Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
 X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the Quarterly Period Ended June 27, 2004
       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

CTS CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 574-293-7511

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  X     No     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 20, 2004:  36,099,702

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

i

Table of Contents

PART I  -  FINANCIAL INFORMATION

   Item 1.   Financial Statements

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
(In thousands, except per share amounts)

				Three Months Ended								Six Months Ended
				June 27, 2004				June 29, 2003				June 27, 2004				June 29, 2003
Net sales				$	137,624			$	116,697			$	259,771			$	222,466
Costs and expenses:
	Cost of goods sold				108,707				92,177				206,245				176,863
	Selling, general and administrative expenses				16,622				14,623				31,499				27,471
	Research and development expenses				4,673				5,390				9,557				11,031
	Gain on sales of assets  — Note D				(3,006	)			—				(3,067	)			—
		Operating earnings			10,628				4,507				15,537				7,101
Other (expense) income:
	Interest expense				(1,590	)			(1,899	)			(3,123	)			(3,871	)
	Interest income				233				101				335				150
	Other				(401	)			(65	)			(519	)			25
		Total other expense			(1,758	)			(1,863	)			(3,307	)			(3,696	)
		Earnings before income taxes			8,870				2,644				12,230				3,405
		Income tax expense — Note J			1,973				661				2,813				851
		Net earnings		$	6,897			$	1,983			$	9,417			$	2,554
Net earnings per share — Note K
	Basic			$	0.19			$	0.06			$	0.26			$	0.07
	Diluted			$	0.19			$	0.06			$	0.26			$	0.07
	Cash dividends declared per share			$	0.03			$	0.03			$	0.06			$	0.06
Average common shares outstanding:
	Basic				35,986				34,227				35,971				34,125
	Diluted				36,253				34,569				36,248				34,415

See notes to condensed consolidated financial statements.

1

Table of Contents

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

					June 27, 2004				December 31, 2003*
					(UNAUDITED)
ASSETS
Current Assets
	Cash and cash equivalents				$	48,199			$	25,346
	Accounts receivable, less allowances (2004 — $1,523; 2003 — $1,585)					82,549				72,290
	Inventories — Note C					44,471				31,925
	Other current assets					8,297				6,697
	Deferred income taxes					28,523				28,508
			Total current assets			212,039				164,766
Property, plant and equipment, less accumulated depreciation (2004 — $280,826; 2003 — $261,838)						116,914				122,481
Other Assets
	Prepaid pension asset — Note G					137,885				132,960
	Intangible assets, net					36,303				37,456
	Other assets — Note D					8,939				24,587
			Total other assets			183,127				195,003
Total Assets					$	512,080			$	482,250
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable				$	64,352			$	52,252
	Accrued liabilities					43,584				43,437
			Total current liabilities			107,936				95,689
Long-term debt — Note F						85,000				75,880
Other long-term obligations						11,026				11,133
Deferred income taxes						5,414				5,357
Shareholders’ Equity
	Preferred stock — authorized 25,000,000 shares without par value; none issued					—				—
	Common stock — authorized 75,000,000 shares without par value; 52,640,014 shares issued at June 27, 2004 and 52,632,088 shares issued at December 31, 2003					263,040				262,748
	Additional contributed capital					21,812				21,520
	Retained earnings					270,677				263,430
	Accumulated other comprehensive earnings					846				151
						556,375				547,849
Cost of common stock held in treasury (2004 — 16,568,326 shares; 2003 — 16,565,558 shares)						(253,671	)			(253,658	)
			Total shareholders’ equity			302,704				294,191
Total Liabilities and Shareholders’ Equity					$	512,080			$	482,250
*The balance sheet at December 31, 2003, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements.

2

Table of Contents

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands of dollars)

				Six Months Ended
				June 27, 2004				June 29, 2003
Cash flows from operating activities:
	Net earnings			$	9,417			$	2,554
	Adjustments to reconcile net earnings
	to net cash provided by operating activities:
	Depreciation and amortization				14,009				17,321
	(Gain) loss on sale of assets				(3,067	)			—
	Changes in assets and liabilities:
	Accounts receivable				(10,259	)			(1,942	)
	Inventories				(12,546	)			1,205
	Other current assets				(1,181	)			(3,159	)
	Prepaid pension asset				(4,925	)			(6,143	)
	Accounts payable and accrued liabilities				12,554				(3,700	)
	Other				706				753
	Total adjustments				(4,709	)			4,335
	Net cash provided by operations				4,708				6,889
Cash flows from investing activities:
	Capital expenditures				(6,213	)			(4,485	)
	Proceeds from sales of assets				19,036				3,974
	Other				—				(123	)
	Net cash provided by (used in) investing activities				12,823				(634	)
Cash flows from financing activities:
	Payments of long-term debt				(112,540	)			(62,125	)
	Proceeds from issuance of long-term debt				121,660				52,025
	Debt issue costs				(2,175	)			—
	Issuance of common stock				—				3,043
	Dividends paid				(2,229	)			(2,047	)
	Other				(48	)			(52	)
	Net cash provided by (used in) financing activities				4,668				(9,156	)
Effect of exchange rate on cash and cash equivalents					654				341
Net increase (decrease) in cash and cash equivalents					22,853				(2,560	)
Cash and cash equivalents at beginning of year					25,346				9,225
Cash and cash equivalents at end of period				$	48,199			$	6,665
Supplemental cash flow information
Cash paid during the period for:
	Interest			$	2,905			$	3,161
	Income taxes--net			$	3,800			$	4,021

See notes to condensed consolidated financial statements.

3

Table of Contents

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED
(In thousands of dollars)

				Three Months Ended								Six Months Ended
				June 27, 2004				June 29, 2003				June 27, 2004				June 29, 2003
Net earnings				$	6,897			$	1,983			$	9,417			$	2,554
Other comprehensive earnings (loss):
	Cumulative translation adjustment				310				770				657				266
	Deferred gain (loss) on forward contracts				7				(37	)			38				(37	)
Comprehensive earnings				$	7,214			$	2,716			$	10,112			$	2,783

See notes to condensed consolidated financial statements.

4

Table of Contents

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED
June 27, 2004

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 unaudited condensed 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, 2003.

The accompanying unaudited condensed 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 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 reported period.  Actual results could differ materially 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 2004.

NOTE B—Stock-Based Employee Compensation

CTS accounts for stock-based employee 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.  CTS has adopted the disclosure requirements of the Financial Accounting Standards Board’s (FASB) Financial Accounting Standard (FAS) No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”  Had employee compensation cost for CTS’ fixed, stock-based compensation plans been determined based on the fair value method, as defined by FAS No. 123, “Accounting for Stock-Based Compensation,” CTS’ net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below:

			Three Months Ended								Six Months Ended
			June 27, 2004				June 29, 2003				June 27, 2004				June 29, 2003
			($ in thousands, except per share amounts)
Net earnings, as reported			$	6,897			$	1,983			$	9,417			$	2,554
Deduct:    Stock-based employee compensation cost,                   net of tax, if fair value based method were used				(297	)			(416	)			(585	)			(797	)
Proforma net earnings			$	6,600			$	1,567			$	8,832			$	1,757
Net earnings per share-basic, as reported			$	0.19			$	0.06			$	0.26			$	0.07
Proforma net earnings per share-basic				0.18				0.05				0.25				0.05
Net earnings per share-diluted, as reported				0.19				0.06				0.26				0.07
Proforma net earnings per share-diluted			$	0.18			$	0.05			$	0.24			$	0.05

5

Table of Contents

NOTE C—Inventories

Inventory consist of the following:

				June 27, 2004				December 31, 2003
				($ in thousands)
Finished goods				$	11,209			$	8,047
Work-in-process					8,498				7,779
Raw materials					24,764				16,099
				$	44,471			$	31,925

NOTE D—Asset Sales

The December 31, 2003 other assets balance sheet item included $17.6 million of assets held for sale. During the first six months of 2004, CTS sold approximately $16.5 million of assets held for sale, including its Longtan, Taiwan building. The proceeds on the assets sales approximated the carrying value. In addition, due to changes in circumstances, which were previously considered unlikely, $1.1 million of the assets held for sale at December 31, 2003 were reclassified to fixed assets during the first six months of 2004.

During the first six months of 2004, CTS also sold excess land located near its Canadian facility for approximately $2.7 million. Cash proceeds related to the sale approximated $2.1 million, with the remaining proceeds of $0.6 million evidenced by a secured note receivable due in May 2006. A gain of $2.7 million was recognized on the sale.

NOTE E—Financial Instruments

In the first quarter of 2004, CTS entered into a series of forward exchange contracts to manage its risk to fluctuations in foreign currency exchange rates between the Euro and the United Kingdom Pound. These contracts, which expire monthly in 2004, are designed to hedge anticipated foreign currency transactions. In accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these forward contracts for forecasted transactions are designated as cash flow hedges and recorded as assets or liabilities on the balance sheet at fair value. Changes in the contracts’ fair values, which totaled $38,000 for the six months ending June 27, 2004, are recognized in accumulated other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs.

NOTE F—Long-Term Debt

CTS has a credit agreement containing a $55 million senior, secured revolving credit facility (Credit Facility). There were no outstanding balances under the Credit Facility at June 27, 2004. Any outstanding balances would be senior to CTS’ convertible debentures. The Credit Facility is collateralized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on the facility fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the Credit Facility. The commitment fee varies based on performance under certain financial covenants and is currently 0.375 percent per annum. The Credit Facility requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Credit Facility. Additionally, the Credit Facility limits the amounts allowed for dividends, capital expenditures and acquisitions. The Credit Facility expires in July 2006.

In April 2002, CTS issued $25 million of five-year, 6.5% convertible, subordinated debentures ($25 million Notes). 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.

In May 2004, CTS issued $60 million convertible senior subordinated debentures ($60 million Notes) in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. These unsecured debentures bear interest at an annual rate of 2.125%, payable semiannually on May 1 and November 1 of each year through the maturity date of May 1, 2024.

The $60 million Notes are convertible, under certain circumstances, into CTS common stock at a conversion price of $15.00 per share (which is equivalent to an initial conversion rate of approximately 66.6667 shares per $1,000 principal amount of the notes). Upon conversion of the $60 million Notes, in lieu of delivering common stock, the Company may, at its discretion, deliver cash or a combination of cash and common stock.

6

Table of Contents

Holders may convert the $60 million Notes at any time during a conversion period if the closing price of CTS common stock is more than 120% of the conversion price ($18.00 per common share) for at least 20 of the 30 consecutive trading days immediately preceding the fist trading day of the conversion period. The conversion periods begin on February 15, May 15, August 15 and November 15 of each year. Holders may also convert the notes if certain corporate transactions occur. As of June 27, 2004, none of the conditions for conversion of the $60 million Notes were satisfied.

CTS may, at its option, redeem all or a portion of the $60 million Notes for cash at any time on or after May 1, 2009, at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest at the redemption date. Holders may require CTS to purchase for cash all or part of their notes on May 1, 2009, 2014, and 2019, or upon the occurrence of certain events, at 100% of the principle amount of the notes plus accrued and unpaid interest up to, but not including, the date of purchase.

CTS used a portion of the proceeds from the issuance of the $60 million Notes to repay $40 million of its industrial revenue bonds that were due in 2013. Another $2 million of industrial revenue bonds were repaid with cash flows from operations in the first quarter of 2004.

In connection with the issuance of the $60 million Notes, CTS incurred $2.2 million of issuance costs, which primarily consisted of investment banker fees, legal and other professional fees. These costs are being amortized to interest expense over the five year period from May 1, 2004 through May 1, 2009.

NOTE G—Retirement Plans

Net pension (income) / postretirement expense for the three and six months ended June 27, 2004 and June 29, 2003 include the following components:

				Three Months Ended								Six Months Ended
				June 27, 2004				June 29, 2003				June 27, 2004				June 29, 2003
PENSION PLANS				($ in thousands)
Service cost				$	1,340			$	1,227			$	2,680			$	2,454
Interest cost					2,823				2,729				5,646				5,456
Expected return on plan assets (1)					(6,763	)			(6,731	)			(13,526	)			(13,462	)
Amortization of unrecognized:
	Transition obligation				(118	)			(140	)			(236	)			(280	)
	Prior service cost				225				221				450				442
Recognized (gain) loss					160				(234	)			320				(468	)
Net pension (income)				$	(2,333	)		$	(2,928	)		$	(4,666	)		$	(5,858	)

(1)      Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

				Three Months Ended								Six Months Ended
				June 27, 2004				June 29, 2003				June 27, 2004				June 29, 2003
OTHER POSTRETIREMENT BENEFIT PLAN				($ in thousands)
Service cost				$	7			$	10			$	14			$	20
Interest cost					78				79				156				158
Net postretirement expense				$	85			$	89			$	170			$	178

7

Table of Contents

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 business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).

Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies.  Components and sensors consist principally of automotive sensors and actuators used in commercial or consumer vehicles; electronic components used in cellular handsets, communications infrastructure and computer markets; low temperature cofired ceramic (LTCC) electronic substrates used in various communications and automotive applications; pointing sticks/cursor controls for computers and games for the computer market; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer.  EMS also includes design of interconnect systems and complex backplanes, global supply-chain management services and related manufacturing and design services as may be required by the customer.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's annual report on Form 10-K. Management evaluates performance based upon operating earnings before interest and income taxes.

Summarized financial information concerning CTS’ reportable segments, is shown in the following table:

8

Table of Contents

Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table:

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 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.  For all claims, 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.

9

Table of Contents

NOTE J—Income Taxes

During the second quarter of 2004, CTS changed the estimate of its 2004 effective tax rate from 25% to 23%. The lower effective tax rate reflects the transfer of certain business operations to jurisdictions with lower statutory tax rates and the notification that manufacturing incentives in one foreign jurisdiction qualified CTS for a lower statutory rate, expiring in 2011, subject to certain conditions.

NOTE K—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.  The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the quarters and six-month periods ending June 27, 2004 and June 29, 2003.

10

Table of Contents

The following table shows the potentially dilutive securities which have been excluded from the diluted earnings per share calculation for the three and six month periods ending June 27, 2004 and June 29, 2003 because they are either anti-dilutive, the exercise price exceeds the average market price or the conversion criteria have not been met.

11

Table of Contents

   Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

CTS is a global manufacturer of components and sensors to the automotive, communications and computer markets. The Company also offers specialized electronic manufacturing, design and supply-chain services to industrial, communications and computing infrastructure original equipment manufacturers (OEMs). Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives and distributors. Sales are reported through two business segments, Components and Sensors and Electronics Manufacturing Services (EMS), which represent 49.6% and 50.4%, respectively, of CTS’ total sales in the second quarter of 2004 and 54.8% and 45.2%, respectively, in the second quarter of 2003.

As discussed in more detail throughout the Management’s Discussion and Analysis

Outlook

CTS currently expects sales growth and earnings for the full year of 2004 as follows:

12

Table of Contents

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

Management believes that judgment and estimates related to the following critical accounting policies could materially affect its consolidated financial statements.

In the first six months of 2004, there have been no changes in the above critical accounting policies.

Results of Operations

Comparison of Second Quarter 2004 and Second Quarter 2003

Business Segment Discussion

Refer to Note H, “Business Segment,” for a description of the Company’s business segments.

The following table highlights the segment results for the three-month periods ending June 27, 2004 and June 29, 2003: