-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UVME8hYgIkMSOcWwlp6KF8rzGEYirKLp4KRTPCvlj4YGGq1BXPtlinR+wBJGpXju PQOGjIiYqiDehttPzV72Rg== 0000026058-00-000009.txt : 20000329 0000026058-00-000009.hdr.sgml : 20000329 ACCESSION NUMBER: 0000026058-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04639 FILM NUMBER: 581544 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 MAIL ADDRESS: STREET 1: 905 W BLVD NORTH CITY: ELKHART STATE: IN ZIP: 46514 10-K 1 CTS CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION 1999 FORM 10-K ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For Fiscal Year Ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction of (IRS Employer Identifi- incorporation or organization) cation Number) 905 West Boulevard North, Elkhart, Indiana 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219-293-7511 Web site address: http://www.ctscorp.com Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common stock, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant has: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __x___ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X There were 24,926,321 shares of Common Stock, without par value, outstanding on March 22, 2000. The aggregate market value of the voting stock held by non-affiliates of CTS Corporation was approximately $1,346.0 million on March 22, 2000. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 2000 Proxy Statement to be filed for the annual meeting of shareholders to be held on April 28, 2000, incorporated by reference in Part 3. (2) Certain portions of the CTS Corporation Form 10-K for the fiscal year ended December 31, 1995, incorporated by reference in Part 4. (3) Portions of the CTS Corporation Form 8-K filed with the Commission September 2, 1998, incorporated by reference in Part 4. (4) Portions of the CTS Corporation Form 14D-1 filed with the Commission May 16, 1997, incorporated by reference in Part 4. (5) Portions of the CTS Corporation Form 10-Q for the quarter ended June 29, 1997 filed with the Commission on August 12, 1997, incorporated by reference in Part 4. SEE THE EXHIBIT INDEX -- PAGES 18 - 19 PART 1 Item 1 Business News and Information CTS BECOMES A WORLD LEADER IN WIRELESS COMPONENTS The acquisition of the Component Products Division of Motorola, Inc. ("CTS Wireless") in 1999 has positioned CTS Corporation as the largest manufacturer of electronic components for wireless applications in North America and a global leader for supplying components to the fast-growing mobile wireless industry. CTS was established in 1896 as a provider of high-quality telephone products. CTS was incorporated as an Indiana Corporation in February 1929, and the principal executive offices are located in Elkhart, Indiana. CTS' expertise in the design and manufacture of quality electronic components and assemblies continues to provide new opportunities for growth. CTS Corporation designs, manufactures, and sells a broad line of electronic components and electronic assemblies, primarily serving the electronic needs of original equipment manufacturers (OEMs). CTS' product lines serve major markets around the world, which principally include communications equipment, automotive and computer equipment - with a wide range of technologies and capabilities. Manufacturing operations, sales representatives and distributors are located throughout the United States and in many countries worldwide providing CTS the ability to work closely with customers. CTS' growth in 1999 was exceptional. New opportunities in the communications market and steady growth in the automotive and computer equipment markets, combined with CTS' strategically focused management, has positioned the Company to be well aligned for growth into the 21st Century. The major elements contributing to sustained growth are: o research and development of new and technologically advanced products to provide Total Customer Satisfaction, o advanced manufacturing programs for continuous improvement in quality and reliability, cost-effectiveness and delivery, o the building of strategic supply relationships, and o the ability to move quickly to participate in fast-growing markets. BUSINESS SEGMENT AND PRODUCTS BY MAJOR MARKET --------------------------------------------- CTS has two reportable business segments: electronic components and electronic assemblies. Electronic components are products which perform the basic level electronic function for a given product family for use in customer assemblies. Electronic components consist principally of wireless components used in cellular handsets, automotive sensors used in commercial or consumer vehicles, frequency control devices such as crystals and clocks, loudspeakers, resistor networks, switches and variable resistors. Electronic assemblies are combinations of electronic products or electronic and mechanical products which, apart from the assembly, may themselves be marketed as separate stand-alone products. Such assemblies represents a completed, higher-level functional product to be used in customer end products or assemblies. These products consist principally of interconnect products such as backpanel and connector assemblies used in the telecommunications industry, RF (radio frequency) integrated modules used in cellular handsets, hybrid microcircuits used in the healthcare market and cursor controls for computers. Within the two business segments, products are also identified by market. CTS products are principally sold into four primary original equipment manufacturing markets including communications equipment, automotive, computer equipment and other markets. Other markets include OEMs for consumer electronics and instruments and controls. Electronic components sales as a percent of consolidated sales were 75% of the total sales for 1999, 67% for 1998 and 61% for 1997. Electronic assemblies sales as a percent of consolidated sales were 25% of sales for 1999, 33% for 1998 and 39% for 1997. The following table presents sales as a percent of total sales by segment into each segment's major markets: Electronic Components Electronic Assemblies --------------------- --------------------- Markets 1999 1998 1997 1999 1998 1997 - ------- ---- ---- ---- ---- ---- ---- Communications Equipment 45% 17% 12% 10% 6% 8% Automotive 19% 32% 31% 0 0 0 Computer Equipment 5% 9% 8% 13% 23% 25% Other 6% 9% 10% 2% 4% 6% Sales by Segment as a % of 75% 67% 61% 25% 33% 39% Consolidated Sales Sales to unaffiliated customers, operating earnings and identifiable assets, by geographic area, are contained in "Note I - Business Segments" appearing in the financial statements as noted in the Index appearing under Item 14 (a) (1) and (2). The following table identifies major products by their business segment and markets. Many products are sold into several OEM markets.
Product Communications Automotive Computer Other Description Equipment Market Equipment Markets Market Market ------ ------ ------ ------- Electronic Components: Wireless Components X Automotive Sensors X Quartz, Crystals and Clock Oscillators X X X Resistor Networks X X X X Potentiometers X X X X DIP/Rotary Switches X X X Loudspeakers X X Heat Sinks X X X Electronic Assemblies: Backpanels and Boxbuild Electronic Assemblies X X X RF Integrated Modules X Pointing Sticks/Cursor Controls X Hybrid Microcircuits X X
MARKETING AND DISTRIBUTION -------------------------- CTS sales engineers and manufacturers' representatives sell CTS electronic components and electronic assemblies to OEMs. CTS maintains sales offices in China, Hong Kong, Japan, Scotland, Singapore, Taiwan, the United Kingdom and the United States. Additionally, various regions of the world are serviced by sales engineers working at independent locations. Approximately 69% of 1999 sales were attributable to coverage by CTS sales engineers. CTS sales engineers generally service the largest customers with application specific products. The engineers work closely with major customers in designing products to meet or exceed customer requirements. CTS utilizes the services of independent sales representatives and distributors in the United States and other countries for customers not serviced directly by CTS sales engineers. Sales representatives receive commissions from CTS. During 1999, approximately 26% of net sales were attributable to coverage by sales representatives. Additionally, independent distributors purchase products from CTS for resale to customers. In 1999, independent distributors and/or dealers accounted for approximately 5% of net sales. RAW MATERIALS ------------- o Raw materials used in many CTS products include steel, copper, brass, aluminum, certain precious metals, resistive and conductive inks, piezoceramics, purchased passive electronic components and semiconductors. o Ceramic materials are used in ceramic filters and resistor networks. o Synthetic quartz is used in surface acoustic wave filter products and frequency control devices, including quartz, crystals and clock oscillators. o Molding compounds are used in automotive sensors, DIP/rotary switches and loudspeakers. These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe that it is dependent upon one or a limited number of vendors. In 1999, all of these materials were available in adequate quantities to meet CTS' production demands. CTS does not currently anticipate any raw material shortages which would slow production. However, the lead times between the placement of orders for certain raw materials and actual delivery to CTS may vary, and occasionally might require the Company to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times for delivery. Precious metal prices may have a significant effect on the cost and selling price of many CTS products, particularly some ceramic filters, sensors, switches, backpanels and boxbuild electronic assemblies, resistor networks and hybrid microcircuits. WORKING CAPITAL --------------- CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. CTS is not generally required to carry significant amounts of inventories in anticipation of rapid delivery requirements because most customer orders are custom built. CTS has "just-in-time" arrangements with certain major customers in order to meet their delivery requirements. CTS carries raw materials, including certain semiconductors, work-in-process and finished goods inventories which are unique to particular customers, and in the event of reductions or cancellations of orders, some inventories may not be useable or returnable to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover the financial exposure of CTS to inventories which are unique to a customer. CTS does not customarily grant special return or payment privileges to customers, although CTS' distributor program permits certain returns or adjustments. CTS' working capital requirements are generally cyclical but not seasonal. Working capital requirements are generally dependent on the overall business level. During 1999, working capital increased to $99.8 million, primarily due to the increase in accounts receivable and inventories. These increases were partially offset by increased accounts payable. A significant portion of CTS' working capital requirements were the result of the CTS Wireless acquisition. Cash increased primarily as a result of the CTS Wireless operating requirements. Cash, except for approximately $7 million in foreign withholding taxes, is generally available to the Company. PATENTS, TRADEMARKS AND LICENSES -------------------------------- CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents and trademarks. CTS believes that the success of its business is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS acquired a significant portfolio of new patents relating to the communications market with the acquisition of CTS Wireless. CTS licenses the right to manufacture several electronic products to companies in the United States and non-U.S. countries. In 1999, license and royalty income was less than 1% of net sales. CTS believes that the success of its business is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee. MAJOR CUSTOMERS --------------- CTS' 15 largest customers represented approximately 71% of net sales in 1999, 66% of net sales in 1998, and 67% of net sales in 1997. During 1999, sales to Motorola, Inc., accounted for 23% of total net sales, but were minimal in the prior two years. Also during 1999, sales to Compaq Computer Corporation amounted to 11% of total net sales as compared to 12% in 1998 and 1997. Sales to General Motors Corporation comprised 12% of net sales in 1998 as compared to 13% of net sales in 1997. Sales to Seagate Technology, Inc., comprised 8% of net sales in 1998, compared to 11% in 1997. BACKLOG OF ORDERS ----------------- Backlog of orders may not provide an accurate indication of present or future business levels for CTS. For many electronic components and electronic assemblies the period between receipt of orders and expected delivery is relatively short. Large orders from major customers may constitute backlog over an extended period of time. Production scheduling and delivery for such orders could be changed or canceled by the customer on relatively short notice. At December 31, 1999, CTS' backlog of orders was $192 million compared to $90 million at December 31, 1998. This increase is largely the result of the Wireless acquisition (primarily electronic components), as well as growth experienced in the frequency (electronic components), interconnect (electronic assemblies) and resistor product lines (primarily electronic assemblies). The backlog of orders at the end of 1999 will generally be filled during the 2000 fiscal year. GOVERNMENT CONTRACTS -------------------- CTS estimates that under 1% of its net sales are associated with purchases by the U.S. Government or non-U.S. governments. Discontinued operations did have significant government contracts in 1998. The sale of discontinued businesses may not have relieved CTS of all liabilities associated with its government contracts. Such contract provisions are not expected to have any material effect on CTS' results. COMPETITION ----------- CTS competes with many domestic and non-U.S. manufacturers principally on the basis of product features, price, technology, quality, reliability, delivery and service. Most CTS product lines encounter significant competition, and there is increased global competition resulting from the CTS Wireless acquisition. The number of significant competitors varies from product line to product line. No one competes with CTS in every product line, but many competitors are larger and more diversified than CTS. Some competitors are divisions or affiliates of customers. CTS is subject to competitive risks which are the nature of the electronics industry including shorter product life cycles and technical obsolescence. Some customers have reduced or plan to reduce the number of suppliers while increasing the volume of purchases. Most customers are demanding higher quality, reliability and delivery standards from CTS as well as competitors. These trends create opportunities for CTS, but also increase the risk of loss of business to competitors. The Company believes that it competes most successfully in custom products manufactured to meet specific applications of major OEMs. CTS believes that it has advantages over certain competitors: o The ability to apply a broad range of the latest technologies and capabilities to develop products for the special requirements of customers, o The capability to sell a wide range of products manufactured to consistent standards of quality and delivery, o CTS is the largest passive component manufacturer for wireless applications in North America and a global leader for supplying components to the fast-growing mobile wireless industry, and o CTS is one of the largest manufacturers of automotive throttle position sensors in the world. NON-U.S. REVENUES AND RISKS --------------------------- In 1999, approximately 53% of net sales to unaffiliated customers were attributable to non-U.S. operations, compared to 40% in 1998. The increase is primarily due to the acquisition of CTS Wireless. At December 31, 1999, approximately 32% of total CTS assets were non-U.S. A substantial portion of these assets, other than cash and equivalents, cannot readily be liquidated. CTS believes that the business risks to its non-U.S. operations, though substantial, are normal risks for non-U.S. businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic turmoil, government regulations and expropriation. CTS has manufacturing facilities in Canada, China, Mexico, Scotland, Singapore and Taiwan. The majority of the non-U.S. operations' sales are to the United States and Europe, which Management believes lessens any potential risk to the Company. Information about revenue from sales to unaffiliated customers, operating earnings and identifiable assets, by geographic area, is contained in "Note I - Business Segments" appearing in the financial statements as noted in the index appearing under Item 14(a) (1) and (2). RESEARCH AND DEVELOPMENT ACTIVITIES ----------------------------------- In 1999, 1998 and 1997, CTS spent $25.3, $13.4 and $13.1 million, respectively, for research and development. The Company believes that a strong commitment to research and development is required for future growth. Most CTS research and development activities relate to developing new products and technologies, improving product flow and adding product value to meet the current and future needs of its customers. CTS employs approximately 500 engineers and technicians that apply engineering techniques such as computer aided design and computer aided product manufacturing to develop and produce prototypes. CTS provides its customers with full systems support to ensure part quality and reliability through all phases of design, launch and manufacturing to meet or exceed customer requirements. The 1999 efforts were particularly focused on wireless communications ongoing R&D activities assumed in the Wireless acquisition. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. The Company expenses all research and development costs as incurred; however, costs may be fully or partially funded by the customer. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT -------------------------------------------- In 1999, the Company incurred a $12.9 million one-time write-off for acquired in-process research and development costs associated with the CTS Wireless acquisition. This cost related to technologies which were being developed for next-generation products, and represented products which were in the development cycle that had not yet reached a level of technological feasibility, and had no alternative future use at the acquisition date. ENVIRONMENTAL PROTECTION LAWS ----------------------------- In complying with federal, state and local environmental protection laws, CTS continued to make additional modifications to manufacturing processes. Such modifications have not materially affected the capital expenditures, earnings or competitive position of CTS. The manufacturing process for certain current and past products created hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different. CTS has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: (1) the Company's status as a de minimis party; (2) the large number of other PRPs identified; (3) the identification and participation of many larger PRPs who are financially viable; (4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and/or (5) the Company's experience to date in reaction to the determination of its allocable share. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of Management, based upon presently available information, either adequate provision for anticipated costs has been made, by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS' consolidated financial position or results of operations. OTHER LEGAL ISSUES ------------------ Under the terms of the sale agreement related to a certain discontinued operation, CTS retains liability for performance and warranty obligations under certain customer contracts. The potential liability expires in 2000. Management does not expect that it will incur any significant costs associated with this contingency. Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business and contracts relating to sales of property. In the opinion of Management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS' consolidated financial position or results of operations. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE ------------------------------------- CTS has addressed the issues associated with potential business disruptions relating to the Year 2000 computer programming issue. CTS formed a Company-wide Year 2000 Readiness Project (Project) to identify and resolve Year 2000 issues. The products of CTS are not "date and time sensitive." CTS may add date and time sensitive components to CTS products at the direction of its customers and upon the customer's assumption of responsibility for the Year 2000 compliance of the components selected. The Project included the inventory of financial, manufacturing, design and other internal systems, hardware, equipment and embedded chips in industrial control instruments, and the assessment, remediation and testing of those systems. All systems were inventoried, reviewed and assessed in 1998, and the majority of systems which were not Year 2000 ready were remedied or replaced and tested in 1998. Systems testing and certification were completed in 1999. As part of the Project, Year 2000 Readiness Surveys were sent to significant service providers, vendors, suppliers, customers and governmental entities that were believed to be critical to business operations. CTS prepared supplier contingency plans based on survey responses. CTS will continue to be diligent in identifying and addressing potential issues which may develop in the coming months. The Company experienced no major disruptions or system failures, and CTS experienced no customer or supplier materially adverse effects. The cost to complete the program was approximately $2 million through December 31, 1999, for outside consultants, software and hardware applications. CTS did not track the internal costs incurred for all of the hours spent on the project. EMPLOYEES --------- CTS employed 9,222 persons at December 31, 1999, and approximately 63% of these persons were employed outside the United States at the end of 1999. Approximately 360 CTS employees in the United States were covered by collective bargaining agreements as of December 31, 1999. There are two collective bargaining agreements at one location, one agreement will expire in 2003 and the other will expire in 2005. Item 2 ------ Properties ---------- CTS has manufacturing facilities, administrative, research and development, and sales offices in many locations. The manufacturing properties are listed and identified with representative products. The other facilities are shown along with the primary activity. Each property's relative size is shown in square footage, and each location is identified as to whether it is leased or owned.
Square Owned/ Manufacturing Facility Footage Leased Representative Products ---------------------- ------- ------ ----------------------- Albuquerque, New Mexico 267,000* Owned Wireless Components Berne, Indiana 249,000 Owned Resistor Networks Burbank, California 12,000 Owned Heat Sinks Carlisle, Pennsylvania 94,000 Leased Crystals and Oscillators Chung-Li, Taiwan 122,000 Leased Wireless Components Dongguan, China 23,000 Leased DIP Switches and Potentiometers Elkhart, Indiana 319,000 Owned Automotive Sensors Glasgow, Scotland 75,000 Owned Backpanels, Boxbuild Glasgow, Scotland 20,000 Leased and Automotive Sensors Hudson, New Hampshire 38,000 Leased Backpanels and Boxbuild Kaohsiung, Taiwan 133,000 Owned DIP Switches and Potentiometers Matamoros, Mexico 51,000 Owned Loudspeakers and Sensors Sandwich, Illinois 94,000 Owned Crystals and Oscillators Scottsdale, Arizona 59,000 Leased Wireless Components Singapore 159,000 Owned Crystals and Oscillators Streetsville, Ontario, Canada 112,000 Owned Automotive Sensors Tianjin, China 173,000 Leased Wireless Components West Lafayette, Indiana 106,000 Owned RF Integrated Modules ------- Total Manufacturing 2,106,000 ========= * CTS Wireless leases approximately 135,000 square feet of its Albuquerque facility to Motorola, Inc., as part of the Joint Use and Occupancy Lease Agreement.
(Properties Continued) Square Owned/ Other Facilities Footage Leased Description ---------------- ------- ------ ----------- Baldwin, Wisconsin 39,000 Owned Storage Facility Bangkok, Thailand 53,000 Owned Leased through November 2002 Brownsville, Texas 85,000 Owned Warehousing Facility Elkhart, Indiana 93,000 Owned Administrative Offices & Research Greenwich, Connecticut 8,000 Leased Sublet through December 2000 Kowloon, Hong Kong 600 Leased Sales Office New Hartford, Connecticut 212,000 Owned Leased Property Schaumburg, Illinois 44,000 Leased Administrative Offices and Research and Development Southfield, Michigan 1,500 Leased Sales Office Taipei, Taiwan 1,250 Leased Sales Office Winsted, Connecticut 55,000 Owned Storage Facility Yokohama, Japan 1,400 Leased Sales Office Discontinued Operations ----------------------- Batavia, Ohio 148,000 Owned Ellis & Watts Operations
CTS regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor and location to its markets and major customers. CTS also reviews the operating costs of its facilities and may from time to time relocate or move a portion of its manufacturing activities in order to reduce operating costs and improve asset utilization and cash flow. The Batavia, Ohio property was sold on January 31, 2000. Item 3 ------ Legal Proceedings ----------------- Contested claims involving various matters, including environmental claims brought by governmental agencies, are being litigated by CTS, both in legal and administrative forums. The Company is subject to normal litigation which results from the ordinary conduct of its business operations, however, Management is not aware of any individually significant pending litigation. Item 4 ------ Submission of Matters to a Vote of Security Holders --------------------------------------------------- During the fourth quarter of 1999, no matter was submitted to a vote of security holders of the Company. PART 2 ------ Item 5 ------ Stock and Dividend Information ------------------------------ The principal market for CTS common stock is the New York Stock Exchange. Quarterly market high and low trading prices for CTS Common Stock for each quarter of the past two years and the amount of dividends declared during the previous two years can be located in "Shareholder Information," appearing herein. On December 31, 1999, there were approximately 1,498 CTS common shareholders of record. CTS intends to continue its policy of considering dividends on a quarterly basis. The declaration of a dividend and the amount of any such dividend is subject to earnings, anticipated working capital, capital expenditures, other investment requirements, the financial condition of CTS and any other factors considered relevant by the Board of Directors. Item 6 ------ Five-Year Financial Summary --------------------------- A summary of selected financial data for CTS for each of the previous five years is contained in the "Five-Year Summary," appearing in the financial statements included herein as noted in the index appearing under Item 14 (a)(1) and (2). Certain divestitures, closures of businesses and certain accounting reclassifications do affect the comparability of information contained in the "Five-Year Summary." Item 7 ------ Management's Discussion and Analysis of Financial Condition and Results of Operations 1997-1999 --------- Information about liquidity, capital resources and results of operations, for the three previous fiscal years, is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations (1997-1999)," appearing in the financial statements included herein as noted in the index appearing under Item 14 (a)(1) and (2). Item 8 ------ Financial Statements and Supplementary Data ------------------------------------------- Consolidated financial statements, meeting the requirements of Regulation S-X, and the Report of Independent Accountants, are contained in the CTS Corporation 1999 Annual Report, incorporated herein. Quarterly per share financial data is provided in "Shareholder Information," under the subheading, "Per Share Data," appearing in the financial statements included herein as noted in the index appearing under Item 14 (a)(1) and (2). Item 9 ------ Changes in Auditors or Disagreements With Accountants on Accounting and Financial Disclosure ------------------------------------------------------- There were no disagreements or changes. PART 3 ------ Item 10 ------- Directors and Executive Officers -------------------------------- Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining to directors of CTS is contained in the 2000 Proxy Statement, pages 5-6, under the caption "Election of Directors" to be filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 2000 Proxy Statement, page 10, under the caption "Directors' & Officers' Stock Ownership", to be filed with the Securities and Exchange Commission, and is incorporated herein by reference. The individuals in the following list were elected as executive officers of CTS at the annual meeting of the Board of Directors on April 30, 1999. They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on April 28, 2000, at which time the election of officers will be considered again by the Board of Directors. List Of Officers ---------------- Name Age Position and Offices ---- --- -------------------- Joseph P. Walker 61 Director, Chairman, President and Chief Executive Officer William J. Kaska 58 Executive Vice President Philip G. Semprevio 49 Executive Vice President Jeannine M. Davis 51 Executive Vice President, Administration, Secretary and Interim Chief Financial Officer Donald R. Schroeder 51 Vice President Business Development and Chief Technology Officer James L. Cummins 44 Vice President Human Resources James N. Hufford 60 Vice President Research, Development and Engineering George T. Newhart 57 Vice President and Corporate Controller Gary N. Hoipkemier 45 Treasurer Brief History of Officers ------------------------- Joseph P. Walker has served as Chairman of the Board, President and Chief Executive Officer of CTS since 1988. William J. Kaska was elected as Executive Vice President effective June 29, 1999. Mr. Kaska served as Vice President and General Manager of CTS Automotive Products from 1992 until being named Group Vice President in 1997. Philip G. Semprevio was elected as Executive Vice President effective June 29, 1999. In December 1998, Mr. Semprevio was elected as Group Vice President. Prior to his joining CTS, he served as President, Justrite Manufacturing Company, LLC, a subsidiary of Federal Signal Corporation. Mr. Semprevio worked for CTS as Vice President and General Manager of the Electrocomponents business unit from 1990-1994. Jeannine M. Davis was elected as Executive Vice President Administration, General Counsel and Secretary effective June 29, 1999. Ms. Davis was named Interim Chief Financial Officer in November 1999. In December 1998, Ms. Davis was named Senior Vice President, Secretary and General Counsel. Previously she served as Vice President, Secretary and General Counsel since 1988. (Officer History Continued) James L. Cummins has served as Vice President Human Resources since 1994. From 1991 - 1994, he served as Director of Human Resources for CTS Corporation. James N. Hufford served as Vice President Research, Development and Engineering from 1995 - 1999. During the four years prior to this appointment, Mr. Hufford served as Manager and then Director of Corporate Research, Development and Engineering for CTS. Mr. Hufford retired effective March 3, 2000. George T. Newhart has served as Vice President and Corporate Controller since 1998. Prior to this appointment, from 1989 - 1998, Mr. Newhart served as Corporate Controller. Donald R. Schroeder was elected as Vice President Business Development and Chief Technology Officer effective January 11, 2000. From 1995 until this appointment, Mr. Schroeder served as Vice President Sales and Marketing. During the six years prior to this appointment, Mr. Schroeder served as Business Development Manager for innovative and new technology for the West Lafayette, Indiana business unit. Gary N. Hoipkemier has served as Treasurer since 1989. Item 11 ------- Director & Executive Compensation --------------------------------- Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 2000 Proxy Statement in the captions "Director Compensation," page 8, and "Executive Compensation," pages 11 - 15, to be filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 12 ------- Directors' & Officers' Stock Ownership ------------------------------------- Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management, is contained in the 2000 Proxy Statement in the caption "Directors' & Officers' Stock Ownership," page 10, to be filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 13 ------- Certain Relationships and Related Transactions ---------------------------------------------- Mr. Profusek is a Partner and Head of the Merger Department of the law firm of Jones, Day, Reavis & Pogue, a law firm which CTS has retained for specific legal services and litigation, on a case by case basis, for over five years. PART 4 ------ Item 14 ------- Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- The list of financial statements and schedules required by Item 14 (a) (1) and (2) is contained on page S-1 herein. (a) (3) Exhibits (3)(a) Amended and Restated Articles of Incorporation, (incorporated by reference to Exhibit 5 to the Company's current Report on Form 8-K, filed with the Commission on September 2, 1998). (3)(b) Bylaws, (Incorporated by reference to Exhibit 4 to the Company's current Report on Form 8-K, filed with the Commission on September 2, 1998). (10)(a) Employment Agreement, dated as of May 9, 1997, between the Company and Joseph P. Walker (incorporated by reference to Exhibit (c)(2) to the Schedule 14D-1 filed with the Commission on May 16, 1997). (10)(b) Prototype officers and directors' indemnification agreement (incorporated by reference to Exhibit (10) (g) to the Company's Annual Report on Form 10-K for 1995 filed with the Commission on March 21, 1996). (10)(c) CTS Corporation 1986 Stock Option Plan, approved by the shareholders on May 30, 1986, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997). (10)(d) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan approved by the shareholders on April 28, 1989, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997). (10)(e) CTS Corporation 1996 Stock Option Plan, approved by the shareholders on April 26, 1996, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997). (10)(f) The CTS Corporation 1997 Stock Option Agreements approved by the shareholders on October 16, 1997, filed as Exhibit (10)(1) to the Company's 10-K for 1997. (10)(g) Asset Sale Agreement dated December 22, 1998, and Earnout Exhibit thereto between CTS Wireless Components, Inc. and Motorola, Inc., under which CTS Wireless Components, Inc. acquired the assets of Motorola's Components Products Division. (10)(h) Shareholders Agreement, dated as of July 17, 1997, among the Company, Sub, WHX Corporation ("WHX") and SB Acquisition Corp., a subsidiary of WHX (incorporated by reference to Exhibit (c) (7) to the Schedule 13-D). (21) Subsidiaries filed herewith. (Part 4, Item 14 Continued) (23) Consent of PricewaterhouseCoopers LLP to incorporation by reference of this Annual Report on Form 10-K for the fiscal year 1999 to Registration Statement 333-90697 on Form S-3, Registration Statement 33-27749 on Form S-8, Registration Statement 333-5730 on Form S-8 and Registration Statement 333-91339 on Form S-8. (b) Reports on Forms 8-K -------------------- Announcement of the February 26, 1999 acquisition of certain assets and liabilities of the Component Products Division of Motorola pursuant to an Asset Sale Agreement dated December 22, 1998, filed March 11, 1999. Indemnification Undertaking --------------------------- For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-27749 (filed March 23, 1989) and 333-5730 (filed October 3, 1996) and 333-91339 (filed November 19, 1999): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provision, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date By /S/Jeannine M. Davis Jeannine M. Davis, Executive Vice President Administration, Secretary and Interim Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date By /S/ Walter S. Catlow Walter S. Catlow, Director Date By /S/ Lawrence J.. Ciancia Lawrence J. Ciancia, Director Date By /S/ Thomas G. Cody Thomas G. Cody, Director Date By /S/ Gerald H. Frieling, Jr. Gerald H. Frieling, Jr., Director Date By /S/ Roger R. Hemminghaus Roger R. Hemminghaus, Director Date By /S/ Robert A. Profusek Robert A. Profusek, Director Date By /S/ Joseph P. Walker Joseph P. Walker, Director Date By /S/ Randall J. Weisenburger Randall J. Weisenburger, Director Date By /S/ George T. Newhart George T. Newhart, Vice President, Corporate Controller and principal accounting officer
Financial Highlights (In thousands except per share data) For the Year 1999 1998 1997 - ------------ ---- ---- ---- Net sales $677,076 $370,441 $390,602 Earnings, excluding the 1999 $8.6 million after-tax effect of acquired IPR&D 60,138 37,474 22,813 Net earnings 51,468 37,474 22,813 Average common shares outstanding -- diluted 28,589 29,228 31,952 Per share data: Earnings -- diluted, excluding the 1999 $0.30 after-tax effect of acquired IPR&D $2.10 $1.28 $0.72 Net earnings -- diluted -- Note M 1.80 1.28 0.72 Dividends declared 0.12 0.12 0.12 Capital expenditures 32,896 21,330 22,180 At Year End - ----------- Working capital $ 99,836 $ 35,306 $ 65,756 Long-term obligations (including current maturities) 167,000 56,000 61,206 Shareholders' equity 164,764 123,839 147,496 Equity per outstanding share 6.00 4.55 4.86
Consolidated Statements of Earnings - ----------------------------------- (In thousands of dollars except per share amounts) Year Ended ---------- December 31 December 31 December 31 1999 1998 1997 ----------- ----------- ---------- Net sales $677,076 $370,441 $390,602 Costs and expenses: Cost of goods sold 471,543 255,844 280,085 Selling, general and administrative expenses 80,866 51,300 45,264 Transaction-related compensation charge -- Note F 0 0 16,200 Research and development expenses 25,348 13,387 13,131 Acquired in-process research and development (IPR&D) - Note B 12,940 0 0 Amortization of intangible assets 3,583 302 2,949 ------ ------ ------ Operating earnings 82,796 49,608 32,973 ------ ------ ------ Other (expense) income: Interest expense (9,944) (2,194) (2,478) Interest income 865 1,141 2,397 Other 338 886 2,838 ------ ------ ------ Total other (expense) income (8,741) (167) 2,757 ------ ------ ------ Earnings before income taxes 74,055 49,441 35,730 Income taxes -- Note H 22,587 15,368 12,537 ------ ------ ------ Earnings from continuing operations 51,468 34,073 23,193 ------ ------ ------ Discontinued operations: Earnings (loss) from discontinued operations, net of income tax charge (benefit) of $2,267 in 1998 and ($253) in 1997 -- Note C 0 3,401 (380) ------ ------ ------- Net earnings $ 51,468 $ 37,474 $ 22,813 ======= ======= ======= Earnings (loss) per share -- Note M Basic: Continuing operations $1.87 $1.22 $0.74 Discontinued operations 0 0.12 (0.01) ----- ----- ----- Net earnings per share $1.87 $1.34 $0.73 ===== ===== ===== Diluted: Continuing operations $1.80 $1.17 $0.73 Discontinued operations 0 0.11 (0.01) ----- ----- ----- Net earnings per share $1.80 $1.28 $0.72 ===== ===== ===== The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Balance Sheets - --------------------------- (In thousands of dollars) December 31, December 31, 1999 1998 ----------- ---------- ASSETS Current Assets Cash and equivalents $ 24,219 $ 16,273 Accounts receivable, less allowances (1999 -- $2,628; 1998 -- $552) 124,682 47,043 Inventories Finished goods 19,399 9,289 Work-in-process 20,288 10,396 Raw materials 39,255 13,637 ------- ------ Total inventories 78,942 33,322 Other current assets 4,869 4,653 Deferred income taxes -- Note H 21,585 16,392 ------- ------- Total current assets 254,297 117,683 Property, Plant and Equipment Buildings and land 61,265 43,113 Machinery and equipment 240,619 161,684 ------- ------- Total property, plant and equipment 301,884 204,797 Less accumulated depreciation 162,192 136,711 ------- ------- Net property, plant and equipment 139,692 68,086 Other Assets Prepaid pension expense -- Note G 68,990 69,074 Investment in discontinued operations -- Note C 9,061 35,123 Intangible assets 53,336 3,206 Accumulated amortization (5,493) (2,042) Other 2,769 2,059 ------- ------- Total other assets 128,663 107,420 ------- ------- Total Assets $522,652 $293,189 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt -- Note E $ 5,000 $ 14,000 Accounts payable 68,315 17,412 Accrued salaries, wages and vacation 16,745 11,181 Accrued taxes other than income 1,536 1,651 Income taxes payable 12,187 10,229 Other accrued liabilities -- Notes D and L 50,678 27,904 ------- ------ Total current liabilities 154,461 82,377 Long-term Debt -- Note E 162,000 42,000 Other long-term Obligations -- Note E 9,846 13,568 Deferred Income Taxes -- Note H 27,263 27,145 Postretirement Benefits -- Note G 4,318 4,260 Contingencies -- Note L 0 0 Shareholders' Equity Preferred stock -- authorized 25,000,000 shares without par value; none issued -- Note J Common stock -- authorized 75,000,000 shares without par value; 48,419,604 shares issued at December 31, 1999, and 48,367,788 share issued at December 31, 1998 - Note J 193,612 190,347 Additional contributed capital 9,005 10,872 Retained earnings 245,414 197,285 Cumulative translation adjustment 291 806 ------- ------- 448,322 399,310 Less cost of common stock held in treasury (1999 -- 20,957,649 shares; 1998 -- 21,124,898 shares) -- Note K 283,558 275,471 Total shareholders' equity 164,764 123,839 ------- ------- Total Liabilities and Shareholders' Equity $522,652 $293,189 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Shareholders' Equity - ----------------------------------------------- (In thousands of dollars) Accumulated Other Additional Common Retained Comprehensive Comprehensive Contributed Treasury Stock Earnings Earnings Earnings Capital Stock Total ----- -------- -------------- ------------- ----------- -------- ----- Balances at December 31, 1996 $34,140 $144,112 $1,373 $(600) $(12,793) $166,232 Net earnings 22,813 $22,813 22,813 Cumulative translation adjustment (net of tax benefit of $238) (679) (679) (679) ------ Comprehensive earnings 22,134 ====== Cash dividends of $0.12 per share (3,756) (3,756) Nonemployee Directors' stock retirement plan - Note F 205 205 Issued 12,102 shares on restricted stock and cash bonus plan--net 135 (224) 89 Issued 214,282 shares on exercise of stock options -- net 273 558 831 Stock compensation 19 12 31 Transaction-related compensation charge 16,200 16,200 Deferred compensation recognized 241 241 Acquired 14,483,646 shares for treasury stock--Note K (206,849) 206,849) Issued 13,259,160 shares to former DCA shareholders 152,227 152,227 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 186,794 163,169 694 15,822 (218,983) 147,496 Net earnings 37,474 37,474 37,474 Cumulative translation adjustment (net of tax of $36) 112 112 112 ------ Comprehensive earnings 37,586 ====== Cash dividends of $0.12 per share (3,358) (3,358) Nonemployee Directors' stock retirement plan - Note F 54 54 Returned 10,200 shares to treasury forfeited from restricted stock and cash bonus plan--net (9) 57 (48) Issued 166,442 shares on exercise of stock options -- net 503 (167) 336 Stock options acquired--Note F (5,273) (5,273) Deferred compensation recognized 212 212 Acquired 3,535,028 shares for treasury stock--Note K (56,273) (56,273) Issued 266,442 shares to former DCA shareholders 3,059 3,059 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 190,347 197,285 806 10,872 (275,471) 123,839 Net earnings 51,468 51,468 51,468 Cumulative translation adjustment (net of tax benefit of $169) (515) (515) (515) -------- Comprehensive earnings $ 50,953 ======== Cash dividends of $0.12 per share (3,339) (3,339) Issued 2,502 shares on nonemployee Directors' stock retirement plan - Note F 6 349 8 363 Issued 201,000 shares on restricted stock and cash bonus plan--net 2,151 (2,893) 742 Issued 169,547 shares on exercise of stock options -- net 513 338 851 Stock options issued with cash bonus 58 58 Deferred compensation recognized 619 619 Acquired 205,800 shares for treasury stock --Note K (9,175) (9,175) Issued 51,816 shares to former DCA shareholders 595 595 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 $193,612 $245,414 $291 $9,005 $(283,558) $164,764 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows - ------------------------------------- (In thousands of dollars) Year Ended ---------- December 31 December 31 December 31 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net earnings $ 51,468 $ 37,474 $ 22,813 Adjustments to reconcile net earnings to net cash provided by operating activities: Net (earnings) loss from discontinued operations 0 (3,401) 380 Depreciation and amortization 33,907 19,155 16,016 Deferred income taxes (5,337) 6,176 (1,462) Acquired in-process research and development 12,940 0 0 Transaction-related compensation charge -- Note F 0 0 16,200 Changes in assets and liabilities net of effects of acquisitions: Accounts receivable (77,639) 4,271 (1,029) Inventories (24,853) 1,924 8,782 Prepaid pension asset (6,368) (7,336) (6,199) Accounts payable and accrued liabilities 72,126 (7,548) 1,583 Income taxes payable 1,958 (4,088) 2,764 Other (1,348) (15) (719) ------ ----- ------ Total adjustments 5,386 9,138 36,316 ------ ----- ------ Net cash provided by continuing operations 56,854 46,612 59,129 Net cash (used in) provided by discontinued operations (1,161) 6,659 (485) ------ ----- ------- Net cash provided by operating activities 55,693 53,271 58,644 Cash flows from investing activities: Proceeds from sale of property, plant and equipment, including discontinued operations, net 28,646 20,691 2,973 Payment for purchase of CTS Wireless -- Note B (97,445) 0 0 DCA acquisition costs (2,932) (6,416) (71,353) Capital expenditures (32,896) (21,330) (22,180) ------- ------- ------- Net cash used in investing activities (104,627) (7,055) (90,560) Cash flows from financing activities: Proceeds from issuance of long-term obligations - CTS Wireless acquisition 97,445 0 0 Proceeds from issuance of long-term obligations - Other 0 0 50,000 Payments of long-term obligations, net (28,445) (5,206) (8,707) Dividends paid (3,301) (3,421) (3,768) Purchases of treasury stock (9,175) (56,273) (10,121) Stock options acquired 0 (5,273) 0 Other 851 288 (106) ------- ------- ------- Net cash provided by (used in) financing activities 57,375 (69,885) 27,298 Effect of exchange rate changes on cash (495) 95 (492) ------- ------- ------- Net increase (decrease) in cash 7,946 (23,574) (5,110) Cash and equivalents at beginning of year 16,273 39,847 44,957 ------- ------- ------- Cash and equivalents at end of year $ 24,219 $ 16,273 $ 39,847 Supplemental cash flow information Cash paid during the year for: Interest $ 9,711 $ 4,685 $ 2,649 Income taxes -- net 24,195 17,218 10,646 Noncash investing and financing activities Common stock issued in connection with DCA acquisition $ 595 $ 3,059 $152,227 The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (In thousands of dollars except share and per share data) NOTE A - Summary of Significant Accounting Policies - --------------------------------------------------- Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition: Revenues from product sales are recognized at the time of shipment to the customer. Cash Equivalents: CTS considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. Inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets principally on the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years, and average lives are approximately 16 years. Machinery and equipment useful lives range from three to eight years. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, any related gain or loss is recognized as other income or expense. CTS assesses the recoverability of long-lived assets, including intangible assets, whenever adverse events or changes in circumstances or the business climate indicates that an impairment may have occurred. If the future cash flows (undiscounted and without interest) expected to result from the use of the related assets are less than the carrying value of such assets, an impairment has been incurred and a loss is recognized to reduce the carrying value of the long-lived assets to fair value. Retirement Plans: CTS has various defined benefit and defined contribution retirement plans covering a majority of its employees. CTS' policy is to annually fund the defined benefit pension plans at or above the minimum required under the Employee Retirement Income Security Act of 1974. Research and Development: Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge which will be useful in developing new products or processes, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. CTS expenses all research and development costs as incurred. NOTE A - Summary of Significant Accounting Policies (continued) - --------------------------------------------------------------- Income Taxes: CTS provides deferred income taxes for transactions reported in different periods for financial reporting and income tax return purposes pursuant to the requirements of FASB Statement No. 109, "Accounting for Income Taxes." Translation of Foreign Currencies: The financial statements of CTS' non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings. The assets and liabilities of the Company's United Kingdom subsidiary are translated into U.S. dollars principally at the current exchange rate at period end, with resulting translation adjustments made directly to the "cumulative translation adjustment" component of shareholders' equity. Statements of earnings accounts are translated at the average rates during the period. Financial Instruments: CTS' financial instruments consist primarily of cash, cash equivalents, trade receivables and payables, and obligations under notes payable and long-term debt. The carrying value for cash and cash equivalents, and trade receivables and payables approximates fair value based on the short-term maturities of these instruments. The carrying value for all long-term debt outstanding at December 31, 1999, and 1998, approximates fair value where fair value is based on market prices for the same or similar debt and maturities. Concentration of Credit Risk: Trade receivables subject the Company to the potential for credit risk with major customers. CTS sells its products to customers principally in the communications, automotive and computer industries, primarily in North America, Europe and the Pacific Rim. CTS performs ongoing credit evaluations of its customers to minimize credit risk. CTS generally does not require collateral. Sales to two major customers accounted for approximately 23% and 11% of revenues, respectively, for the year ended December 31, 1999, which exposes the Company to a concentration of credit risk. Management believes the likelihood of incurring material losses due to concentration of credit risk is remote. At December 31, 1998, CTS had no significant concentrations of credit risk. Stock-Based Compensation: CTS accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,"Accounting for Stock Issued to Employees" and its related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the closing market price of CTS' stock on the date of the grant over the amount that must be paid to acquire the stock. See Note F for the required pro forma net income and earnings per share disclosures required by FASB Statement No. 123. NOTE A - Summary of Significant Accounting Policies (continued) - --------------------------------------------------------------- Earnings Per Share: Basic and diluted earnings per common share are reported in conformity with FASB Statement No.128, "Earnings per Share." All prior period earnings per share (EPS) data presented have been restated to reflect a two-for-one stock split in 1999 (Note J). Basic earnings per share exclude any dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock that shared in the earnings of CTS. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the period plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options. Refer to Note M for the reconciliation of the numerator and denominator of the basic and diluted EPS computations. Comprehensive Earnings: CTS reports comprehensive earnings in accordance with FASB Statement No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive earnings and its components in general- purpose financial statements. The components of comprehensive earnings for CTS include foreign translation adjustments and net earnings. These components can be found within the Statements of Shareholders' Equity in the columns titled "Comprehensive Earnings" and "Accumulated Other Comprehensive Earnings." Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made for the years presented in the financial statements to conform to the classifications adopted in 1999. NOTES TO CONSOLIDATED STATEMENTS - -------------------------------- NOTE B - Acquisition - -------------------- On February 26, 1999, CTS Corporation completed the acquisition of certain assets and liabilities of the Component Products Division of Motorola, Inc., hereafter referred to as "CTS Wireless." CTS Wireless designs and manufactures electronic components and assemblies including ceramic filters, quartz crystals, crystal oscillators, surface acoustic wave components and piezoceramic devices, in five facilities in the USA and Asia, primarily for the wireless communications industry. The acquisition was accounted for under the purchase method of accounting. As part of the acquisition, the Company paid Motorola, Inc. $94 million at the closing and assumed approximately $49 million of debt (including pension obligation). The Company may be obligated to pay up to an additional $105 million over five years depending upon increased sales and profitability of CTS Wireless and has estimated the 1999 liability for this obligation at $7 million. The Company financed a substantial portion of the purchase price through bank borrowings. CTS incurred approximately $4 million in costs directly associated with the acquisition which are included in the overall consideration. The purchase price has been allocated to the assets acquired based on the estimated fair values as follows: (In millions) Inventory $ 20.8 Property, plant and equipment 69.6 Current technology 10.1 Identifiable intangible assets 40.6 In-process research & development (IPR&D) 12.9 ------ Total $154.0 Identifiable intangible assets include trademarks, tradenames, technology rights, and customer lists that are amortized over 25 years. Current technology is amortized over four years. In-process research and development represents the value assigned to research and development projects of CTS Wireless that were commenced but not yet completed or reached technological feasibility at the date of acquisition and which, if unsuccessful, have no alternative future use in research and development activities or otherwise. As of the date of acquisition, the $12.9 million of purchase price allocated to in-process research and development related to technologies Note B - Acquisition (continued) - -------------------------------- being developed for next-generation products and represents products that are currently in the development cycle that have not yet reached a level of technological feasibility and have no alternative future use. CTS Wireless' in-process research and development projects were initiated to address the rapid technological change associated with the wireless communications industry. The incomplete projects include developing technology for the miniaturization of components such as oscillators, quartz and ceramics. The calculations of amounts allocated to in-process research and development projects were based on risk- adjusted future cash flows related to the incomplete research and development projects. The resulting cash flows were discounted to their present value using a rate of 18%, which exceeds the overall cost of capital for the Company. Estimated net cash inflows from the acquired in-process technology, related to CTS Wireless, commenced in the latter part of 1999 and are projected to steadily decline through 2004. As of the date of acquisition, approximately $10 million had been expended to develop these research and development projects. The estimated cost to complete the projects is approximately $9 million to be incurred through the year 2000. Remaining efforts on the projects are significant and include important phases of project design, development and testing. The Company has reviewed the assumptions used in the forecasts and continues to believe that the amount allocated to acquired in-process research and development is reasonable. The operating results of CTS Wireless have been included in the consolidated statements of earnings from the date of acquisition. Pro forma results of operations as if the acquisition of CTS Wireless had occurred at the beginning of the periods presented, follow: Pro forma Pro forma Year ended Year ended December 31, 1999 December 31, 1998 ----------------- ----------------- Unaudited Net sales (In millions) $ 722 $ 676 Net earnings (In millions) $ 53 $ 28 Diluted earnings per share $1.84 $0.95 These unaudited pro forma consolidated results of operations have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of acquired intangible assets and increased interest expense on acquisition debt. In management's opinion, the pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on January 1 of each year presented, or of future operations of the combined companies under the ownership and operation of the Company. NOTE C - Discontinued Operations - -------------------------------- During 1998, CTS finalized a plan to sell all of the businesses of Dynamics Corporation of America (DCA) not strategic to CTS' electronic components and electronic assemblies core business segments. These noncore businesses are recorded as discontinued operations for all periods presented in the consolidated financial statements. In 1998, CTS completed the sale of one discontinued operation which resulted in gross proceeds of approximately $22 million. During 1999, the divestiture of three additional discontinued operations was completed, resulting in gross proceeds of approximately $31 million. The one remaining discontinued operation was sold in January 2000, for approximately $5 million, completing the disposal of all discontinued operations. The investment in discontinued operations included in the balance sheet at December 31, 1999, and 1998, is primarily comprised of accounts receivable, inventory, fixed assets, accounts payable and real estate held for sale. The Company's results for 1999 do not include any income or loss from the discontinued operations, as any anticipated losses were included in the Company's 1998 results. The Company does not expect any material gain or loss in fiscal 2000 when the disposals are completed and a final accounting performed. Operating results for discontinued operations are summarized as follows: Discontinued Operations 1999 1998 1997 - ----------------------- ---- ---- ---- Net Sales $21,649 $102,984 $24,549 ======= ======== ======= Earnings (loss) before income taxes 0 5,668 (633) Income tax provision (benefit) 0 2,267 (253) ------- -------- ------- Total discontinued operations, net of income taxes $ 0 $ 3,401 $ (380) ======= ======== ======= Note D - Short-term Borrowings - ------------------------------ CTS had unsecured lines of credit arrangements of $20,312 at December 31, 1999. These arrangements are generally subject to annual renewal and renegotiation, and may be withdrawn at the banks' option. Average daily short-term borrowings, including borrowings denominated in non-U.S. currencies, were $3,017 during 1999. The weighted-average interest rate, computed by relating interest expense to average daily short-term borrowings, was 7.1% in 1999. There were minimal borrowings against these lines during 1998. NOTE E- Long-term Debt and Other Long-term Obligations - ------------------------------------------------------ Long-term debt and other long-term obligations were comprised of the following: 1999 1998 ============================================================================== Long-term debt: Term loan at 8.4%, due in annual installments through 1999 $ 0 $ 9,000 Term loan at 6.82% (1999) and 6.1% (1998), due in quarterly installments through 2004 66,000 47,000 Revolving credit agreement, average interest rate of 6.2% in 1999, due in 2005 59,000 0 Industrial revenue bonds at a weighted- average rate of 7.5%, due in 2013 42,000 0 - ------------------------------------------------------------------------------ 167,000 56,000 Less current maturities 5,000 14,000 - ------------------------------------------------------------------------------ Total long-term debt $ 162,000 $42,000 ============================================================================== Other long-term obligations: Contractual DCA employee termination benefits, payable ratably through 2007 $ 6,423 $ 9,356 Untendered shares of DCA 3,139 3,735 Other 284 477 - ------------------------------------------------------------------------------ Total other long-term obligations $ 9,846 $ 13,568 ============================================================================== CTS has a $66,000 term loan with seven banks, which matures as follows: 2000 - $5,000; 2001 - $10,000; 2002 - $15,000; 2003 - $15,000 and 2004 - $21,000. CTS also has an unsecured revolving credit agreement totaling $150.0 million with seven banks, which expires in 2005. Interest rates on these borrowings and the term loan fluctuate based upon LIBOR, with adjustments based on the ratio of CTS' consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA). The Company pays a commitment fee that varies based on performance under certain financial covenants applicable to the undrawn portion of the revolving credit agreement. Currently, that fee is 0.25 percent per annum. The credit agreement and term loans require, among other things, that the Company maintain a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum leverage ratio. Debt relating to the industrial revenue bonds was assumed from Motorola, Inc. (Note B), and is collateralized by the land, building and equipment acquired with the bonds. Interest is payable to Motorola, Inc. semiannually. NOTE F- Stock Plans - ------------------- At December 31, 1999, CTS had four stock-based compensation plans, which are described below. CTS applies APB Opinion No. 25 and related Interpretations in accounting for its plans. With the exception of the 1997 transaction-related option grant, compensation cost is normally not recognized for its fixed stock option grants as they are granted at fair market value at the grant dates. Had compensation cost for CTS' fixed stock-based compensation plans been determined based on the fair value method, as defined in FASB Statement No. 123, CTS' net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 ---- ---- ---- Net earnings As reported $51,468 $37,474 $22,813 Pro forma $50,825 $37,206 $21,360 Net earnings per share- As reported $1.80 $1.28 $0.72 diluted Pro forma $1.78 $1.28 $0.67 The pro forma information presented above includes the effect of the difference between the intrinsic value compensation charge calculated under APB Opinion No. 25 and the fair value amount calculated under FASB Statement No. 123. The effects of applying FASB Statement No. 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995, some of which would have had income statement effects in 1997 and 1998 due to the fixed stock option awards generally vesting 25% per year over a four-year period. The weighted-average fair value of each option grant (which is amortized over the option vesting period for purposes of determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: dividend yield of 0.37%, 0.85% and 0.70%, respectively; expected volatility of 19.82%, 30.49% and 19.93%, respectively; risk-free interest rate of 5.86%, 5.30% and 5.80%, respectively and expected life of 5.2, 4.2 and 4.3 years, respectively. CTS' 1996 Stock Option Plan (1996 Plan) provides for grants of incentive stock options or nonqualified stock options to officers and key employees. Under the 1996 Plan, CTS may grant options to its officers and key employees for up to 1,200,000 shares of common stock. Options are granted under this Plan at the fair market value on the grant date and are exercisable generally in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. Upon the exercise of stock options, payment may be made using cash, shares of the Company's common stock or a combination thereof, subject to certain restrictions as described in the plan document. Under the 1996 Plan, options to purchase a total of 603,460 shares were outstanding as of December 31, 1999. At December 31, 1999, 245,360 of these shares were exercisable. During 1997, CTS granted 2,400,000 options for shares to certain officers and key employees. These options were fully vested and are exercisable over a ten-year period terminating May 8, 2007. Based on the value of CTS shares on the date of the merger and the option price of $10.42 per share, a $16,200 before tax, $10,530 after tax, or $0.33 per diluted share, charge to expense was recorded. During 1998, the Company acquired 900,000 of these shares at a cost of $5,273. Of the 2,400,000 shares subject to option granted, 1,500,000 remain to be exercised at December 31, 1999. NOTE F- Stock Plans (continued) - ------------------------------- A summary of the status of fixed stock options as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates, is presented below. All prior years' data has been restated to reflect the two-for-one stock split distributed in August 1999.
1999 1998 1997 ---- ---- ---- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at begin- ning of year 2,138,208 $10.05 2,981,084 $9.48 825,150 $ 5.35 Granted 213,700 33.61 281,000 14.09 2,400,000 10.42 Exercised (179,848) 6.46 (217,250) 5.45 (231,166) 4.73 Acquired 0 0 (900,000) 10.42 0 0 Expired or canceled (68,600) 15.51 (6,626) 10.08 (12,900) 5.20 ------- ----- ------ ----- ------- ---- Outstanding at end of year 2,103,460 $12.61 2,138,208 $10.05 2,981,084 $ 9.48 ========= ====== ========= ====== ========= ====== Options exercisable at year end 1,745,360 1,769,708 2,723,384 Weighted-average fair value of options granted during the year $10.05 $4.26 $7.60 The following table summarizes information about fixed stock options outstanding at December 31, 1999: Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/99 Life (Years) Price at 12/31/99 Price - -------- ----------- ------------ --------- ----------- --------- $ 6.230 203,960 .96 $6.23 203,960 $6.23 10.415-15.000 1,695,200 6.91 10.84 1,541,400 10.52 16.219-35.969 192,600 9.43 30.76 0 0 46.000-62.250 6,400 9.80 48.72 0 0 71.000-79.250 5,300 9.96 71.78 0 0
NOTE F- Stock Plans (continued) - ------------------------------- CTS has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which reserves 2,400,000 shares of the Company's common stock for sale, at market price or below, or award to key employees. Shares sold or awarded are subject to restrictions against transfer and repurchase rights of CTS. In general, restrictions lapse at the rate of 20% per year beginning one year from the award or sale. In addition, the Plan provides for a cash bonus to the participant equal to the fair market value of the shares on the dates restrictions lapse, in the case of an award, or the excess of the fair market value over the original purchase price if the shares were purchased. The total bonus paid to any participant during the restricted period is limited to twice the fair market value of the shares on the date of award or sale. Under the Plan, during 1999, 224,000 shares were awarded, leaving 1,797,400 shares available for award or sale at December 31, 1999. Under the Plan, in 1997, 42,000 shares were awarded. In addition to the shares issued and related amortization of deferred compensation associated with the issuances, CTS charged to expense $3,644, $371 and $910 for additional cash compensation payable under the formula provisions of the Plan in 1999, 1998 and 1997, respectively. CTS has a Stock Retirement Plan for Nonemployee Directors. This retirement plan provides for a portion of the total compensation payable to Nonemployee Directors to be deferred and paid in CTS stock. Under this plan, the amount of the actual dollar compensation was $363, $54 and $205 in 1999, 1998 and 1997, respectively. NOTE G - Employee Retirement Plans - ---------------------------------- Defined benefit plans - --------------------- CTS has a number of noncontributory defined benefit pension plans (Plans) covering approximately 27% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees' compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. In 1999, the Company amended the Pension Plan to include certain employees of CTS Wireless. The Company also amended the Pension Plan to improve early retirement subsidies and to include specific benefits for certain employees. CTS provides other postretirement benefits consisting of life insurance programs for retired employees. A majority of the Company's domestic employees are eligible for life insurance benefits. The Company funds life insurance benefits through term life insurance policies. The Company plans to continue funding premiums on a pay-as-you-go basis. The following provides a reconciliation of benefit obligations, plan assets, and the funded status of the plans and other postretirement benefits.
Other Postretirement Pension Benefits Benefits 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at January 1 $124,052 $106,962 $4,506 $4,735 Service cost 5,483 3,482 42 35 Interest cost 9,574 7,830 293 296 Acquisitions/divestitures 21,269 0 0 0 Plan amendments 7,997 2,658 0 10 Actuarial loss (gain) (18,163) 9,350 (380) (244) Benefits paid (6,465) (6,230) (331) (326) ------- ------- ------ ------ Benefit obligation at December 31 $143,747 $124,052 $4,130 $4,506 - -------------------------------------------------------------------------------------------------------- Change in plan assets: Assets at fair value at January 1 $245,880 $218,294 $ 0 $ 0 Actual return on assets 104,397 33,714 0 0 Acquisitions/divestitures 14,019 0 0 0 Company contributions 392 311 331 326 Benefits paid (6,465) (6,230) (331) (326) Administrative and other expenses (250) (209) 0 0 ------- ------- ----- ---- Assets at fair value at December 31 $357,973 $245,880 $ 0 $ 0 - -------------------------------------------------------------------------------------------------------- Reconciliation of prepaid (accrued) cost: Funded status of the plan $214,226 $121,828 $(4,130) $ (4,506) Unrecognized net gain (152,380) (49,983) (197) 236 Unrecognized prior service cost 10,047 2,808 9 10 Unrecognized transition asset (2,903) (5,579) 0 0 -------- ------- ------- ------- Prepaid (accrued) cost $ 68,990 $ 69,074 $(4,318) $ (4,260)
NOTE G - Employee Retirement Plans (Continued) - ---------------------------------------------- Net pension income/postretirement expense for the Plans in 1999, 1998 and 1997 includes the following components:
Other Postretirement Pension Benefits Benefits ---------------- -------------- 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Service cost--benefits earned during the year $ 5,483 $ 3,482 $ 2,846 $ 42 $ 35 $ 32 Interest cost on projected benefit obligation 9,574 7,830 6,196 293 296 298 Expected return on plan assets (89,370) (29,737) (43,970) 0 0 0 Net amortization and deferral 67,945 11,089 28,729 1 (2) (12) - -------------------------------------------------------------------------------------------------------------------------------- Net (income) expense $(6,368) ($7,336) $(6,199) $336 $329 $318 - -------------------------------------------------------------------------------------------------------------------------------- Assumptions for 1999: Discount rate as of December 31 7.50% 6.75% 7.50% 7.50% 6.75% 7.50% Expected return on plan assets 9.75% 9.75% 9.75% 9.75% 9.75% 9.75% Rate of compensation increase 5%-7% 4%-7% 5%-7% 0 0 0 - --------------------------------------------------------------------------------------------------------------------------------
Net pension income is determined using assumptions as of the beginning of each year. Funded status is determined using assumptions as of the end of each year. The majority of U.S. defined benefit pension plan assets are invested in common stock, including approximately $110 million and $26 million in CTS common stock at December 31, 1999, and 1998, respectively. The balance is invested in corporate bonds, U.S. government backed mortgage securities and bonds, asset backed securities, a private equity fund, non-U.S. corporate bonds and convertible issues. Defined contribution plans CTS sponsors a 401(k) Plan, as well as several other defined contribution plans, covering certain non-U.S. employees and its domestic hourly employees not covered by a defined benefit pension plan. Contributions and costs are generally determined as a percentage of the covered employee's annual salary. Amounts expensed for the 401(k) Plan and the other plans totaled $2,821 in 1999, $2,457 in 1998 and $2,351 in 1997. NOTE H - Income Taxes - --------------------- Earnings from continuing operations before income taxes consist of the following:
1999 1998 1997 ---- ---- ---- Domestic $20,770 $26,789 $ 3,656 Non-U.S. 53,285 22,652 32,074 ------ ------ ------ Total $74,055 $49,441 $35,730 Significant components of income taxes are as follows: 1999 1998 1997 - ---------------------------------------------------------------------------------------- Current: Federal $11,736 $1,041 $2,308 State 2,975 928 1,130 Non-U.S. 13,079 7,654 9,928 ------ ----- ----- Total current 27,790 9,623 13,366 ------ ----- ------ Deferred: Federal (4,585) 5,737 (540) State (965) 902 (462) Non-U.S. 347 (894) 173 ------ ----- ----- Total deferred (5,203) 5,745 (829) ------ ----- ----- Total provision for income taxes $22,587 $15,368 $12,537
NOTE H - Income Taxes (continued) - --------------------------------- Significant components of CTS' deferred tax liabilities and assets at December 31, 1999, and 1998 are: 1999 1998 ---- ---- Pensions $26,920 $24,180 Depreciation 2,805 2,725 Basis difference-acquired assets 1,385 5,025 Other 1,757 2,037 ----- ----- Gross deferred tax liabilities 32,867 33,967 ------ ------ Postretirement benefits 594 1,601 Inventory reserves 3,144 5,194 Nondeductible accruals 18,294 11,388 Nonrecurring compensation charge 3,543 3,543 Other 2,324 2,644 ------ ----- Gross deferred tax assets 27,899 24,370 ------ ------ Net deferred tax liabilities (4,968) (9,597) Deferred tax asset valuation allowance (601) (1,175) ------ ------ Total $(5,569) $(10,772) ======= ======== During 1999, the valuation allowance was decreased as a result of the utilization of certain deferred tax assets in non-U.S. jurisdictions. NOTE H - Income Taxes (continued) - --------------------------------- A reconciliation from the statutory federal income tax to the Company's effective income tax follows:
1999 1998 1997 ---- ---- ---- Taxes at the U.S. statutory rate $25,919 $ 17,304 $12,506 State income taxes, net of federal income tax benefit 1,307 1,191 433 Non-U.S. income taxed at rates different than the U.S. statutory rate (2,996) 98 (154) Tax exempt earnings (995) 0 0 Utilization of net operating loss carryforwards and benefit of scheduled tax credits (574) (2,781) (1,552) Nonrecurring compensation expense 0 (724) 1,006 Other (74) 280 298 ------- ------- ------- Provision for income taxes $22,587 $15,368 $12,537 ======= ======= =======
Undistributed earnings of certain non-U.S. subsidiaries amount to approximately $80 million at December 31, 1999. Prior year earnings are intended to be invested indefinitely and, accordingly, no provision has been made for non-U.S. withholding taxes. In the event all undistributed earnings were remitted, approximately $7 million of withholding tax would be imposed. NOTE I - Business Segments - -------------------------- FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to provide certain information about their operating segments. CTS' reportable segments are based upon the nature of products within the Company. The products comprising the reportable segments are managed separately and have differing technology and marketing strategies. CTS has two reportable segments: electronic components and electronic assemblies. Electronic components are products which perform the basic level electronic function for a given product family for use in customer assemblies. Electronic components consist principally of wireless components used in cellular handsets, automotive sensors used in commercial or consumer vehicles, frequency control devices such as crystals and clocks, loudspeakers, resistor networks, switches and variable resistors. Electronic assemblies are assemblies of electronic or electronic and mechanical products which, apart from the assembly, may themselves be marketed as separate stand-alone products. Such assembly represents a completed, higher-level functional product to be used in customer end products or assemblies. These products consist principally of interconnect products such as backpanel and connector assemblies used in the telecommunications industry, RF integrated modules used in cellular handsets, hybrid microcircuits used in the healthcare market and cursor controls for computers. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Management evaluates performance based upon operating earnings before interest and income taxes. NOTE I - Business Segments (continued) - -------------------------------------- Summarized financial information concerning CTS' reportable segments is shown in the following table: Electronic Electronic 1999 Components Assemblies Total - ---- ---------- ---------- ----- Net sales to external customers $507,344 $169,732 $677,076 Operating earnings* 81,025 14,711 95,736 Total assets 407,822 105,769 513,591 Depreciation and amortization 29,266 4,641 33,907 Capital expenditures $ 22,028 $ 10,868 $ 32,896 1998 Net sales to external customers $247,719 $122,722 $370,441 Operating earnings 41,955 7,653 49,608 Total assets 199,068 58,998 258,066 Depreciation and amortization 15,271 3,884 19,155 Capital expenditures $ 16,032 $ 5,298 $ 21,330 1997 Net sales to external customers $237,926 $152,676 $390,602 Operating earnings** 34,253 14,920 49,173 Total assets 230,759 50,320 281,079 Depreciation and amortization 9,823 6,193 16,016 Capital expenditures $ 15,728 $ 6,452 $ 22,180 * Excludes the effect of a one-time, noncash write-off for acquired in-process research and development (IPR&D), related to the acquisition of CTS Wireless of $12,940. ** Excludes the effect of a one-time transaction-related compensation charge of $16,200. NOTE I - Business Segments (continued) - -------------------------------------- Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table:
Pre-tax Earnings 1999 1998 1997 ---- ---- ---- Total operating earnings for reportable segments $95,736 $49,608 $49,173 Transaction-related compensation charge 0 0 (16,200) Acquired in-process research and development (IPR&D) (12,940) 0 0 Interest expense (9,944) (2,194) (2,478) Interest income 865 1,141 2,397 Other income 338 886 2,838 ------- ------- ------- Earnings before income taxes $74,055 $49,441 $35,730 ======= ======= ======= Assets Total assets for reportable segments $513,591 $258,066 $281,079 Investment in discontinued operations 9,061 35,123 37,117 -------- -------- -------- Total assets $522,652 $293,189 $318,196 ======== ======== ======== Financial information relating to CTS' operations by geographic area was as follows: Net Sales 1999 1998 1997 ---- ---- ---- United States (U.S.) $318,627 $221,395 $224,779 China 153,222 0 0 United Kingdom 96,807 92,784 108,145 Taiwan 59,392 8,592 10,186 Other non-U.S. 49,028 47,670 47,492 -------- -------- -------- Consolidated $677,076 $370,441 $390,602 ======== ======== ======== Sales are attributed to countries based upon the origin of the sale. Long-lived assets United States $104,398 $41,431 $40,752 China 18,581 0 0 United Kingdom 15,583 11,543 10,387 Taiwan 36,369 2,858 3,110 Other non-U.S. 12,604 13,418 13,657 -------- ------- ------- Consolidated $187,535 $69,250 $67,906 ======== ======= =======
During 1999, revenues from one customer of CTS' electronic components business segment represents approximately $141,501, or 28%. Revenue from one customer of CTS' electronic assemblies business segment during 1999 represents $71,986, or 42%. NOTE J - Capital Stock - ---------------------- CTS adopted a Shareholder Rights Plan (the "Plan") on August 28, 1998. The Plan was implemented by declaring a dividend, distributable to shareholders of record on September 10, 1998, of one common share purchase right (a "Right") for each outstanding share of common stock held at the close of business on that date. Each Right under the Plan will initially entitle registered holders of common stock to purchase one one-hundredth of a share of CTS' new Series A Junior Participating Preferred Stock (Series A Preferred Stock) for a purchase price of $125 per share, subject to adjustment. The Rights will be exercisable only if a person or group (1) acquires 15% or more of the common stock or (2) announces a tender offer that would result in that person or group acquiring 15% or more of the common stock. The Rights are redeemable for $0.01 per Right (subject to adjustment) at the option of the Board of Directors. Until a Right is exercised, the holder of the Right, as such, has no rights as a shareholder of CTS. The Rights will expire on August 27, 2008, unless redeemed by CTS prior to that date. On June 24, 1999, the CTS Corporation Board of Directors declared a two-for-one stock split in the form of a stock dividend to CTS shareholders of record on July 12, 1999. Under the split, CTS common shareholders received a stock dividend of one CTS share for each CTS share held. All shares outstanding and per share amounts have been restated to reflect the stock split. NOTE K - Treasury Stock - ----------------------- Common stock held in treasury at December 31, 1999, totaled 20,957,649 shares with a cost of $283,558, compared to 21,124,898 shares with a cost of $275,471 at December 31, 1998. On October 16, 1997, CTS reinstituted its common stock repurchase plan whereby it may purchase shares of common stock in open market or privately negotiated transactions. The remaining shares authorized for repurchase under the Board of Directors' authorization dated October 30, 1987, and amended on February 23, 1990, and June 25, 1998, is approximately 430,000 shares. There can be no assurance as to the number of shares CTS may repurchase or the timing of such purchases. NOTE L - Contingencies - ---------------------- Certain processes in the manufacture of CTS' current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; CTS has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on CTS' business or financial condition, based on the following: 1) CTS' status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by CTS to certain of the sites; and/or 5) CTS' experience to date in relation to the determination of its allocable share. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. Accrued environmental costs as of December 31, 1999 totaled $7,696, compared with $7,100 at December 31, 1998, are included in Other Accrued Liabilities. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of CTS. Under the terms of the sale agreement related to a certain discontinued operation, CTS retains liability for performance and warranty obligations under certain customer contracts. The potential liability expires in 2000. Management does not expect that it will incur any significant costs associated with this contingency. Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business and contracts relating to sales of property. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS' consolidated financial position or results of operations. NOTE M - Earnings Per Share - --------------------------- FASB Statement No. 128, "Earnings per Share" (EPS), requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted EPS computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for 1999, 1998 and 1997. The other dilutive securities of approximately 308,000, 336,000 and 148,000 for the years ended December 31, 1999, 1998 and 1997, respectively, consisted primarily of shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their DCA shares.
Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ - ---------------------------------------------------------------------------------------- 1999: Basic EPS $51,468 27,498 $1.87 - ---------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 783 Other 308 - ---------------------------------------------------------------------------------------- Diluted EPS $51,468 28,589 $1.80 - ---------------------------------------------------------------------------------------- 1998: Basic EPS $37,474 28,028 $1.34 - ---------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 864 Other 336 - ---------------------------------------------------------------------------------------- Diluted EPS $37,474 29,228 $1.28 - ---------------------------------------------------------------------------------------- 1997: Basic EPS $22,813 31,248 $0.73 - ---------------------------------------------------------------------------------------- Effect of Dilutive Securities: Stock Options 556 Other 148 - ---------------------------------------------------------------------------------------- Diluted EPS $22,813 31,952 $0.72 - ----------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1997- 1999) LIQUIDITY AND CAPITAL RESOURCES The table below highlights significant comparisons and ratios related to liquidity and capital resources of CTS for each of the last three years.
(In thousands of dollars) December 31 December 31 December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------- Net cash provided by (used in) continuing operations: Operating activities $ 56,854 $ 46,612 $ 59,129 Investing activities (104,627) (7,055) (90,560) Financing activities 57,375 (69,885) 27,298 ======================================================================================== Cash and equivalents $ 24,219 $ 16,273 $ 39,847 Accounts receivable 124,682 47,043 51,314 Inventories, net 78,942 33,322 34,683 Current assets 254,297 117,683 146,747 Accounts payable 68,315 17,412 22,593 Accrued liabilities 81,146 50,965 53,192 Current liabilities 154,461 82,377 80,991 Working capital 99,836 35,306 65,756 Current ratio 1.65 1.43 1.81 Interest-bearing debt $167,000 $ 56,000 $ 61,206 Shareholders' equity 164,764 123,839 147,496 Interest-bearing debt as a percent of shareholders' equity 101% 45% 41% Interest-bearing debt as a percent of capitalization 50% 31% 29% =======================================================================================================================
Cash flow from operating activities of $56.9 million was significantly affected by increases in inventory and accounts receivable, principally at CTS Wireless (Wireless). A significant portion of cash was required to fund an investment of accounts receivable at Wireless as CTS did not acquire any accounts receivable in the Wireless acquisition. An investment in inventory was required in both business segments to support the growth experienced in 1999. The 1998 positive cash flow provided by operating activities from continuing operations of $46.6 million was lower than the 1997 amount by $12.5 million, resulting from the impact of the reductions in accounts payable and accrued liabilities. Offsetting these decreases in liabilities, were reductions in receivables and inventories in 1998. The 1997 positive cash flow from operating activities from continuing operations of $59.1 million, an improvement of $24.0 million, or 68% over 1996, was primarily a result of the substantial reduction in inventories, and the higher operating earnings after excluding the effect of the noncash transaction-related compensation charge of $16.2 million in 1997. The 1999 use of $104.6 million for investing activities had two major components. First, the Wireless acquisition required $94.0 million at the closing plus approximately $4 million in costs directly associated with the acquisition. Also, the Company had record-setting capital expenditures of $32.9 million for capacity expansion in the newly acquired Wireless operation, and for the pre-acquisition operating units (those traditional CTS product lines which comprised the product offering prior to the Wireless acquisition). Wireless capital expenditures for both the electronic component and electronic assembly segments were primarily for capacity increases in the surface acoustic wave filter products and the RF integrated modules. These expenditures were due to the increased demand from Motorola for mobile wireless phones, and due to the increased demand for ceramic duplexer products from various communications customers. Capital additions were required for interconnect products for capacity increases and to support the advanced surface mount technology, primarily for the electronic assemblies segment. Significant expenditures were also required for automotive sensors (electronic components) to meet changing customer needs, and for resistor products for the cursor control development programs in the electronic assemblies segment. Also, during 1999, the divestiture of the non-strategic DCA units acquired in 1997 as a part of the DCA merger was essentially completed, generating $28.6 million in positive cash flow. During 1998, cash expenditures for investing activities totaled $7.1 million. Included in this total were $20.7 million of proceeds from the sale of property and equipment, primarily associated with the sale of a nonstrategic asset acquired within the DCA merger. These cash proceeds were offset by capital expenditures of $21.3 million. Approximately one-third of these capital expenditures was for selected capacity increases, particularly in the molding operations within the automotive product lines (electronic components). Production equipment for newer products was also added in our resistor product lines (primarily electronic components). Cash expenditures for investing activities totaled $90.6 million in 1997, primarily as a result of the purchase of the DCA operating assets. In October 1997, the Company completed the acquisition of DCA, including the reacquisition of 13.8 million shares (post-split basis) of CTS common stock owned by DCA. The total purchase price of approximately $250 million included total cash expended in connection with the DCA acquisition of $71.4 million. Of the total cash consideration, $50.0 million was obtained from an unsecured six-year amortizing term loan. In addition to the acquisition programs, investment activities during the last three years included capital expenditures of $32.9 million, $21.3 million and $22.2 million in 1999, 1998 and 1997, respectively. During 1997, major capital additions included capacity expansions in certain key product lines and expenditures for new product production equipment. CTS expects to increase its capital expenditures to approximately $127 million in 2000. These capital expenditures will primarily be for production capacity expansion, new products and cost reduction programs. In the pre-acquisition product lines, significant expenditures will be required in the interconnect, automotive and resistor product lines for new product introduction, additional capacity and new technology. Projected capital expenditures in 2000 for Wireless projects will include programs for the RF integrated modules capacity expansion to increase capacity for the oscillator products and reduce product size as a result of customer demands in the wireless handset industry for the ceramic duplexer products to increase capacity, and for the office building move to establish a new Wireless headquarters. In 1999, financing activities totaled $57.4 million. This was primarily related to the $94.0 million required for the Wireless acquisition offset by $28.4 million of repayments made possible from sales proceeds of $28.6 million related to discontinued operations. The Wireless acquisition required long-term borrowing to fund this purchase, which was accomplished through a $225.0 million bank unsecured credit facility. The facility was acquired at LIBOR plus approximately one percent, and had an original term of six years. During the year, this loan was paid down by $28.4 million. Also during 1999, the Company repurchased 205,800 shares of its common stock at a total cost of $9.2 million. Refer to Note K -- Treasury Stock, for a description of the Company's repurchase plan. Cash used for financing activities during 1998 amounted to $69.9 million and was primarily used for the repurchase of a portion of the Company's outstanding stock. During the year, 3.5 million shares (post-split basis) were repurchased at a total cost of $56.3 million. Also included in the 1998 financing activities was the repayment of $5.2 million of long-term debt and the acquisition of certain stock options at a cost of $5.3 million. Financing activities during 1997 generated $27.3 million. These financing activities primarily related to the Company's $50.0 million term loan in connection with the acquisition of DCA, partially reduced by purchases of treasury stock of $10.1 million and payments of long-term obligations of $8.7 million. Dividends paid were $3.3 million, $3.4 million and $3.8 million in 1999, 1998 and 1997, respectively. Amounts decreased due to the repurchase of outstanding shares. At the end of each of the last three years, cash of various non-U.S. subsidiaries was invested in U.S.-denominated cash equivalents. No provision for U.S. income taxes or withholding taxes on the undistributed earnings at December 31, 1999, has been made because prior year earnings are indefinitely reinvested in the subsidiaries. If all non-U.S. earnings were repatriated, approximately $6.9 million of withholding taxes would accrue. As described in Note B -- Acquisition, on December 22, 1998, CTS agreed to pay Motorola, Inc. $94.0 million at closing (which occurred on February 26, 1999) and assume approximately $49 million of Motorola obligations. In addition, CTS may be obligated to pay up to an additional $105.0 million over five years depending upon increased sales and profitability of Wireless. CTS financed a substantial portion of the purchase price, and related working capital, through borrowings under a new $225.0 million bank unsecured credit facility, which replaced the previous $125.0 million borrowing facility. Interest on this new facility was at an initial floating rate of LIBOR plus approximately one percent and has a term of six years. The new debt agreement requires principal amortization and has financial covenants consistent with the replaced borrowing facility. On December 10, 1999, CTS filed a shelf registration Statement Form S-3, with the Securities and Exchange Commission. Under this shelf process, CTS has a two-year period within which it may elect to offer up to $500.0 million in any combination of debt securities, common stock, preferred stock or warrants. The Company believes it has sufficient liquidity including cash generated from operations, available credit facilities, as well as access to public and private sources of funding through its shelf registration to support its cash needs in fiscal 2000. RESULTS OF OPERATIONS - --------------------- Business Segment Data Table - --------------------------- (In thousands of dollars) Electronic Electronic Components Assemblies ---------- ---------- 1999 Sales $507,344 $169,732 Operating earnings* 81,025 14,711 Operating earnings % of sales* 16.0% 8.7% 1998 Sales $247,719 $122,722 Operating earnings 41,955 7,653 Operating earnings % of sales 16.9% 6.2% 1997 Sales $237,926 $152,676 Operating earnings** 34,253 14,920 Operating earnings % of sales** 14.4% 9.8% * Excludes the effect of a one-time, noncash write-off of $12.9 million pre-tax for acquired in-process research and development (IPR&D) related to the acquisition of Wireless. ** Excludes the effect of a one-time transaction-related compensation charge of $16.2 million. Overview - -------- Electronic components sales increased by $259.6 million, or about 105% from 1998. Although the primary reason for the increase was the result of the Wireless acquisition and the inclusion of products for the wireless handset and communications industry for ten months of 1999, growth was also experienced in automotive and frequency control components. The higher volume contributed to the 93% increase in operating earnings. Operating earnings as a percent of sales decreased to 16% in 1999 from 17% in 1998 as a result of wireless product sales, which have a lower margin than CTS traditional product lines. In the electronic assemblies segment, sales and earnings increased substantially, owing to the growth in interconnect and resistor products for the computer and communications equipment markets. The 1998 operating earnings from electronic components at $42.0 million comprised the larger portion of the total earnings, primarily due to the higher volume and generally higher margins of the products within this segment. For this business segment, sales increased by $9.8 million, or 4% over 1997, and the associated operating earnings increase was $7.7 million, or an improvement as a percent of sales of 2.5 percentage points. The improvement in both sales and earnings were primarily within the frequency product lines with the full-year impact of the former DCA product lines and the efficiencies realized in both our frequency and electrocomponents operations. The decline in the electronic assemblies segment was a result of the decrease in flex cable assembly product sales of $19.5 million and the 1997 sale of the North American interconnect product line, which impacted 1998 by $11.3 million. The 1997 sales of electronic components increased by $22.3 million, or 10% over 1996, generally across all product lines. The improved 1997 operating earnings in the amount of $6.7 million, or 24% over 1996, was driven by the overall volume increase, and was also a result of the operating improvements and expense control throughout the major product lines within this segment. Also during 1997, significant improvement was realized in our electronic assemblies segment as sales increased by $47.0 million, primarily owing to the substantially higher sales in the disk drive and telecommunications markets. The higher 1997 operating earnings in the electronic assemblies segment was a direct result of the 44% volume increase generated by operating efficiencies and facilities utilization. Most Recent Three Fiscal Years Discussion - ----------------------------------------- The following table highlights significant information with regard to the Company's overall results of operations during the past three fiscal years. (In thousands of dollars) December 31 December 31 December 31 1999 1998 1997 ----------- ----------- ----------- Net sales $ 677,076 $370,441 $390,602 Gross earnings 205,533 114,597 110,517 Gross earnings as a percent of sales 30.4% 30.9% 28.3% Operating earnings - before acquired IPR&D (1999) and transaction-related compensation charge (1997) $ 95,736 $ 49,608 $ 49,173 Operating earnings - after acquired IPR&D (1999) and transaction-related compensation charge (1997) 82,796 49,608 32,973 Earnings before income taxes 74,055 49,441 35,730 Earnings from continuing operations 51,468 34,073 23,193 Net earnings (loss) from discontinued operations 0 3,401 (380) Net earnings $ 51,468 $ 37,474 $22,813 The 1999 net sales rose $306.6 million, or 83% from 1998, primarily as a result of the Wireless acquisition in February, as shown in Note I-- Business Segments. The largest sales increase was in the electronic components segment in the amount of $259.6 million, or 105%. The electronic assemblies segment also grew substantially over 1998 with sales increasing $47.0 million, or 38%. Net sales for 1998 were below the 1997 level by $20.2 million. The decline was primarily due to a decrease of $19.5 million in electronic assembly products including flex cable product sales and the sale of the North American interconnect product line and facilities, which impacted 1998 by $11.3 million. Partially offsetting these decreases in revenue was the full-year impact of the former DCA frequency control product lines of $11.9 million. Electronic component sales, in 1998, increased by $9.8 million, or 4% over 1997, primarily as a result of the full-year impact of the former DCA frequency control products of $11.9 million. Sales of the electronic assemblies declined by $30.0 million in 1998 as a result of the decreased flex cable product sales by $19.5 million, and the 1997 sale of our North American interconnect product line, impacting 1998 sales by $11.3 million. Net sales for 1997 increased by $69.3 million, or 22% over 1996. This 1997 growth occurred primarily in our automotive components and computer equipment assemblies sold domestically and in Europe. The sales for electronic components increased during 1997 by $22.3 million, or 10% over the 1996 level, primarily within our automotive sensors, resistor network and frequency control product lines. Sales of electronic assemblies improved substantially in 1997, increasing by $47.0 million, or 44%, primarily in our flex cable assembly products and in our European sourced interconnect products. As a result of the 1999 Wireless acquisition, the percent of total annual sales in the communications equipment market has increased to 55%, from the 19% in 1997. At the same time, our other two major markets served, computer equipment and automotive, have declined as a percent of total annual sales. Computer equipment has dropped from 33% in 1997 to 18% in 1999, while automotive has declined from 31% in 1997 to 19% in 1999. During this three-year comparative period, sales into the automotive market actually increased by $8.3 million, or 7%. Sales into the computer equipment market decreased by $8.2 million or 6%, primarily due to the significant decline in the flex cable sales for the disk drive products within the electronic assemblies segment. Within the electronic components segment, sales into the communications equipment market comprise 61% of total sales in 1999, compared to 19% in 1997, as a result of the Wireless acquisition and the burgeoning demand for hand-held wireless communication devices. Within the electronic assemblies segment, sales into the communication equipment market were 39% in 1999, compared to 19% in 1997, also a result of the rapidly growing demand for hand-held wireless devices. Sales of electronic components into the computer equipment market were 6% in 1999 versus 13% in 1997, although sales dollars remained essentially the same. Electronic assemblies sold into the computer equipment market were 53% in 1999 compared to 64% in 1997, the result of the decline in the flex cable assembly business. Sales of electronic components into the automotive market were 25% in 1999 versus 51% in 1997, although revenue dollars actually increased by $8.3 million, while the electronic assembly sales into this market were minimal in both periods. CTS' 15 largest customers represented approximately 71% of net sales in 1999, 66% of net sales in 1998 and 67% of net sales in 1997. During 1999, sales to Motorola, Inc. accounted for 23% of total net sales, but were minimal in the prior two years. Also during 1999, sales to Compaq Computer Corporation amounted to 11% of total net sales as compared to 12% in 1998 and 1997. Sales to General Motors Corporation comprised 12% of net sales in 1998 as compared to 13% in 1997. Sales to Seagate Technology, Inc., comprised 8% of net sales in 1998, compared to 11% in 1997. Because most of CTS' revenues are derived from the sale of custom products, the relative contribution to revenues of changes in unit volume cannot be meaningfully determined. CTS' products are usually priced with reference to expected or required profit margins, customer expectations and market competition. Pricing for most of CTS' electronic component and assembly products frequently decreases over time and also fluctuates in accordance with total industry utilization of manufacturing capacity. In 1999, 1998 and 1997, improvements in gross earnings were realized over each of the preceding years in absolute terms principally due to effective facilities utilization and production efficiencies, the higher absorption of fixed manufacturing overhead expenses and overall expense control. In 1999, gross earnings were substantially improved over 1998, due principally to the higher volume as a result of the Wireless acquisition. However, gross earnings as a percent of sales, in 1999 were slightly under 1998, caused by the lower margins within the Wireless product lines. The 1998 gross earnings percent of sales was better than 1997, due to favorable sales mix resulting from our focus on the most profitable product lines. Selling, general and administrative expenses as a percent of sales have remained relatively constant over the last three years, ranging from 12% in 1999, to 14% in 1998, to 12% in 1997. In 1999, as in previous years, CTS continued to control these expenses while filling key management positions required for the new Wireless acquisition and for planned future growth and development. Research and development expenses increased by $12.0 million in 1999, primarily due to the significant ongoing R&D activities assumed in the Wireless acquisition, as well as continuing efforts in our pre-acquisition operations, primarily in the electronic components segment. The 1998 research and development expenses of $13.4 million increased from 1997 by $0.3 million, as the new product development programs continued, particularly for our automotive products included in the electronic components segment. During 1997, research and development expenses increased by $2.4 million, or 22% over 1996 to $13.1 million, though remaining relatively constant as a percent of sales, as CTS continued to invest in programs for new products and product improvements. A substantial portion of the research and development efforts was devoted to additional products and product enhancements within our automotive, resistor network and frequency control products included in our electronic components business segment. The 1999 operating earnings at $95.7 million (before the IPR&D charge) nearly doubled from the comparable 1998 amount. This increase is due to higher revenue and management's control over operating expenses. The 1998 operating earnings of $49.6 million were slightly better than the comparable amount in 1997, excluding the 1997 transaction-related compensation charge of $16.2 million. In spite of the lower comparable revenue of over $20.2 million for continuing operations, 1998 earnings increased as a result of the focus on the more profitable product lines, production and facilities efficiencies and overall expense control. Excluding the nonrecurring compensation charge of $16.2 million related to the DCA acquisition, 1997 operating earnings of $33.0 million increased by $15.8 million, or 47% over 1996. Contributing to this substantial earnings increase was the overall volume increase, operating improvements and continued expense control. The 30.5% effective tax rate for 1999 was slightly lower than the 31% rate from 1998, primarily resulting from greater earnings in lower tax rate jurisdictions. The 1998 effective tax rate of 31% decreased from 35% in 1997. This decrease was primarily due to the utilization of net operating loss carryforwards in non-U.S. jurisdictions. The remeasurement of the tax benefit related to a one-time compensation charge incurred in 1997 based upon the increase in the CTS stock price also contributed to the lower 1998 tax rates, as did the increased earnings in the lower tax rate jurisdictions in which CTS operates. The 1997 effective tax rate of 35% was lower than the 1996 tax rate of 37%, principally due to the utilization of net operating loss carryforwards in non-U.S. jurisdictions. Environmental - ------------- CTS has been notified by the U.S. Environmental Protection Agency, as well as state agencies and generator groups, that it is or may be a Potentially Responsible Party regarding hazardous waste remediation at non-CTS sites. Additionally, CTS provides reserves for probable remediation activities at certain of its manufacturing locations. These issues are discussed in Note L -- Contingencies. Market Risk - ----------- CTS is exposed to market risk, including changes in foreign currency exchange rates and interest rates. As discussed in Note A to the consolidated financial statements, the financial statements of all CTS' non-U.S. subsidiaries, except the United Kingdom subidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency. The market risk associated with foreign currency exchange rates is not material in relation to CTS' consolidated financial position, results of operations or cash flows. As such, the Company does not utilize a significant number of derivative financial instruments to manage the exposure in the United Kingdom or its other non-U.S. operations. As a part of the Company's risk management program, CTS performs sensitivity analysis to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 63-basis-point increase in interest rates (approximately 10% of the Company's weighted-average interest rate) on variable-rate debt instruments would have an immaterial effect on the Company's 1999 and 1998 earnings before income taxes and the fair value of debt instruments as of the end of such fiscal years. YEAR 2000 Computer Systems Compliance - ------------------------------------- CTS has addressed the issues associated with potential business disruptions relating to the Year 2000 computer programming issue. CTS formed a Company-wide Year 2000 Readiness Project (Project) to identify and resolve Year 2000 issues. The products of CTS operating units are not "date and time sensitive." CTS may add date and time sensitive components to CTS products at the direction of its customers and upon the customer's assumption of responsibility for the Year 2000 compliance of the components selected. The Project included the inventory of financial, manufacturing, design and other internal systems, hardware, equipment and embedded chips in industrial control instruments, and the assessment, remediation and testing of those systems. All systems were inventoried, reviewed and assessed in 1998, and the majority of systems which were not Year 2000 ready were remedied or replaced and tested in 1998. Systems testing and certification were completed in 1999. As part of the Project, Year 2000 Readiness Surveys were sent to significant service providers, vendors, suppliers, customers and governmental entities that are believed to be critical to business operations. CTS prepared supplier contingency plans based on survey responses. CTS will continue to be diligent in identifying and addressing potential issues which may develop in the coming months. The Company experienced no major disruptions or system failures, and CTS experienced no customer or supplier materially adverse effects. The cost to complete the program was approximately $2 million through December 31, 1999, for outside consultants, software and hardware applications. CTS did not track the internal costs incurred for all of the hours spent on the project.
Shareholder Information (In thousands of dollars except per share data) Quarterly Results of Operations ------------------------------- (Unaudited) Earnings Earnings from from Net Gross Operating Continuing Discontinued Net Sales Earnings Earnings Operations Operations Earnings ----- -------- -------- ---------- ---------- -------- 1999 - ---- 1st quarter(a) $120,339 $ 37,187 $ 3,332 $ 2,163 $ 0 $ 2,163 2nd quarter 177,825 52,686 23,601 14,490 0 14,490 3rd quarter 180,203 54,967 25,928 15,949 0 15,949 4th quarter 198,709 60,693 29,935 18,866 0 18,866 ------- ------ ------ ------ ------ ------ $677,076 $205,533 $82,796 $51,468 $ 0 $51,468 1998 1st quarter $ 94,041 $ 26,367 $10,323 $ 7,378 $1,334 $ 8,712 2nd quarter 99,293 31,219 13,379 8,900 766 9,666 3rd quarter 83,777 26,341 11,543 7,804 394 8,198 4th quarter 93,330 30,670 14,363 9,991 907 10,898 ------- ------ ------ ------ ----- ------ $370,441 $114,597 $49,608 $34,073 $3,401 $37,474 Per Share Data (b) (Unaudited) ----------- Earnings from Earnings from Discontinued Continuing Operations Operations Net Earnings --------------------- ------------- ------------ Dividends High(c) Low(c) Declared Basic Diluted Basic Diluted Basic Diluted ------- ------ -------- ----- ------- ----- ------- ----- ------- 1999 1st quarter (a) $25.50 $20.44 $0.03 $0.08 $0.07 $ 0 $ 0 $0.08 $0.07 2nd quarter 35.44 22.81 0.03 0.53 0.51 0 0 0.53 0.51 3rd quarter 60.00 34.75 0.03 0.58 0.56 0 0 0.58 0.56 4th quarter 86.25 38.75 0.03 0.68 0.66 0 0 0.68 0.66 ---- ---- ---- ---- ---- ---- ---- $0.12 $1.87 $1.80 $ 0 $ 0 $1.87 $1.80 1998 1st quarter $17.44 $13.63 $0.03 $0.25 $0.24 $0.04 $0.04 $0.29 $0.28 2nd quarter 19.00 13.82 0.03 0.32 0.30 0.03 0.03 0.35 0.33 3rd quarter 16.44 13.22 0.03 0.28 0.28 0.02 0.01 0.30 0.29 4th quarter 21.94 11.82 0.03 0.37 0.35 0.03 0.03 0.40 0.38 ---- ---- ---- ---- ---- ---- ---- $0.12 $1.22 $1.17 $0.12 $0.11 $1.34 $1.28 (a) The first quarter of 1999 results include a one-time, noncash write-off of $12.9 million pre-tax, $8.6 million after-tax, or $.30 per diluted share, for acquired in-process research and development(IPR&D), related to the acquisition of CTS Wireless. (b) Per share data reflects the effect of a two-for-one stock split, which was distributed in August 1999. (c) The market prices of CTS common stock presented reflect the highest and lowest prices on the New York Stock Exchange for each quarter of the last two years.
Five-Year Summary - ----------------- (In thousands of dollars except per share and other data) % of % of % of % of % of 1999 Sales 1998 Sales 1997 Sales 1996 Sales 1995 Sales ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- Summary of Operations - --------------------- Net sales $677,076 100.0 $370,441 100.0 $390,602 100.0 $321,297 100.0 $300,157 100.0 Cost of goods sold 471,543 69.6 255,844 69.1 280,085 71.7 233,801 72.8 225,353 75.1 Selling, general and administrative expenses 80,866 12.0 51,300 13.8 45,264 11.6 42,621 13.3 38,629 12.9 Transaction-related compensation charge 0 0 0 0 16,200 4.1 0 0 0 0 Research and development expenses 25,348 3.8 13,387 3.6 13,131 3.4 10,743 3.3 8,004 2.7 Acquired in-process research and development (IPR&D) 12,940 1.9 0 0 0 0 0 0 0 0 Amortization of intangible assets 3,583 0.5 302 0.1 2,949 0.8 712 0.2 683 0.2 ------ --- ------ ---- ------ --- ------ ---- ------ --- Operating earnings 82,796 12.2 49,608 13.4 32,973 8.4 33,420 10.4 27,488 9.1 Other (expense) income --net (8,741) (1.3) (167) (0.1) 2,757 0.7 182 0.1 196 0.1 ------ ---- ---- ---- ----- --- --- --- --- --- Earnings before income taxes 74,055 10.9 49,441 13.3 35,730 9.1 33,602 10.5 27,684 9.2 Income taxes 22,587 3.3 15,368 4.1 12,537 3.2 12,432 3.9 10,520 3.5 ------ --- ------ --- ------ --- ------ --- ------ --- Earnings from continuing operations 51,468 7.6 34,073 9.2 23,193 5.9 21,170 6.6 17,164 5.7 Discontinued Operations: Net earnings (loss) from discontinued operations 0 0 3,401 0.9 (380) (0.1) 0 0 0 0 -------- ---- -------- ---- ------- ---- ------- ---- ------- --- Net earnings 51,468 7.6 37,474 10.1 22,813 5.8 21,170 6.6 17,164 5.7 Retained earnings--beginning of year 197,285 163,169 144,112 126,546 112,506 Dividends declared (3,339) (3,358) (3,756) (3,604) (3,124) -------- -------- -------- ------- ------- Retained earnings--end of year $245,414 $197,285 $163,169 $144,112 $126,546 ======== ======== ======== ======= ======= Earnings (loss) per share: Basic: Continuing operations $1.87 $1.22 $0.74 $0.68 $0.55 Discontinued operations 0 0.12 (0.01) 0 0 ---- ---- ----- ---- ---- Net earnings per share $1.87 $1.34 $0.73 $0.68 $0.55 Diluted: Continuing operations $1.80 $1.17 $0.73 $0.67 $0.55 Discontinued operations 0 0.11 (0.01) 0 0 ---- ---- ----- ---- ---- Net earnings per share $1.80 $1.28 $0.72 $0.67 $0.55 Average basic shares outstanding (000's) 27,498 28,028 31,248 31,336 31,204 Average diluted shares outstanding (000's) 28,589 29,228 31,952 31,532 31,312 Cash dividends per share $0.12 $0.12 $0.12 $0.12 $0.10 Capital expenditures 32,896 21,330 22,180 17,210 11,181 Depreciation and amortization 33,907 19,155 16,016 12,491 11,683 Financial Position at Year End Current assets $254,297 $117,683 $146,747 $138,201 $126,113 Current liabilities 154,461 82,377 80,991 51,391 50,962 Current ratio 1.6 to 1 1.4 to 1 1.8 to 1 2.7 to 1 2.5 to 1 Working capital $99,836 $35,306 $65,756 $86,810 $75,151 Inventories 78,942 33,322 34,683 38,761 38,885 Property, plant and equipment--net 139,692 68,086 66,511 56,103 50,696 Total assets 522,652 293,189 318,196 249,372 227,127 Short-term notes payable 0 0 0 0 6,685 Long-term debt 162,000 42,000 56,000 11,214 13,385 Shareholders' equity 164,764 123,839 147,496 166,232 146,253 Common shares outstanding (000's) 27,462 27,243 30,356 31,350 31,304 Equity (book value) per share $6.00 $4.55 $4.86 $5.30 $4.67 Other Data Stock price range $86.25-$20.44 $21.94-$11.82 $18.63-$6.79 $7.84-$6.00 $6.29-$4.57 Average number of employees 7,662 4,105 3,954 3,815 4,007 Number of shareholders at year end 1,498 1,379 1,404 986 1,062
ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) AND (2) AND ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1999 CTS CORPORATION AND SUBSIDIARIES ELKHART, INDIANA FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d) CTS CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements of CTS Corporation and subsidiaries included in the annual report of the registrant to its shareholders for the year ended December 31, 1999, are referenced in Item 8 and incorporated herein: Consolidated balance sheets - December 31, 1999, and December 31, 1998 Consolidated statements of earnings - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Consolidated statements of shareholders' equity - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Consolidated statements of cash flows - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Notes to consolidated financial statements The following consolidated financial statement schedule of CTS Corporation and subsidiaries, is included in item 14(d): Page Schedule II - Valuation and qualifying accounts S-3 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are inapplicable, not required or the information is included in the consolidated financial statements or notes thereto. S-1 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of CTS Corporation In our opinion, the consolidated financial statements listed in the index appearing under item 14(a)(1) and (2) on page S-1 present fairly, in all material respects, the financial position of CTS Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(d) on page S-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois January 26, 2000 S-2 CTS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------- (In thousands of dollars)
Additions (Reductions) ---------------------- Balance at Charged to Charged to Beginning of Costs and Other Balance at Classification Period Expenses Accounts Deductions(1) End of Period -------------- ------ -------- -------- ------------- ------------- Year ended December 31, 1999: Allowance for doubtful receivables $552 $2,081 $11 $16 $2,628 Year ended December 31, 1998: Allowance for $692 $(79) $ 0 $61 $ 552 doubtful receivables Year ended December 31, 1997: Allowance for doubtful receivables $622 $ 74 $ 0 $ 4 $ 692
(1) Uncollectible accounts written off. S-3 EXHIBIT 21 ---------- CTS CORPORATION AND SUBSIDIARIES -------------------------------- CTS Corporation (Registrant), an Indiana corporation Subsidiaries: ------------- CTS Corporation (Delaware), a Delaware corporation CTS of Panama, Inc., a Republic of Panama corporation CTS Components Taiwan, Ltd., 1 a Taiwan, Republic of China corporation CTS Singapore Pte., Ltd., a Republic of Singapore corporation CTS Electro de Matamoros, S.A., 1 a Republic of Mexico corporation CTS Export Corporation, a Virgin Islands corporation CTS Japan, Inc., a Japan corporation CTS International B.V., a Netherlands corporation CTS of Canada, Ltd., a Province of Ontario (Canada) corporation CTS Manufacturing (Thailand) Ltd., 1 a Thailand corporation CTS Electronics Hong Kong Ltd., 1 a Hong Kong corporation CTS (Tianjin) Electronics Company, Ltd., a Peoples' Republic of China corporation CTS Corporation U.K. Ltd., a United Kingdom corporation CTS Printex, Inc., a California corporation CTS Wireless Components, Inc., a Delaware corporation Dynamics Corporation of America, a New York corporation International Electronic Research Corporation, a California corporation LTB Investment Corporation, a Delaware corporation Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is wholly-owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed 1 Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership. EXHIBIT 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333- 90697) and Form S-8 (No. 33-27749, No. 333-5730 and No. 333-91339) of CTS Corporation of our report dated January 26, 2000 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois March 28, 2000 EX-27 2
5 0000026058 CTS CORPORATION 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 24,219 16,273 0 0 127,310 47,595 2,628 552 78,942 33,322 254,297 117,683 301,884 204,797 162,192 136,711 522,652 293,189 154,461 82,377 0 0 0 0 0 0 193,612 190,347 (28,848) (66,508) 522,652 293,189 677,076 370,441 677,076 370,441 471,543 255,844 594,280 320,833 (1,203) (2,027) 0 0 9,944 2,194 74,055 49,441 22,587 15,368 51,468 34,073 0 3,401 0 0 0 0 51,468 37,474 1.87 1.34 1.80 1.28
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