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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 September 29, 2002
-----------------------
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)
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
-------------
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 October 17, 2002: 33,846,071.
CTS CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Earnings (Loss) - For the Three Months
and Nine Months ended September 29, 2002 and
September 30, 2001 3
Condensed Consolidated Balance Sheets -
As of September 29, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash
Flows - For the Nine Months Ended
September 29, 2002 and September 30, 2001 5
Consolidated Statements of Comprehensive
Earnings (Loss) - For the Three Months and Nine Months
Ended September 29, 2002 and September 30, 2001 6
Notes to Condensed Consolidated Financial
Statements 7-15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15-25
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 26
Item 4. Controls and Procedures 26
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings 26-27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
CERTIFICATIONS
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 28-30
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 NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
Net sales $ 110,944 $ 131,153 $ 341,262 $ 451,864
Costs and expenses:
Cost of goods sold 87,059 102,551 273,590 359,819
Selling, general and administrative
expenses 16,651 21,370 48,531 67,454
Research and development expenses 5,390 8,118 18,544 25,386
Restructuring and impairment
charges--Note C 18,343 -- 18,343 14,011
--------- --------- --------- ---------
Operating loss (16,499) (886) (17,746) (14,806)
Other (expense) income:
Interest expense (2,192) (2,673) (7,744) (9,272)
Interest income 113 168 281 517
Other 150 (462) 682 (927)
--------- --------- --------- ---------
Total other expense (1,929) (2,967) (6,781) (9,682)
--------- --------- --------- ---------
Loss before income taxes (18,428) (3,853) (24,527) (24,488)
Income tax benefit (4,607) (963) (6,132) (6,122)
--------- --------- --------- ---------
Net loss $ (13,821) $ (2,890) $ (18,395) $ (18,366)
========= ========= ========= =========
Net loss per share - Note J
Basic $ (0.41) $ (0.10) $ (0.56) $ (0.66)
--------- --------- --------- ---------
Diluted $ (0.41) $ (0.10) $ (0.56) $ (0.66)
--------- --------- --------- ---------
Cash dividends declared per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
--------- --------- --------- ---------
Average common shares outstanding:
Basic 33,606 28,495 32,907 27,955
Diluted 33,606 28,495 32,907 27,955
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)
SEPTEMBER 29, DECEMBER 31,
2002 2001*
ASSETS (UNAUDITED)
Current Assets
Cash $ 11,627 $ 13,255
Accounts receivable, less allowances
(2002--$1,608; 2001--$1,470) 64,870 81,563
Inventories-Note B 40,977 50,149
Other current assets 5,632 4,371
Deferred income taxes 51,646 51,336
--------- ---------
Total current assets 174,752 200,674
Property, plant and equipment, less accumulated
depreciation (2002--$250,956; 2001--$207,212) 161,062 191,958
Other Assets
Prepaid pension asset 113,016 102,196
Intangible assets-Note F 40,871 44,004
Assets held for sale-Note E 18,220 21,940
Other 6,326 7,159
--------- ---------
Total other assets 178,433 175,299
--------- ---------
$ 514,247 $ 567,931
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt-Note G $ -- $ 27,500
Accounts payable 45,604 50,842
Accrued liabilities 55,049 75,515
--------- ---------
Total current liabilities 100,653 153,857
Long-term debt-Note G 103,475 125,013
Other long-term obligations 7,001 7,274
Deferred income taxes 39,634 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; 50,463,190 shares
issued at September 29, 2002, and
48,531,936 shares issued at
December 31, 2001 239,660 213,947
Additional contributed capital 23,326 24,153
Retained earnings 255,568 276,988
Accumulated other comprehensive loss (937) (1,702)
--------- ---------
517,617 513,386
Cost of common stock held in treasury
2002--16,617,173 shares; 2001--17,630,192 shares (254,133) (270,513)
--------- ---------
Total shareholders' equity 263,484 242,873
--------- ---------
$ 514,247 $ 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)
NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
Cash flows from operating activities:
Net loss $(18,395) $(18,366)
Depreciation and amortization 33,420 39,858
Deferred income taxes -- (2,746)
Prepaid pension asset (10,820) (11,091)
Income tax benefit related to exercised
stock options -- 3,687
Restructuring and impairment charges 18,343 14,011
Changes in assets and liabilities:
Accounts receivable 16,693 54,928
Inventories 9,172 30,968
Other current assets (1,670) (1,147)
Accounts payable and accrued liabilities (29,241) (72,152)
Other (331) (956)
-------- --------
Total adjustments 35,566 55,360
-------- --------
Net cash provided by operations 17,171 36,994
-------- --------
Cash flows from investing activities:
Capital expenditures (11,341) (71,927)
Proceeds from the sale of assets 2,317 5,000
Other (139) (2,754)
-------- --------
Net cash used in investing activities (9,163) (69,681)
Cash flows from financing activities:
Payments of long-term obligations (75,088) (20,000)
Proceeds from issuance of long-term
obligations 26,050 34,000
Net change in short-term borrowings -- (2,116)
Dividend payments (2,932) (2,554)
Proceeds from issuance of common stock 40,960 --
Stock options exercised 14 10,615
Other 103 --
-------- --------
Net cash (used for) provided by
financing activities (10,893) 19,945
Effect of exchange rate changes on cash 1,257 27
-------- --------
Net decrease in cash (1,628) (12,715)
Cash at beginning of year 13,255 20,564
-------- --------
Cash at end of period $ 11,627 $ 7,849
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 4,316 $ 9,469
Income taxes--net $ 4,127 $ 11,596
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 NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
Net loss $(13,821) $(2,890) $(18,395) $(18,366)
Other comprehensive earnings (loss):
Cumulative translation adjustments 366 916 1,138 (194)
Deferred gain (loss) on
forward contract 14 -- (373) --
-------- ------- -------- --------
Comprehensive loss $(13,441) $(1,974) $(17,630) $(18,560)
======== ======= ======== ========
See notes to condensed consolidated financial statements.
Page 6
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 29, 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 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, 2001.
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, results of operations, and cash flows 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)
SEPTEMBER 29, DECEMBER 31,
2002 2001
Finished goods $16,890 $19,660
Work-in-process 7,910 8,747
Raw materials 16,177 21,742
------- -------
$40,977 $50,149
======= =======
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES
2002 RESTRUCTURING AND IMPAIRMENT CHARGES
In the third quarter of 2002, CTS recorded $18.3 million of pre-tax
restructuring and impairment charges. The restructuring and impairment charges
reflect operational improvements and related organizational realignments
primarily in the electronic components segment.
Page 7
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd)
Significant actions under the third quarter 2002 restructuring plan include
operational improvements and organizational realignments resulting in
approximately 300 employee reductions; relocating certain manufacturing
operations from a leased facility to a CTS-owned facility in Tianjin, China;
relocating engineering and design activities from a leased engineering and
design facility in Chung-Li, Taiwan to other CTS-owned facilities; and
transferring certain production processes from CTS' Albuquerque, New Mexico
facility to its Tianjin, China facility. Additionally, the charges reflect CTS'
decision to terminate all design activities related to new custom variations for
Voltage Controlled Oscillators ("VCO") and 9x11mm and 5x7mm Temperature
Compensated Crystal Oscillators ("TCXO"). CTS will continue to manufacture
existing designs of these products to satisfy current customer requirements. CTS
expects to complete substantially all of these actions by the end of 2002.
The restructuring charge of $5.0 million recorded in the third quarter of 2002
relates primarily to organizational realignment in the electronic components
segment, and reductions in support staff for the design of new custom variations
of certain TCXO and VCO product lines. Included in this amount is $4.6 million
of severance costs associated with the separation of approximately 300
employees, of which approximately 175 employees had been severed as of September
29, 2002. Approximately 67% of the employees severed were salary and indirect
employees and 33% were hourly production employees.
The following table displays the restructuring activity and restructuring
reserve balances for actions initiated in the third quarter of 2002:
($ in millions)
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
Third quarter of 2002 charge $4.6 $0.4 $5.0
Items paid or utilized in the third
quarter of 2002 (1.7) -- (1.7)
---- ---- ----
Reserve balance at September 29, 2002 $2.9 $0.4 $3.3
==== ==== ====
The 2002 restructuring plan also includes $13.3 million of asset impairment
charges. Approximately $10.6 million of the impairment charge is the adjustment
needed to recognize impairments resulting from the reduction in the remaining
useful lives of certain manufacturing equipment following the decision to
terminate the design of new custom variations of certain VCO and TCXO product
lines. CTS will continue to manufacture existing designs of these products to
satisfy current customer requirements. Approximately $2.1 million of the
impairment charge relates to the write-off of leasehold improvements in Taiwan
and China. Approximately $0.2 million relates to impairment of certain
intangible assets acquired in the acquisition of the Component Products Division
("CTS Wireless") of Motorola, Inc. ("Motorola") (See Note D, "Acquisition"). The
remaining $0.4 million impairment charge relates to further adjustments to the
estimated fair value of certain assets held for sale (see Note E, "Assets Held
for Sale").
Page 8
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd)
2001 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 $26.0 million in the fourth
quarter. The restructuring plan actions were designed to enable the Company to
operate more efficiently in the then-existing environment and, at the same time,
position the Company for success when the economy improves. Major actions under
the restructuring plan included closing its Chung-Li, Taiwan, manufacturing
facility in the fourth quarter of 2001 and a decision to dispose of its Longtan,
Taiwan, building. The plan also covered ceasing production at its Sandwich,
Illinois, and Carlisle, Pennsylvania, facilities in 2002 and discontinuing the
manufacture of intermediate frequency surface acoustical wave ("IF SAW")
filters. IF SAW filter production was stopped at the end of the second quarter
of 2001. Amounts included in the Condensed Consolidated Statement of Earnings
(Loss) relating to the manufacture of IF SAW filters were insignificant in 2001.
The restructuring plan provided that production formerly completed at its
Chung-Li, Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities be
transferred to other existing CTS manufacturing locations. CTS has substantially
completed these consolidations and transfers as of September 2002.
The following table displays the restructuring activity and restructuring
reserve balances for the 2001 plan as of December 31, 2001 and September 29,
2002:
($ in millions)
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
Second quarter 2001 charge $6.4 $2.0 $8.4
Fourth quarter 2001 charge 3.2 0.4 3.6
---- ----- ----
Total 2001 restructuring charge 9.6 2.4 12.0
Items paid or utilized in 2001 (6.8) (1.4) (8.2)
---- ---- ----
Reserve balance at December 31, 2001 2.8 1.0 3.8
Items paid or utilized in first nine
months of 2002 (2.1) (0.7) (2.8)
---- ---- ----
Reserve balance at September 29, 2002 $0.7 $0.3 $1.0
==== ==== ====
$12.0 million of the restructuring charge recorded in 2001 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 salary and indirect employees and 88% were hourly production employees.
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 CTS Wireless (see Note D, "Acquisition").
Page 9
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 closures under the restructuring plan.
During the first nine months of 2002, CTS recorded, in cost of sales, $1.3
million of one-time charges, consisting primarily of equipment relocation and
other employee-related costs associated with the restructuring activities.
During the first nine months of 2001, CTS recorded $8.3 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 their 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 acquired certain assets and liabilities of the Component Products
Division of 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. No amount is expected to be paid in
2003 for 2002 based on current projections. The maximum remaining potential
payment under the acquisition agreement was $34.8 million at September 29, 2002.
NOTE E--ASSETS HELD FOR SALE
Assets held for sale at September 29, 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. An impairment loss was
recorded to reduce these assets to their then-estimated fair value. The Company
routinely monitors the estimated value of all assets held for sale and records
adjustments to these values as required. During the third quarter of 2002, the
Company reduced their estimate of the fair value of these assets by $0.4
million. 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. The assets to be disposed of are
held by both the electronic components and electronic assemblies segments.
Page 10
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTE F--INTANGIBLE ASSETS
CTS recorded approximately $2.9 million and $5.1 million of intangible asset
amortization in the nine month period ended September 29, 2002 and September 30,
2001, respectively. The components of intangible assets as of September 29,
2002, include the following:
GROSS WEIGHTED
CARRYING ACCUMULATED AVERAGE
($ in thousands) AMOUNT AMORTIZATION LIFE
Amortized intangible assets:
Customer Lists $36,405 (3,693) 30
Patents 10,319 (3,194) 10
Technology 12,014 (11,534) 4
Other 300 (259) 8
------- -------- --
Total 59,038 (18,680) 21
--
Unamortized Goodwill 513 --
------- --------
Total intangibles $59,551 $(18,680)
======= ========
During the third quarter of 2002, CTS recorded an impairment charge of $0.2
million on the technology intangible as a result of the third quarter 2002
restructuring actions (see Note C, "Restructuring and Impairment Charges").
NOTE G--LONG-TERM DEBT
At September 29, 2002, CTS' amended credit agreement consisted of a revolving
credit facility commitment totaling $115 million, expiring in December 2003. The
outstanding balance was $36.5 million at September 29, 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 September 29, 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.
Page 11
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTE G--LONG-TERM DEBT (Cont'd)
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 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
Financial Accounting Standards Board ("FASB") Financial Accounting Standard
("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 ClearONE(TM) 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 12
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
THIRD QUARTER 2002
Net sales to external customers $ 62,164 $ 48,780 $110,944
Segment operating earnings $ 321 $ 1,630 $ 1,951
Total assets $429,604 $ 84,643 $514,247
THIRD QUARTER 2001
Net sales to external customers $ 70,202 $ 60,951 $131,153
Segment operating earnings (loss) $ (1,704) $ 1,581 $ (123)
Total assets $485,200 $110,614 $595,814
FIRST NINE MONTHS OF 2002
Net sales to external customers $186,312 $154,950 $341,262
Segment operating earnings (loss) $ (6,138) $ 8,024 $ 1,886
Total assets $429,604 $ 84,643 $514,247
FIRST NINE MONTHS OF 2001
Net sales to external customers $250,649 $201,215 $451,864
Segment operating earnings $ 2,728 $ 4,743 $ 7,471
Total assets $485,200 $110,614 $595,814
Reconciling information between reportable segments and CTS' consolidated totals
is shown in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
($ in thousands) SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
Total segment operating earnings (loss) $ 1,951 $ (123) $ 1,886 $ 7,471
Restructuring, asset impairment
and related one-time charges -
Electronic Components (13,790) (763) (14,893) (19,418)
Restructuring, asset impairment
and related one-time charges -
Electronic Assemblies (4,660) -- (4,739) (2,859)
Interest expense (2,192) (2,673) (7,744) (9,272)
Other income (expense) 263 (294) 963 (410)
-------- -------- -------- --------
Loss before income taxes $(18,428) $ (3,853) $(24,527) $(24,488)
======== ======== ======== ========
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
Page 13
PART 1 -- FINANCIAL INFORMATION (CONT'D)
NOTE I--CONTINGENCIES (Cont'd)
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
third quarter of 2002 and 2001, 245,000 and 442,000, respectively, of dilutive
securities issuable in connection with stock plans 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 September 29, 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 third 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 third quarter of 2002 and 2001, the number of stock
options excluded from the computation was 1,564,000 and 812,000, respectively.
Also, excluded from the 2002 third quarter diluted earnings per share
calculation is the dilutive effect of the 1,247,000 of shares related to the $25
million convertible debt, as the impact of these shares would be anti-dilutive.
As a result of the net loss for the first nine months of 2002 and 2001, 295,000
and 802,000, 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 14
PART 1 -- FINANCIAL INFORMATION (Cont'd)
NOTE K--RECENT ACCOUNTING PRONOUNCEMENTS (Cont'd)
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." FAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities. This standard
requires a liability be recognized at fair value for costs associated with exit
or disposal activities only when the liability is incurred as opposed to at the
time the Company commits to an exit plan as permitted under EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". FAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not expect that the
adoption of this standard in 2003 will have a material impact on the Company's
financial position, results of operations or cash flows.
NOTE L--SUBSEQUENT EVENT
On October 11, 2002, CTS amended its credit agreement with its existing nine
banks. The amended agreement reduces the revolving credit facility from $115
million to $85 million, establishes a basket for cash restructuring charges and
adjusts certain financial covenants beginning in 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 judgement and estimates related to the following
critical accounting policies could materially affect its consolidated financial
statements.
- Estimating inventory valuation, the allowance for doubtful accounts and
other accrued liabilities.
- Valuation of long-lived and intangible assets and depreciation /
amortization periods.
- Income taxes
- Retirement plans
In the first nine months of 2002, there have been no changes in the above
critical accounting policies.
Page 15
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
CTS assesses the carrying value of long-lived and intangible assets and the
remaining useful lives whenever events or changes in circumstances indicate the
carrying value may not be recoverable or the estimated useful life may no longer
be appropriate. Factors considered important which could trigger this review
include significant decreases in operating results, significant changes in its
use of the assets, decisions to curtail the development of new products or
variations of current products, competitive factors and the strategy of its
business, and significant negative industry or economic trends.
When the Company determines that the carrying value of long-lived and intangible
assets may not be recoverable, an impairment charge is recorded. Impairment is
generally measured based on a projected discounted cash flow method using a
discount rate determined by the Company to be commensurate with the risk
inherent in our current business model or prevailing market rates of investment
securities, if available.
In the third quarter of 2002, CTS reduced the carrying value of certain assets
to estimated fair value through impairment charges totaling $13.3 million (see
Note C, "Restructuring and Impairment Charges"). Fair values are determined
based on estimated discounted cash flows, published third party sources, third
party offers and information furnished by third party brokers/dealers.
The Company cannot predict the occurrence of future impairment-triggering events
nor the impact such events might have on the reported asset values. Such events
may include strategic decisions made in response to the economic conditions
relative to product lines, operations and the impact of the economic environment
on our customer base.
RETIREMENT PLANS
Actuarial assumptions are used in determining pension income and the benefit
obligation. CTS, after considering the advice of its actuaries, assumes a
discount rate, expected rate of return on plan assets and a rate of compensation
increase in determining its annual pension income and the projected benefit
obligation. During the fourth quarter of each year, CTS reviews its actuarial
assumptions in light of current economic factors to determine if the assumptions
need to be adjusted. CTS anticipates that one or more of these assumptions will
change. Changes in the actuarial assumptions could have a material affect on
CTS' results of operations in future years.
Page 16
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS
The following table highlights changes in significant components of the
consolidated statements of earnings (loss) for the three-month periods ended
September 29, 2002 and September 30, 2001.
($ IN THOUSANDS)
SEPTEMBER 29, SEPTEMBER 30, INCREASE
2002 2001 (DECREASE)
Net sales $ 110,944 $ 131,153 $ (20,209)
Gross profit 23,885 28,602 (4,717)
Gross profit as a percent
of sales 21.5% 21.8% (0.3%)
Selling, general and
administrative expenses 16,651 21,370 (4,719)
Selling, general and
administrative expenses as
a percent of sales 15.0% 16.3% (1.3%)
Research and development
expenses 5,390 8,118 (2,728)
Restructuring and impairment
charges 18,343 -- 18,343
Operating loss (16,499) (886) (15,613)
Operating loss as
a percent of sales (14.9%) (0.7%) (14.2%)
Interest expense 2,192 2,673 (481)
Other income (expense) 150 (462) 612
Loss before income tax
benefit (18,428) (3,853) (14,575)
Income tax benefit (4,607) (963) (3,644)
Income tax rate 25.0% 25.0% --
Net loss $ (13,821) $ (2,890) $ (10,931)
Net sales decreased by $20.2 million, or 15% from the third quarter of 2001. 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. Partially offsetting this
decrease are lower levels of restructuring-related, one-time charges included in
costs of goods sold of $0.1 million in the third quarter of 2002 compared to
$0.8 million in the third quarter of 2001. The 2002 and 2001
restructuring-related, one-time charges consist primarily of equipment
relocation and other employee-related costs. Included in gross profit for the
three-month period ending September 29, 2002 is approximately $1.0 million
pertaining to the resolution of a customer credit related to prior periods.
As a percentage of total sales, the third quarter of 2002 sales of electronic
components and electronic assemblies were 56% and 44%, respectively. In the
third quarter of 2001, as a percentage of total sales, sales of electronic
components and electronic assemblies were 54% and 46%, respectively. Refer to
Note H, "Business Segments," for a description of the Company's business
segments.
Page 17
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
The electronic components segment experienced an $8.0 million sales decrease, or
11%, from the third quarter of 2001. Sales decreases occurred principally as a
result of the softness in demand and price erosion for wireless handset and
infrastructure components for the communication market.
The electronic assemblies segment experienced a 2002 sales decrease of $12.2
million, or 20%, from the third quarter of 2001. The revenue decrease was
primarily the result of lower demand for integrated interconnect systems
products for the data storage systems for the computer equipment and
communication markets, and the continued softness and price erosion in the
wireless handset market.
Selling, general and administrative expenses were $16.7 million, versus $21.4
million in the prior year's quarter. The reduction was primarily due to 2001 and
2002 restructuring actions and cost reduction programs, and lower sales-related
expenses.
Research and development expenses decreased $2.7 million to $5.4 million from
the third quarter of 2001. The reduction reflects savings through organization
consolidation and relocation of certain R&D activities as well as the decision
to end the design of new variations of certain products. Significant ongoing R&D
activities continue in our wireless and automotive product lines to support
current product and process enhancements, to expand applications and to enable
new product development.
In the third quarter of 2002, CTS recorded $18.3 million of pre-tax
restructuring and impairment charges. The restructuring and impairment charges
reflect operational improvements and related organizational realignments
primarily in the electronic components segment.
Significant actions under the third quarter 2002 restructuring plan include
operational improvements and organizational realignments resulting in
approximately 300 employee reductions; relocating certain manufacturing
operations from a leased facility to a CTS-owned facility in Tianjin, China;
relocating engineering and design activities from a leased engineering and
design facility in Chung-Li, Taiwan to other CTS-owned facilities; and
transferring certain production processes from CTS' Albuquerque, New Mexico
facility to its Tianjin, China facility. Additionally, the charges reflect CTS'
decision to terminate all design activities related to new custom variations for
Voltage Controlled Oscillators ("VCO") and 9x11mm and 5x7mm Temperature
Compensated Crystal Oscillators ("TCXO"). CTS will continue to manufacture
existing designs of these products to satisfy current customer requirements. CTS
expects to complete substantially all of these actions by the end of 2002. See
also Note C, "Restructuring and Impairment Charges."
The restructuring charge of $5.0 million recorded in the third quarter of 2002
relates primarily to organizational realignment in the electronic components
segment, and reductions in support staff for the design of new custom variations
of certain TCXO and VCO product lines. Included in this amount is $4.6 million
of severance costs associated with the separation of
Page 18
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
approximately 300 employees, of which approximately 175 employees had been
severed as of September 29, 2002. Approximately 67% of the employees severed
were salary and indirect employees and 33% were hourly production employees.
The following table displays the restructuring activity and restructuring
reserve balances for actions initiated in the third quarter of 2002:
($ in millions)
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
Third quarter of 2002 charge $4.6 $0.4 $5.0
Items paid or utilized in the third
quarter of 2002 (1.7) --- (1.7)
---- ---- ----
Reserve balance at September 29, 2002 $2.9 $0.4 $3.3
==== ==== ====
The 2002 restructuring plan also includes $13.3 million of asset impairment
charges. Approximately $10.6 million of the impairment charge is the adjustment
needed to recognize impairments resulting from the reduction in the remaining
useful lives of certain manufacturing equipment following the decision to
terminate the design of new custom variations of certain VCO and TCXO product
lines. CTS will continue to manufacture existing designs of these products to
satisfy current customer requirements. Approximately $2.1 million of the
impairment charge relates to the write-off of leasehold improvements in Taiwan
and China. Approximately $0.2 million relates to impairment of certain
intangible assets acquired in the acquisition of CTS Wireless (See Note D,
"Acquisition"). The remaining $0.4 million impairment charge relates to further
adjustments to the estimated fair value of certain assets held for sale (see
Note E, "Assets Held for Sale"). The expected 2003 pre-tax profitability
improvement associated with the 2002 restructuring and asset impairment charges
is estimated to be approximately $17 million.
The increase in operating loss of $15.6 million was principally due to the lower
gross profit on reduced sales and $18.3 million of restructuring and impairment
charges recorded in 2002. This was partially offset by lower selling, general
and administrative expenses and research and development expenses.
Interest expense decreased $0.5 million in the third quarter of 2002 as compared
to the third quarter of 2001 primarily due to lower debt levels.
The increase in other income is attributable to higher gains on sales of
property, plant and equipment and favorable effects of exchange rates in the
third quarter of 2002.
Page 19
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
The following table highlights changes in significant components of the
consolidated statements of earnings (loss) for the nine month periods ended
September 29, 2002 and September 30, 2001:
($ in thousands)
SEPTEMBER 29, SEPTEMBER 30, INCREASE
2002 2001 (DECREASE)
Net sales $ 341,262 $ 451,864 $(110,602)
Gross profit 67,672 92,045 (24,373)
Gross profit as a percent of sales 19.8% 20.4% (0.6%)
Selling, general and
administrative expenses 48,531 67,454 (18,923)
Selling, general and
administrative expenses as a
percent of sales 14.2% 14.9% (0.7%)
Research and development expenses 18,544 25,386 (6,842)
Restructuring and impairment
charges 18,343 14,011 4,332
Operating loss (17,746) (14,806) (2,940)
Operating loss, as a
percent of sales (5.2%) (3.3%) (1.9%)
Interest expense 7,744 9,272 (1,528)
Other income (expense) 682 (927) 1,609
Loss before income
tax benefit (24,527) (24,488) (39)
Income tax benefit (6,132) (6,122) (10)
Income tax rate 25.0% 25.0% --
Net loss $ (18,395) $ (18,366) $ (29)
CHANGES IN RESULTS OF OPERATIONS: COMPARISON OF FIRST NINE MONTHS 2002 TO FIRST
NINE MONTHS 2001
Net sales decreased by $110.6 million, or 24% from the first nine months of
2001. Sales decreased $64.3 million, or 26%, in the electronic component segment
and $46.3 million, or 23%, 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 nine months of 2002 and 2001 were 55% and 45%,
respectively. Refer to Note H - "Business Segments," for a description of the
Company's business segments.
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. Included in the first nine months of 2002 and 2001
are $1.3 million and $8.3 million, respectively, of one-time charges, including
inventory writedowns, equipment relocation, and other employee-related costs
associated with the Company's restructuring
Page 20
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 NINE MONTHS 2002 TO FIRST
NINE MONTHS 2001 (CONT'D)
plans. Gross profit for the first nine months of 2002 also includes $3.1 million
of a customer reimbursement for expenses substantially incurred in prior
quarters and $1.0 million pertaining to the resolution of a customer credit
related to prior periods.
Selling, general and administrative expenses decreased primarily due to 2001 and
2002 restructuring actions and cost reduction programs, and lower sales-related
expenses.
Research and development expenses decreased $6.8 million to $18.5 million from
the first nine months of 2001. The reduction reflects savings through
organization consolidation and relocation of certain R&D activities, as well as
the decision to end the design of new variations of certain products.
Significant ongoing R&D activities continue in our wireless and automotive
product lines to support current product and process enhancements, to expand
applications and to enable new product development.
In the third quarter of 2002, CTS recorded $18.3 million of pre-tax
restructuring and impairment charges. The restructuring and impairment charges
reflect operational improvements and related organizational realignments
primarily in the electronic components segment.
Significant actions under the third quarter 2002 restructuring plan include
operational improvements and organizational realignments resulting in
approximately 300 employee reductions; relocating certain manufacturing
operations from a leased facility to a CTS-owned facility in Tianjin, China;
relocating engineering and design activities from a leased engineering and
design facility in Chung-Li, Taiwan to other CTS-owned facilities; and
transferring certain production processes from CTS' Albuquerque, New Mexico
facility to its Tianjin, China facility. Additionally, the charges reflect CTS'
decision to terminate all design activities related to new custom variations for
Voltage Controlled Oscillators ("VCO") and 9x11mm and 5x7mm Temperature
Compensated Crystal Oscillators ("TCXO"). CTS will continue to manufacture
existing designs of these products to satisfy current customer requirements. CTS
expects to complete substantially all of these actions by the end of 2002. See
also Note C, "Restructuring and Impairment Charges."
The restructuring charge of $5.0 million recorded in the third quarter of 2002
relates primarily to organizational realignment in the electronic components
segment, and reductions in support staff for the design of new custom variations
of certain TCXO and VCO product lines. Included in this amount is $4.6 million
of severance costs associated with the separation of approximately 300
employees, of which approximately 175 employees had been severed as of September
29, 2002. Approximately 67% of the employees severed were salary and indirect
employees and 33% were hourly production employees.
Page 21
PART 1 -- FINANCIAL INFORMATION (CONT'D)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
CHANGES IN RESULTS OF OPERATIONS: COMPARISON OF FIRST NINE MONTHS 2002 TO FIRST
NINE MONTHS 2001 (CONT'D)
The following table displays the restructuring activity and restructuring
reserve balances for actions initiated in the third quarter of 2002:
($ in millions)
WORKFORCE OTHER
REDUCTIONS EXIT COSTS TOTAL
Third quarter of 2002 charge $ 4.6 $0.4 $ 5.0
Items paid or utilized in the third
quarter of 2002 (1.7) ---- (1.7)
----- ---- -----
Reserve balance at September 29, 2002 $ 2.9 $0.4 $ 3.3
===== ==== =====
The 2002 restructuring plan also includes $13.3 million of asset impairment
charges. Approximately $10.6 million of the impairment charge is the adjustment
needed to recognize impairments resulting from the reduction in the remaining
useful lives of certain manufacturing equipment following the decision to
terminate the design of new custom variations of certain VCO and TCXO product
lines. CTS will continue to manufacture existing designs of these products to
satisfy current customer requirements. Approximately $2.1 million of the
impairment charge relates to the write-off of leasehold improvements in Taiwan
and China. Approximately $0.2 million relates to impairment of certain
intangible assets acquired in the acquisition of CTS Wireless (See Note D,
"Acquisitions"). The remaining $0.4 million impairment charge relates to further
adjustments to the estimated fair value of certain assets held for sale (see
Note E, "Assets Held for Sale"). The expected 2002 pre-tax profitability
improvement associated with the 2002 restructuring and asset impairment charges
is estimated to be approximately $17 million.
During the first nine months of 2001, CTS recorded $14 million of restructuring
and impairment charges relating to a plan to realign its operations. The plan
was 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. 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 for the first nine months of 2002 was $2.9 million greater
than the operating loss for the first nine months of 2001 primarily due to
incremental restructuring and impairment charges of $4.3 million. Other factors
impacting the change in operating loss include lower gross margin on lower sales
partially offset by reduced operating expenses.
Interest expense decreased $1.5 million for the first nine months of 2002
compared to the same period in 2001 primarily due to lower debt levels.
Page 22
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 NINE MONTHS 2002 TO FIRST
NINE MONTHS 2001 (CONT'D)
The increase in other income is attributable to higher gains on sales of
property, plant and equipment and favorable effects of exchange rates in the
first nine months of 2002.
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)
SEPTEMBER 29, DECEMBER 31, INCREASE
2002 2001 (DECREASE)
Cash $ 11,627 $ 13,255 $ (1,628)
Accounts receivable, net 64,870 81,563 (16,693)
Inventories, net 40,977 50,149 (9,172)
Current assets 174,752 200,674 (25,922)
Accounts payable 45,604 50,842 (5,238)
Current portion of debt -- 27,500 (27,500)
Current liabilities 100,653 153,857 (53,204)
Working capital 74,099 46,817 27,282
Current ratio 1.7 1.3 0.4
Long-term debt (including
current maturities) 103,475 152,513 (49,038)
Shareholders' equity 263,484 242,873 20,611
Long-term debt (including
current maturities) as a
percent of shareholders'
equity 39% 63% (24%)
Long-term debt (including
current maturities) as a
percent of capitalization 28% 39% (11%)
The percentage of long-term debt to shareholders' equity decreased to 39% on
September 29, 2002, versus 63% on December 31, 2001, due to the repayment of
debt with the proceeds from the issuance of common stock and from cash provided
by operations.
From December 31, 2001, to September 29, 2002, CTS' working capital increased
$27.3 million. This increase is primarily attributable to the reduction in the
current portion of borrowings at September 29, 2002, compared with December 31,
2001, of $27.5 million. Additional reductions in accounts payable and accruals
($25.7 million) were offset by reductions in accounts receivable ($16.7 million)
and inventory ($9.2 million).
Capital expenditures were $11.3 million during the first nine months of 2002,
compared with $71.9 million for first nine months of 2001. The 2002 capital
expenditures were primarily for production equipment for new products. The
Page 23
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 (CONT'D)
capital expenditures in the first nine months of 2001 were primarily for
building projects in Asia of $34.6 million and for new production equipment for
new products and technologies.
In the first nine months of 2002, cash flows provided by operating activities
were $17.2 million. The net loss for the first nine months of 2002 combined with
the increase in the pension asset and the net increase in working capital were
more than offset by the depreciation and amortization and restructuring and
impairment charges for the first nine months of 2002.
In the first nine months of 2001, cash flows provided by operating activities
were $37.0 million.
Cash flows used for investing activities totaled $9.2 million through the first
nine months of 2002, including $11.3 million of capital expenditures, partially
offset by $2.3 million of proceeds from the sale of assets held for sale and
other property, plant and equipment. In the first nine months of 2001, cash
flows used for investing activities totaled $69.7 million, consisting primarily
of $71.9 million of capital expenditures partially offset by $5.0 million of
proceeds from the sale/leaseback of property.
Cash flows used for financing activities were $10.9 million in the first nine
months of 2002 consisting primarily of repayments of debt of $75.1 million and
dividend payments of $2.9 million. These uses of cash were partially offset by
proceeds from the issuance of debt of $26.1 million, primarily the $25 million
of convertible, subordinated debentures, and proceeds from the issuance of
common stock of $41.0 million. Cash flows provided by financing activities were
$19.9 million in the first nine months of 2001, consisting primarily of a net
increase in debt of $14.0 million, $10.6 million related to the exercise of
stock options, 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 $20
million, $11.3 million of which has been spent during the first nine months of
the year. These capital expenditures are primarily for new products and cost
savings initiatives.
On October 11, 2002, CTS amended its credit agreement with its existing nine
banks. The amended agreement reduces the revolving credit facility from $115
million to $85 million, establishes a basket for cash restructuring charges and
adjusts certain financial covenants beginning in 2003. The agreement includes
the revolving credit facility commitment which expires in December 2003. The
outstanding balance was $36.5 million at September 29, 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 in the future, there can be no
Page 24
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 (CONT'D)
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.
During 2002, CTS was required to repay $27.5 million term loans under its credit
agreement, all of which had been paid, 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 nine months 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 September 29, 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 nine months of 2002, CTS issued $12.9 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 September 29, 2002, CTS could issue up to approximately an
additional 850,000 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.
Page 25
PART 1 -- FINANCIAL INFORMATION (CONT'D)
*****
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
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.
ITEM 4. CONTROLS AND PROCEDURES
On September 25, 2002, in response to the requirement of the Sarbanes-Oxley Act
of 2002, we initially reviewed our internal control structure and our disclosure
controls and procedures. Such controls and procedures are designed to ensure
that material information related to CTS and its subsidiaries is made known, on
a regular basis, to management including our CEO and CFO. These disclosure
controls and procedures were again reviewed and evaluated on October 17, 2002.
Based on this evaluation, the Company, including the CEO and CFO, have concluded
that the Company's disclosure controls and procedures are adequate to ensure the
clarity and material completeness of the Company's disclosure in its periodic
reports required to be filed with the SEC. Additionally, based upon this most
recent evaluation, we have concluded that there were no significant changes in
internal controls or other factors that could significantly affect the internal
controls of the company.
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
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PART 2 -- OTHER INFORMATION (CONT'D)
ITEM 1. LEGAL PROCEEDINGS (CONT'D)
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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(10)(a) The Second Amendment to the Third Amended and Restated Credit
Agreement.
(99)(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
During the three-month period ended September 29, 2002, CTS filed one
report on Form 8-K dated August 21, 2002, under Item 5., Other Events,
containing the press release announcing that CTS was evaluating further
restructuring actions.
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/ RICHARD G. CUTTER III /s/ VINOD M. KHILNANI
- --------------------------- ---------------------------------
Richard G. Cutter III Vinod M. Khilnani
Vice President, Secretary Senior Vice President and Chief
and General Counsel Financial Officer
Dated: October 24, 2002
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CERTIFICATIONS
I, Donald K. Schwanz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CTS
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Page 28
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 24, 2002 /s/ DONALD K. SCHWANZ
----------------------------- ----------------------------------
Donald K. Schwanz
Chairman of the Board &
Chief Executive Officer
CERTIFICATIONS
I, Vinod M. Khilnani, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CTS
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
Page 29
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 24, 2002 /s/ VINOD M. KHILNANI
----------------------------- -------------------------------
Vinod M. Khilnani
Sr. Vice President &
Chief Financial Officer
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