things, that CTS maintain a minimum net worth, a minimum
fixed charge coverage ratio and a maximum leverage ratio. These covenants could
reduce the borrowing availability under the credit agreement. Additionally, the
credit agreement limits the amount allowed for dividends, capital expenditures
and acquisitions and requires the proceeds of all asset sales be applied against
outstanding borrowings. Furthermore, it requires repayment in an amount of 90%
of excess cash flow, as defined therein.
On April 16, 2002, the Company issued $25 million of five-year, 6.5%
convertible, subordinated debentures. These debentures are unsecured and convert
into CTS common stock at a conversion price of $20.05 per share.
Page 10
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE G--LONG-TERM DEBT (Cont'd)
At any time after the three-year anniversary of the issue date, the purchasers
may accelerate the maturity of the debentures. CTS also has the right after such
three-year anniversary and under certain circumstances, to force conversion of
the debentures into common stock. CTS used the net proceeds from the offering to
repay in full the outstanding term loans under its then-existing credit
facility, and the balance was applied to its revolving credit facility.
NOTE H--BUSINESS SEGMENTS
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. 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; quartz crystals and oscillators, and ClearONETM terminators used in
the communications and computer markets; and resistor networks, switches and
potentiometers used to serve multiple markets. Electronic assemblies are
assemblies of electronic or electronic and mechanical products which, apart from
the assembly, may themselves be marketed as separate stand-alone products. Such
assemblies represent completed, higher-level functional products to be used in
customer-end products or assemblies. These products consist principally of
integrated interconnect products containing backpanel and connector assemblies
used in the computer and communications infrastructure markets, RF (radio
frequency) integrated modules used in cellular handsets, low temperature cofired
ceramics ("LTCC") for global positioning systems ("GPS") and Bluetooth
communications products and pointing sticks/cursor controls for notebook
computers.
Page 11
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE H--BUSINESS SEGMENTS (Cont'd)
Management evaluates performance based upon segment operating earnings before
interest and income taxes. Summarized financial information concerning CTS'
reportable segments is shown in the following table:
($ in thousands) Electronic Electronic
Components Assemblies Total
---------- ---------- -----
Second Quarter 2002
Net sales to external customers $ 65,903 $ 51,822 $117,725
Segment operating earnings (loss) $ (3,918) $ 2,843 $ (1,075)
Total assets $456,539 $ 90,452 $546,991
Second Quarter 2001
Net sales to external customers $ 80,582 $ 63,141 $143,723
Segment operating earnings (loss) $ (2,035) $ 1,764 $ (271)
Total assets $503,298 $126,384 $629,682
First Half 2002
Net sales to external customers $124,148 $106,170 $230,318
Segment operating earnings (loss) $ (6,459) $ 6,394 $ (65)
Total assets $456,539 $ 90,452 $546,991
First Half 2001
Net sales to external customers $180,447 $140,264 $320,711
Segment operating earnings $ 4,432 $ 3,162 $ 7,594
Total assets $503,298 $126,384 $629,682
Reconciling information between reportable segments and CTS' consolidated totals
is shown in the following table:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---- ---- ---- ----
Total segment operating earnings
(loss) $(1,075) $ (271) $ (65) $ 7,594
Restructuring, asset impairment
and related one-time charges -
Electronic Components (400) (16,555) (1,103) (18,655)
Restructuring, asset impairment and
related one-time charges -
Electronic Assemblies -- (2,859) (79) (2,859)
Interest expense (2,882) (3,233) (5,552) (6,599)
Other income (expense) 792 20 700 (116)
------- ------- ------ --------
Loss before income taxes $(3,565) $(22,898) $(6,099) $(20,635)
======= ======== ======= ========
NOTE I--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. CTS 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
Page 12
Part 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE I--CONTINGENCIES
remediation at several non-CTS sites. 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 relating to
all such matters, either adequate provision for probable costs has been made, or
the ultimate costs resulting will not materially affect the consolidated
financial position, results of operations or cash flows of CTS.
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, results of
operations or cash flows.
NOTE J--EARNINGS PER SHARE
FAS No. 128, "Earnings per Share," requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share ("EPS") computations. As a result of the net loss for the
second quarter of 2002 and 2001, 1,568,000 and 886,000, respectively, of
dilutive securities issuable in connection with stock plans and convertible debt
have been excluded from the diluted loss per share calculation because their
effect would reduce the loss per share. These dilutive securities also include,
at June 30, 2002, 152,000 shares of CTS common stock to be issued to DCA
shareholders who have not yet tendered their stock certificates for exchange. In
the second quarter of 2002 and 2001, the calculation also excludes the effect of
stock options when the option exercise price exceeds the average market price of
the common shares during the period. In the second quarter of 2002 and 2001, the
number of stock options excluded from the computation was 800,000 and 848,000,
respectively.
As a result of the net loss for the first half of 2002 and 2001, 943,000 and
982,000, respectively, of dilutive securities have been excluded from the
diluted loss per share calculation because their effect would be anti-dilutive.
NOTE K--RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued standards No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." FAS No. 141 requires business
combinations initiated after June 30, 2001 be accounted for using the purchase
method of accounting. It also specifies the types of acquired intangible assets
that are required to be recognized and reported separately from goodwill. FAS
No. 142 requires goodwill and certain intangibles no longer be amortized, but
instead be tested for impairment at least annually. The FASB also issued
standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." FAS No. 144 defines impairment for long-lived assets and provides
guidance on the measurement of asset impairments. CTS had no transitional effect
of adopting these statements at January 1, 2002.
Page 13
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
- ---------------------
Results of Operations
- ---------------------
The following table highlights changes in significant components of the
consolidated statements of earnings (loss) for the three-month periods ended
June 30, 2002 and July 1, 2001.
($ in thousands)
June 30, July 1, Increase
2002 2001 (Decrease)
---- ---- ----------
Net sales $117,725 $143,723 $(25,998)
Gross profit 21,109 22,878 (1,769)
Gross profit as a percent
of sales 17.9% 15.9% 2.0%
Selling, general and
administrative expenses 16,563 21,064 (4,501)
Selling, general and
administrative expenses as
a percent of sales 14.1% 14.7% (0.6%)
Research and development
expenses 6,021 7,488 (1,467)
Restructuring and impairment
charges -- 14,011 (14,011)
Operating loss (1,475) (19,685) 18,210
Operating loss as
a percent of sales (1.3%) (13.7%) 12.4%
Interest expense 2,882 3,233 (351)
Other income (expense) 706 (149) 855
Loss before income tax
benefit (3,565) (22,898) 19,333
Income tax benefit (892) (5,725) 4,833
Income tax rate 25.0% 25.0% --
Net loss $(2,673) $(17,173) $14,500
Net sales decreased by $26.0 million, or 18% from the second quarter of 2001.
Gross profit as a percent of sales is higher due to lower levels of
restructuring-related, one-time expenses included in costs of good sold in the
second quarter of 2002 compared to the second quarter of 2001. Gross profit and
operating earnings include $0.4 million and $5.4 million of
restructuring-related, one-time charges in the second quarter of 2002 and 2001,
respectively. The 2002 restructuring-related, one-time charges consist primarily
of equipment relocation and other employee-related costs. The 2001
restructuring-related, one-time charges consist primarily of inventory
writedowns and employee-related costs. Partially offsetting this increase is a
reduction in gross margin caused by lower absorption of fixed manufacturing
overhead expenses in the second quarter of 2002.
As a percentage of total sales, the second quarter of 2002 and 2001 sales of
electronic components and electronic assemblies were 56% and 44%, respectively.
Page 14
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
- ------------------------------
Refer to Note H, "Business Segments," for a description of the Company's
business segments.
The electronic components segment experienced a $14.7 million sales decrease, or
18%, from the second quarter of 2001. Sales decreases occurred principally as a
result of the softness in demand and price erosion for wireless handset and
infrastructure components.
The electronic assemblies segment experienced a 2002 sales decrease of $11.3
million, or 18%, from the second quarter of 2001. The revenue decrease was
experienced primarily as a result of lower demand for integrated interconnect
systems products for the data storage systems for the computer equipment market,
and the continued softness and price erosion in the wireless handset market.
Selling, general and administrative expenses were $16.6 million, versus $21.1
million in the prior year's quarter. The reduction was primarily due to 2001
restructuring actions and cost reduction programs, and lower sales-related
expenses.
Research and development expenses decreased $1.5 million to $6.0 million from
the second quarter of 2001. However, as a percent of sales, research and
development expense remained fairly constant at 5.1% in the second quarter of
2002 compared to 5.2% in the second quarter of 2001. Significant ongoing R&D
activities continue in our wireless, automotive and resistor product lines to
support current product and process enhancements, to expand applications and to
enable new product development.
The decrease in operating loss dollars, was principally due to the $14 million
restructuring and impairment charges and $5.4 million of restructuring-related,
one-time charges recorded in the second quarter of 2001.
The increase in other income (expense) is attributable to higher gains on sales
of property, plant and equipment and favorable effects of exchange rates in the
second quarter of 2001.
Page 15
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
- -----------------------------
The following table highlights changes in significant components of the
consolidated statements of earnings (loss) for the six month periods ended June
30, 2002 and July 1, 2001:
($ in thousands)
June 30, July 1, Increase
2002 2001 (Decrease)
---- ---- ----------
Net sales $230,318 $320,711 $(90,393)
Gross profit 43,787 63,443 (19,656)
Gross profit as a percent of sales 19.0% 19.8% (0.8%)
Selling, general and
administrative expenses 31,880 46,084 (14,204)
Selling, general and
administrative expenses as a
percent of sales 13.8% 14.4% (0.6%)
Research and development expenses 13,154 17,268 (4,114)
Restructuring and impairment
charges -- 14,011 (14,011)
Operating loss (1,247) (13,920) 12,673
Operating loss, as a
percent of sales (0.5%) (4.3%) 3.8%
Interest expense 5,552 6,599 (1,047)
Other income (expense) 532 (465) 997
Loss before income
tax benefit (6,099) (20,635) 14,536
Income tax benefit (1,525) (5,159) 3,634
Income tax rate 25.0% 25.0% --
Net loss $(4,574) $(15,476) $10,902
Changes in Results of Operations: Comparison of First Half 2002 to First
- ------------------------------------------------------------------------
Half 2001
- ---------
Net sales decreased by $90.4 million, or 28% from the first half of 2001. Sales
decreased $56.3 million, or 31%, in the electronic component segments and $34.1
million, or 24%, in the electronic assemblies segment. The decrease in
electronic components and electronic assemblies segments was primarily due to
weak economic conditions and the related effects in the primary markets served
by CTS' two operating segments.
As a percentage of total sales, sales of electronic components and electronic
assemblies in the first half of 2002 were 54% and 46%, respectively. In the
first half of 2001, as a percentage of total sales, sales of electronic
components and electronic assemblies were 56% and 44%, respectively. Refer to
Note H - "Business Segments," for a description of the Company's business
segments.
Page 16
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
- -----------------------------
Changes in Results of Operations: Comparison of First Half 2002 to First
- ------------------------------------------------------------------------
Half 2001 (Cont'd)
- ------------------
Gross profit decreased primarily due to lower sales levels. The lower gross
profit as a percent of sales results principally from lower absorption of fixed
manufacturing overhead expenses caused by lower production levels, combined with
a downward pricing pressure. Also included in the first half of 2002 and 2001
are $1.2 million and $7.5 million, respectively, of one-time charges relating to
the 2001 restructuring plan. Gross profit for the first half of 2002 also
includes $3.1 million of a customer reimbursement for expenses substantially
incurred in prior quarters.
Selling, general and administrative expenses decreased due to overall expense
control and lower sales volume.
Research and development expenses decreased $4.1 million to $13.2 million from
the first half of 2001. However, as a percent of sales, research and development
expense increased to 5.7% in the first half of 2002 up from 5.4% in the first
half of 2001. Significant ongoing R&D activities continue in our wireless,
automotive and resistor product lines to support current product and process
enhancements, to expand applications and to enable new product development.
During the first half of 2001, CTS recorded $14 million of restructuring and
impairment charges relating to a plan to realign its operations. The plan was
designed to size the Company to then-existing market realities, while continuing
to put a priority on positioning the Company to be successful as the economy
recovers and market growth returns. See Note C, "Restructuring and Impairment
Charges," for a more detailed explanation of the plan actions. The expected 2002
pre-tax profitability improvement associated with the 2001 restructuring and
asset impairment charges is estimated to be $15 million.
The operating loss was reduced in the first half of 2002 compared to the first
half of 2001 primarily due to the $14 million restructuring and impairment
charges and $7.5 million of restructuring related, one-time charges recorded in
the first half of 2001. Other factors impacting the change in operating loss
include lower gross margin on lower sales partially offset by reduced operating
expenses.
The increase in other income (expense) is attributable to higher gains on sales
of property, plant and equipment and favorable effects of exchange rates in the
first half of 2002.
Page 17
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
- -----------------------------
Liquidity and Capital Resources
- -------------------------------
The following table highlights changes in balance sheet items and ratios and
other information related to liquidity and capital resources:
(Dollars in thousands)
June 30, December 31, Increase
2002 2001 (Decrease)
---- ---- ----------
Cash $15,047 $ 13,255 $ 1,792
Accounts receivable, net 73,329 81,563 (8,234)
Inventories, net 43,094 50,149 (7,055)
Current assets 189,225 200,674 (11,449)
Accounts payable 47,044 50,842 (3,798)
Current portion of debt -- 27,500 (27,500)
Current liabilities 104,279 153,857 (49,578)
Working capital 84,946 46,817 38,129
Current ratio 1.8 1.3 0.5
Long-term debt (including
current maturities) 120,007 152,513 (32,506)
Shareholders' equity 275,970 242,873 33,097
Long-term debt (including
current maturities) as a
percent of shareholders'
equity 43% 63% (20%)
Long-term debt (including
current maturities) as a
percent of capitalization 30% 39% (9%)
The percentage of long-term debt to shareholders' equity decreased to 43% on
June 30, 2002, versus 63% on December 31, 2001, due to the repayment of debt
primarily with the proceeds from the issuance of common stock.
From December 31, 2001, to June 30, 2002, CTS' working capital increased $38.1
million. This increase is primarily attributable to the reduction in the current
portion of borrowings at June 30, 2002, compared with December 31, 2001, of
$27.5 million combined with reductions in accounts payable and accruals ($22.1
million) partially offset by reductions in accounts receivable ($8.2 million)
and inventory ($7.1 million).
Capital expenditures were $8.0 million during the first half of 2002, compared
with $56.2 million for first half 2001. The 2002 capital expenditures were
primarily for production equipment for new products. The capital expenditures in
the first half of 2001 included $27.8 million for building projects and $19.8
million for production equipment for new products.
In the first half of 2002, cash flows provided by operating activities were $2.7
million. The net loss for the first half of 2002 combined with the increase in
the pension asset and net working capital reductions were more than offset by
depreciations and amortization for the first half of 2002.
Page 18
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
- -----------------------------
In the first half of 2001, cash flows provided by operating activities were
$24.1 million. Cash flows used for investing activities totaled $6.2 million
through the first half of 2002, including $8.0 million of capital expenditures,
partially offset by $1.8 million of proceeds from the sale of assets held for
sale and other property, plant and equipment. In the first half of 2001, cash
flows used for investing activities totaled $58.7 million, consisting primarily
of $56.2 million of capital expenditures.
Cash flows provided by financing activities were $4.8 million in the first half
of 2002 consisting primarily of proceeds from the issuance of debt of $26.1
million and proceeds from the issuance of common stock of $39.1 million
partially offset by a net repayment of debt of $58.6 million and dividend
payments of $1.9 million. Cash flows provided by financing activities were $32.4
million in the first half of 2001, consisting primarily of a net increase in
debt of $29.0 million, and other financing activities, primarily related to
proceeds from additional borrowings under the short-term notes payable and
dividend payments.
CTS' capital expenditures for 2002 are presently expected to total less than $25
million, $8.0 million of which has been spent during the first half of the year.
These capital expenditures are primarily for new products and cost savings
initiatives.
In April 2002, CTS amended its credit agreement with its existing nine banks.
The amended agreement adjusts certain financial covenants, reduces the revolving
credit facility to $115 million, eliminates the term loans, and allows for
limited acquisitions. The agreement includes the revolving credit facility
commitment, expiring in December 2003. The outstanding balance was $53 million
at June 30, 2002.
These debt agreements contain financial covenants as described in Note G,
"Long-term Debt." Although CTS management currently expects to be in compliance
with all financial covenants, there can be no assurance of this. Certain
factors, such as forecasted future operating results, are dependent upon future
events, some of which are beyond CTS' ability to control.
CTS believes cash flows from operations and borrowings under its credit
agreement will be adequate to fund its working capital, restructuring
activities, capital expenditures and debt service requirements. However, if
customer demand decreases significantly from CTS' current forecast, CTS may need
to find an alternative funding source. In this event, CTS may choose to pursue
additional equity and/or debt financing. CTS cannot assure that additional
financing, which would be affected by general economic and market conditions,
would be available on terms acceptable to CTS or at all.
Page 19
Part 1 -- FINANCIAL INFORMATION (Cont'd)
Item 2. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations (Continued)
- -----------------------------------------------
During 2002, CTS was required to repay $27.5 million term loans under its credit
agreement, all of which had been paid as of the April 2002 credit agreement
amendment, and to make $5.9 million of lease payments.
On December 14, 1999, CTS' shelf registration statement on Form S-3 was declared
effective by the Securities and Exchange Commission. CTS could initially offer
up to $500.0 million in any combination of debt securities, common stock,
preferred stock or warrants under the registration statement.
During the first half of 2002, CTS issued $28.2 million of common stock under
this registration statement and received net proceeds of $28.1 million. CTS used
the net proceeds of these equity issuances to repay term loans under its credit
agreement. As of June 30, 2002, CTS could offer up to $445.8 million of
additional debt and/or equity securities under this registration statement.
On November 13, 2001, CTS' Form S-3 registration statement registering 2.0
million shares of CTS common stock to be issued under CTS' Direct Stock Purchase
Plan was declared effective by the Securities and Exchange Commission. During
the first half of 2002, CTS issued $11.0 million of common stock under this
registration statement. CTS used the net proceeds of these equity issuances to
repay term and revolving loans under its credit agreement and for working
capital. As of June 30, 2002, CTS could issue up to an additional 1.1 million
shares of common stock under this registration statement.
Also in April 2002, the Company issued $25 million of five-year, 6.5%
convertible, subordinated debentures. These debentures are unsecured and convert
into CTS common stock at a conversion price of $20.05 per share. At any time
after the three-year anniversary of the issue date, the purchasers may
accelerate the maturity of the debentures. CTS also has the right after such
three-year anniversary and under certain circumstances, to force conversion of
the debentures into common stock. CTS used the net proceeds from the offering to
repay the outstanding term loans in full under its then- existing credit
facility, and the balance was applied to its revolving credit facility.
*****
Statements about the Company's earnings outlook and its plans, estimates and
beliefs concerning the future are forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, based on the Company's
current expectations. Actual results may differ materially from those stated in
the forward-looking statements due to a variety of factors which could affect
the Company's operating results, liquidity and financial condition. We undertake
no obligations to publicly update or revise any forward-looking statements.
Factors that could impact future results include among others: the general
market conditions in the communications, computer and automotive markets, and in
the overall economy; whether the Company is able to implement measures to
improve its financial condition and flexibility; the Company's successful
execution of its restructuring, consolidation and cost-reduction plans; pricing
Page 20
Part 1 -- FINANCIAL INFORMATION (Cont'd)
- ----------------------------------------
pressures and demand for the Company's products, especially if economic
conditions worsen or do not recover in the key markets for the Company's
products; and risks associated with our international operations, including
trade and tariff barriers, exchange rates and political risks. Investors are
encouraged to examine the Company's SEC filings, which more fully describe the
risks and uncertainties associated with the Company's business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There have been no material changes in CTS' market risk since December 31, 2001.
Part 2 -- OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------- -----------------
CTS is involved in litigation and in other administrative proceedings with
government agencies regarding the protection of the environment, and other
matters, the results of which are not yet determinable. In the opinion of
management, based upon currently available information, adequate provision for
anticipated costs has been made, or the ultimate costs resulting from such
litigation or administrative proceedings will not materially affect the
consolidated financial position, results of operations or cash flows of CTS. See
also Note I, "Contingencies," in the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The Annual Meeting of Shareholders of CTS Corporation was held on May 1, 2002.
At the meeting, the following matters were submitted to a vote of the
stockholders of CTS:
1. The election of nine directors to serve for one year beginning
at the 2002 annual shareholders' meeting and expiring at the 2003 annual
shareholders' meeting. A summary of votes by directors is shown below:
Director For Withheld
-------- --- --------
Walter S. Catlow 25,956,886 3,131,082
Lawrence J. Ciancia 25,956,348 3,131,620
Thomas G. Cody 25,954,892 3,133,076
Gerald H. Frieling 25,931,937 3,156,031
Roger R. Hemminghaus 25,961,422 3,126,546
Michael A. Henning 25,957,602 3,130,366
Robert A. Profusek 25,953,925 3,134,043
Donald K. Schwanz 25,946,586 3,141,382
Randall J. Weisenburger 25,949,550 3,138,418
Page 21
Part 2 -- OTHER INFORMATION (Cont'd)
- ------------------------------------
2. The CTS Corporation Management Incentive Plan was approved by the
shareholders with 27,766,223 affirmative votes, 633,471 votes against,
688,274 abstaining votes, and 3,965,418 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
--------
None
b. Reports on Form 8-K
-------------------
During the three-month period ending June 30, 2002, CTS filed the following
reports on Form 8-K:
o Report dated April 18, 2002, under Item 5., Other Events,
containing the press release announcing the completion of a private
placement of convertible debt securities.
o Report dated April 22, 2002, under Items 5., Other Events, filing
the Securities Purchase Agreements and the form of debenture related to its
$25 million 6 1/2% Convertible Subordinated Debentures.
o Report dated April 30, 2002, under Item 5., Other Events, filing Amendment
No. 2. to the Rights Agreement.
o Report dated June 20, 2002, under Item 5., Other Events, filing a
copy of a press release announcing expected financial results for the
second quarter of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CTS CORPORATION CTS CORPORATION
/S/ /S/
- -------------------------- ------------------------------
Richard G. Cutter III Vinod M. Khilnani
Vice President, Secretary Senior Vice President and Chief
and General Counsel Financial Officer
Dated: July 24, 2002
Page 22