Back to GetFilings.com
CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
2000
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
For Fiscal Year Ended December 31, 2000
---------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark 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.
There were 27,783,049 shares of Common Stock, without par value, outstanding on
March 8, 2001. The aggregate market value of the voting stock held by non-
affiliates of CTS Corporation was approximately $690.7 million on March 8, 2001.
1
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 2001 Proxy Statement to be filed for the
annual meeting of shareholders to be held on April 18, 2001,
incorporated by reference in Part 3.
(2) Certain portions of the CTS Corporation Form 10-K for the
fiscal year ended December 31, 1995, filed with the Commission
on March 21, 1996, 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.
(6) Portions of the CTS Corporation Form 10-K for the fiscal year
ended December 31, 1997, filed with the Commission on March
27, 1998, incorporated by reference in Part 4.
(7) Portions of the CTS Corporation Form 10-K for the fiscal year
ended December 31, 1998, filed with the Commission on February
25, 1999, incorporated by reference in Part 4.
SEE THE EXHIBIT INDEX -- PAGES 16 - 17
2
PART 1
Item 1. Business
--------
CTS Corporation is a global electronic components and electronic assemblies
manufacturer. CTS was established in 1896 as a provider of high-quality
telephone products and was incorporated as an Indiana Corporation in February
1929. The principal executive offices are located in Elkhart, Indiana.
CTS Corporation designs, manufactures, assembles and sells a broad line of
electronic components and custom electronic assemblies primarily for the
communications, computer and automotive markets. CTS operates 19 manufacturing
facilities located throughout North America, Asia and Europe. CTS' product lines
serve major markets globally, including the needs of original equipment
manufacturers (OEMs) by utilizing CTS sales engineers, manufacturers'
representatives and independent distributors.
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, including
crystals and oscillators, ceramic filters and surface acoustic wave (SAW)
filters used in cellular handsets and public infrastructure and networking
communication for the communications equipment market; automotive sensors and
actuators used in the automotive market; ClearONE(TM) terminators used in the
computer equipment market; potentiometers, resistor networks and switches used
to serve multiple markets.
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 represent completed,
higher-level functional products to be used in customer end products or
assemblies. These products consist principally of interconnect products such as
integrated interconnect systems and backpanels used in the mass data storage
systems, internet access systems and network servers within the computer
equipment market; RF (radio frequency) integrated modules used in cellular
handsets for the communications equipment market; pointing sticks/cursor
controls for personal computers for the computer equipment market; and low
temperature cofired ceramics (LTCC) for Bluetooth communications products for
the communications equipment market.
Within the two business segments, products are also identified by market. CTS
products are principally sold into three primary OEM major markets including
communications equipment, computer equipment and automotive. Other smaller
markets include consumer electronics, instruments and controls and
defense/aerospace, primarily consisting of OEM customers.
3
The following table provides a breakdown of net sales as a percent of net sales
by segment in each segment's major markets:
Electronic Components Electronic Assemblies
--------------------- ---------------------
Markets 2000 1999 1998 2000 1999 1998
- ------- ---- ---- ---- ---- ---- ----
Communications Equipment 37% 45% 17% 15% 10% 6%
Computer Equipment 5% 5% 9% 22% 13% 23%
Automotive 15% 19% 32% -- -- --
Other 5% 6% 9% 1% 2% 4%
--- --- --- --- --- ---
Net Sales by Segment as a %
of Consolidated Net Sales 62% 75% 67% 38% 25% 33%
=== === === === === ===
Net sales to external customers, operating earnings and total assets by segment,
and net sales and long- lived 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).
4
The following table identifies major products by their business segment and
markets. Many products are sold into several OEM markets.
Communications Computer
Product Equipment Equipment Automotive Other
Description Market Market Market Markets
----------- ------ ------ ------ -------
Electronic Components:
- ----------------------
Ceramic and SAW Filters X
Quartz Crystals, Clock and
Precision Oscillators X X X
Automotive Sensors X
Resistor Networks X X X X
ClearONE(TM) Terminators X
DIP Switches and
Potentiometers X X X X
Actuators X
Electronic Assemblies:
- ----------------------
Integrated Interconnect Systems
and Backpanels X X X
RF Integrated Modules X
Pointing Sticks/Cursor Controls X X
Low Temperature Cofired
Ceramics (LTCC) X
5
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, Korea, Singapore, Taiwan, Scotland and the United
States. Approximately 62% of 2000 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 specific customer requirements.
CTS utilizes the services of independent manufacturers' representatives and
distributors in the United States and other countries for customers not serviced
directly by CTS sales engineers. Independent manufacturers' representatives
receive commissions from CTS. During 2000, approximately 33% of net sales were
attributable to coverage by sales representatives. Additionally, independent
distributors purchase products from CTS for resale to customers. In 2000,
independent distributors and/or dealers accounted for approximately 5% of net
sales.
RAW MATERIALS
-------------
- 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.
- Ceramic materials are used in ceramic filters, resistor networks and
RF integrated modules.
- Synthetic quartz is used in surface acoustic wave filter products and
frequency control devices, including quartz crystals, clock and
precision oscillators.
- Molding compounds are used in automotive sensors, actuators, DIP
switches and potentiometers.
These raw materials are purchased from several vendors, and except for certain
semiconductors, CTS does not believe it is dependent upon one or a limited
number of vendors. In 2000, substantially 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 CTS 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, resistor
networks, switches, backpanels and integrated interconnect systems.
6
WORKING CAPITAL
---------------
Working capital requirements are generally dependent on the overall business
level. During 2000, working capital increased to $102.8 million, primarily due
to the increase in accounts receivable and inventories. These increases were
partially offset by increased accounts payable. Changes in CTS' cash position
during 2000 are shown in the "Consolidated Statement of Cash Flow" included
herein as noted in the Index appearing under Item 14 (a) (1) and (2).
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 for 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
neither cyclical nor seasonal.
PATENTS, TRADEMARKS AND LICENSES
--------------------------------
CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents
and trademarks. CTS believes the success of its business is not materially
dependent on the existence or duration of any patent, group of patents or
trademarks. CTS has in excess of 350 U.S. patents with hundreds of foreign
counterpart patents.
CTS licenses the right to manufacture several electronic products to companies
in the United States and non-U.S. countries. In 2000, license and royalty income
was less than 1% of net sales. CTS believes 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 75% of net sales in 2000,
71% of net sales in 1999 and 66% of net sales in 1998. Sales to Motorola, Inc.,
accounted for 21% of net sales in 2000, 23% of net sales in 1999 and were
minimal in 1998. Sales to Compaq Computer Corporation amounted to 21% of net
sales in 2000, 11% of net sales in 1999 and 12% in 1998. Sales to General
Motors Corporation comprised 12% of net sales in 1998.
7
ORDER BACKLOG
-------------
Order backlog 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. Additionally, large orders from major customers may include
backlog covering 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 February 25, 2001, CTS' backlog of orders was approximately $150
million compared to approximately $190 million at February 27, 2000. This
decrease is largely the result of softening market conditions. Order backlog at
the end of February 2001 will generally be filled during the 2001 fiscal year.
GOVERNMENT CONTRACTS
--------------------
CTS estimates under 1% of its net sales are associated with purchases by the
Government.
COMPETITION
-----------
CTS competes with many U.S. 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 global competition. 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.
CTS believes it competes most successfully in custom products manufactured to
meet specific applications of major OEMs.
8
NON-U.S. REVENUES AND RISKS
---------------------------
In 2000, approximately 52% of net sales to external customers originated from
non-U.S. operations compared to 53% in 1999. At December 31, 2000,
approximately 36% 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 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 downturns, government regulations and
expropriation. CTS has manufacturing facilities in Canada, China, Mexico,
Scotland, Singapore and Taiwan.
Net sales to external customers originating from non-U.S. operations for the
electronic components segment were $305.4 million in 2000 compared to $280.4 in
1999, and for the electronic assemblies segment were $146.6 million in 2000
compared to $78.0 in 1999. Additional information about net sales to external
customers, operating earnings and total assets by segment, and net sales to
external customers and long-lived 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 2000, 1999 and 1998, CTS spent $32.6, $25.3 and $13.4 million, respectively,
for research and development. CTS believes 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 1,000 engineers and technicians who
develop new materials, new processes and innovative products. 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. Many such research and development activities are for
the benefit of one or a limited number of customers or potential customers. CTS
expenses all research and development costs as incurred.
EMPLOYEES
---------
CTS employed 9,060 persons at December 31, 2000, and approximately 62% of these
persons were employed outside the United States. Approximately 350 CTS
employees in the United States were covered by collective bargaining agreements
as of December 31, 2000. There are two collective bargaining agreements at one
location, one agreement will expire in 2003 and the other will expire in 2005.
9
Item 2. Properties
----------
CTS has manufacturing facilities, administrative, research and development and
sales offices in the following locations.
Square Owned/
Manufacturing Facilities Footage Leased Business Segment
------------------------ ------- ------ ----------------
Albuquerque, New Mexico 267,000 Owned (1) Electronic Components
Berne, Indiana 249,000 Owned Electronic Components
and Electronic Assemblies
Burbank, California 9,200 Owned Electronic Components
Burbank, California 4,850 Leased Electronic Components
Carlisle, Pennsylvania 94,000 Leased Electronic Components
Chung-Li, Taiwan 145,000 Leased Electronic Components
and Electronic Assemblies
Dongguan, China 23,000 Leased Electronic Assemblies
Elkhart, Indiana 319,000 Owned Electronic Components
Glasgow, Scotland 75,000 Owned Electronic Components
Glasgow, Scotland 20,000 Leased and Electronic Assemblies
Hudson, New Hampshire 20,000 Leased Electronic Assemblies
Kaohsiung, Taiwan 133,000 Owned Electronic Components
Londonderry, New Hampshire 83,000 Leased Electronic Assemblies
Matamoros, Mexico 51,000 Owned Electronic Components
and Electronic Assemblies
Sandwich, Illinois 94,000 Owned Electronic Components
Singapore 159,000 Owned (2) Electronic Components
Streetsville, Ontario, Canada 112,000 Owned Electronic Components
and Electronic Assemblies
Tianjin, China 160,000 Leased Electronic Components
West Lafayette, Indiana 106,000 Owned Electronic Assemblies
-------
Total Manufacturing 2,124,050
=========
(1) The land and buildings are collateral for certain industrial revenue bonds.
(2) Ground lease through 2039; restrictions on use and transfer apply.
10
Square Owned/
Non-Manufacturing Facilities Footage Leased Description
---------------------------- ------- ------ -----------
Baldwin, Wisconsin 39,000 Owned Storage Facility
Bloomingdale, Illinois 110,000 Leased Administrative Offices and
Research
Brownsville, Texas 85,000 Owned Warehousing Facility
Elkhart, Indiana 93,000 Owned Administrative Offices & Research
Kowloon, Hong Kong 600 Leased Sales Office
New Hartford, Connecticut 212,000 Owned Storage Facility
Seoul, Korea 4,300 Leased Sales Office
Southfield, Michigan 1,700 Leased Sales Office
Taipei, Taiwan 1,250 Leased Sales Office
Yokohama, Japan 1,400 Leased Sales Office
All non-manufacturing facilities are used by both the electronic components and
the electronic assemblies segments.
CTS regularly assesses the adequacy of its manufacturing facilities for
manufacturing capacity, available labor and location to its markets and major
customers. Management believes the Company's manufacturing facilities are
suitable and adequate, and have sufficient capacity to meet its current needs.
The extent of utilization varies from plant to plant and with general economic
conditions. 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.
CTS is in the process of constructing new facilities in Longtan, Taiwan (owned)
and Tianjin, China (land use right) to replace leased facilities.
Item 3. Legal Proceedings
-----------------
Certain processes in the manufacture of CTS' current and past products create
hazardous waste by- products as currently defined by federal and state laws and
regulations. CTS has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator groups, that it is
or may be a Potentially Responsible Party ("PRP") regarding hazardous waste
remediation at several non-CTS sites. In addition to these non-CTS sites, CTS
has an ongoing practice of providing reserves for probable remediation
activities at certain of its manufacturing locations and for claims and
proceedings against CTS with respect to other environmental matters. In the
opinion of management, based upon presently available information relating to
all such matters, either adequate provision for probable costs has been made,
or the ultimate costs resulting will not materially affect the consolidated
financial position or results of operations of CTS.
Certain claims are pending against CTS with respect to matters arising out of
the ordinary conduct of its business and contracts relating to sales of
property. In the opinion of management, based upon presently available
information, either adequate provision for anticipated costs has been made by
insurance, accruals or otherwise, or the ultimate anticipated costs resulting
will not materially affect CTS' consolidated financial position or results of
operations.
11
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
During the fourth quarter of 2000, no matter was submitted to a vote of CTS
security holders.
PART 2
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
----------------------------------------------------------------------
The principal market for CTS common stock is the New York Stock Exchange using
the symbol "CTS." 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 March 8, 2001, there were approximately 1,520
CTS common shareholders of record.
CTS' current practice is to pay dividends at an annual rate of $0.12 per share.
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. Selected Financial Data
-----------------------
A summary of selected financial data for CTS for each of the previous five years
is contained in the "Five-Year Summary," included herein.
Certain acquisitions, 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
-------------
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 (1998-2000)," included
herein.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
A discussion of market risk for CTS is contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations (1998 - 2000),"
included herein and "Note A - Financial Instruments" and "Note A - Accounting
Pronouncements" of the financial statements as noted in the Index appearing
under item 14 (a) (1) and (2).
12
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Consolidated financial statements, meeting the requirements of Regulation S-X,
the Report of Independent Accountants, and "Quarterly Results of Operations"
and "Per Share Data" appear in the financial statements and supplementary
financial data included herein as noted in the Index appearing under Item 14
(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART 3
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining
to directors of CTS is contained in the 2001 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
2001 Proxy Statement, page 12, under the caption "Directors' & Officers' Stock
Ownership", to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
13
The individuals in the following list were elected as executive officers of CTS
at the annual meeting of the Board of Directors on April 28, 2000, or elected as
indicated. They are expected to serve as executive officers until the next
annual meeting of the Board of Directors, scheduled on April 18, 2001, 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 62 Chairman of the Board and Chief
Executive Officer
Donald K. Schwanz 56 President and Chief Operating
Officer
Philip G. Semprevio 50 Executive Vice President
Jeannine M. Davis 52 Executive Vice President
Administration and Secretary
Donald R. Schroeder 52 Executive Vice President
and Chief Technology Officer
H. Tyler Buchanan 49 Vice President
James L. Cummins 45 Vice President Human Resources
George T. Newhart 58 Vice President, Investor Relations
and Interim Chief Financial
Officer
Richard G. Cutter 54 Vice President, General Counsel
and Assistant Secretary
Matthew W. Long 39 Assistant Treasurer
BRIEF HISTORY OF OFFICERS
-------------------------
Joseph P. Walker has served as Chairman of the Board and Chief Executive Officer
of CTS since 1988. From 1988 to January 18, 2001, Mr. Walker also served as
President.
Donald K. Schwanz was elected as President and Chief Operating Officer,
effective January 18, 2001. Prior to joining CTS, he was President of the
industrial control business of Honeywell, Inc., and had been with Honeywell
since 1979, with positions of increasing responsibility.
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.
14
Jeannine M. Davis was elected as Executive Vice President Administration and
Secretary, effective June 29, 1999. Ms. Davis was elected to the CTS Board of
Directors on June 27, 2000. Previously, she served as Vice President, Secretary
and General Counsel since 1988.
Donald R. Schroeder was elected as Executive Vice President and Chief Technology
Officer, effective December 20, 2000. In January 2000, Mr. Schroeder was elected
as Vice President Business and Chief Technology Officer. From 1995 to January
2000, Mr. Schroeder served as Vice President Sales and Marketing.
H. Tyler Buchanan was elected Vice President on August 25, 2000. Prior to his
promotion, he held the position of Vice President and General Manager, CTS
Automotive Products. He has held positions of varying responsibility with CTS
since 1977.
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.
George T. Newhart was appointed Interim Chief Financial Officer on January 29,
2001, and was elected Vice President Investor Relations on December 8, 2000.
Prior to this appointment, Mr. Newhart served as Vice President and Corporate
Controller since 1998, and prior to this appointment, from 1989 - 1998, he
served as Corporate Controller.
Richard G. Cutter, III, was elected Vice President and Assistant Secretary on
August 25, 2000. Prior to this appointment, Mr. Cutter was General Counsel since
January 2000, and retains that position. Prior to joining CTS, he was General
Counsel with General Electric - Silicones.
Matthew W. Long was elected as Assistant Treasurer on December 18, 2000. Mr.
Long was Corporate Controller for Morgan Drive Away, Inc. from July through
December 2000. Prior to this, he served as Controller with CTS'
Electrocomponents business and as External Financial Accounting Manager from
1996 - July 2000.
Item 11. Executive Compensation
-----------------------
Information responsive to Item 402 of Regulation S-K pertaining to management
remuneration is contained in the 2001 Proxy Statement under the captions
"Director Compensation," page 12, and "Executive Compensation," pages 14 - 16,
to be filed with the Securities and Exchange Commission, and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information responsive to Item 403 of Regulation S-K pertaining to security
ownership of certain beneficial owners and management, is contained in the 2001
Proxy Statement under the caption "Directors' & Officers' Stock Ownership,"
page 12, to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
15
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
None.
PART 4
Item 14. Exhibits, Financial Statements 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)(i) 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)(ii) 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 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)(d) 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)(e) The CTS Corporation 1997 Stock Option Agreements approved
by the shareholders on October 16, 1997, filed as Exhibit
(10)(l) to the Company's Form 10-K for 1997, filed with the
Commission on March 27, 1998.
(10)(f) 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, (incorporated by reference to Exhibit 10(f) to
the Company's Annual Report on Form 10-K for 1998, filed
with the Commission on February 25, 1999).
16
(10)(g) Prototype severance agreement between the Company and its
officers, general managers and managing directors filed
herewith.
(10)(h) The CTS Corporation Executive Deferred Compensation Plan
effective September 14, 2000 filed herewith.
(21) Subsidiaries filed herewith.
(23) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of this Annual Report on Form 10-K for the fiscal
year 2000 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
--------------------
During the three-month period ending December 31, 2000, CTS filed one
report on Form 8-K, dated December 29, 2000, under Item 5., Other
Events, related to the future amendment of the Rights Agreement.
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.
17
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/George T. Newhart
George T. Newhart
Vice President Investor Relations 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/ Jeannine M. Davis
Jeannine M. Davis, 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/ Michael A. Henning
Michael A. Henning, 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/ Thomas A. Kroll
Thomas A. Kroll,
Controller, Group Accounting
18
Financial Highlights
- --------------------
(In thousands except per share data)
For the Year 2000 1999 1998
==================================================================================================================================
Net sales $866,523 $677,076 $370,441
Earnings, excluding the 1999 $8.6 million after-tax effect of acquired IPR&D 83,802 60,138 37,474
Net earnings 83,802 51,468 37,474
Average common shares outstanding -- diluted 28,675 28,589 29,228
Per share data:
Earnings -- diluted, excluding the 1999 $0.30 after-tax effect of acquired IPR&D $2.92 $2.10 $1.28
Net earnings -- diluted -- Note M 2.92 1.80 1.28
Dividends declared 0.12 0.12 0.12
Capital expenditures 119,216 32,896 21,330
At Year End
==================================================================================================================================
Working capital $102,805 $ 99,836 $ 35,306
Long-term debt (including current maturities) 188,000 167,000 56,000
Shareholders' equity 246,357 164,764 123,839
Equity per outstanding share 8.87 6.00 4.55
19
Consolidated Statements of Earnings
- -----------------------------------
(In thousands of dollars except per share amounts)
Year Ended
----------
December 31 December 31 December 31
2000 1999 1998
----------- ----------- -----------
Net sales $866,523 $677,076 $370,441
Costs and expenses:
Cost of goods sold 605,598 471,543 255,844
Selling, general and administrative expenses 94,501 80,866 51,300
Research and development expenses 32,583 25,348 13,387
Acquired in-process research and development (IPR&D) - Note B -- 12,940 --
Amortization of intangible assets 5,211 3,583 302
------- ------ ------
Operating earnings 128,630 82,796 49,608
------- ------ ------
Other (expense) income:
Interest (13,050) (9,944) (2,194)
Interest income 846 865 1,141
Other 701 338 886
------- ------ ------
Total other expense (11,503) (8,741) (167)
------- ------ ------
Earnings before income taxes 117,127 74,055 49,441
32,796 22,587 15,368
------- ------ ------
Earnings from continuing operations 84,331 51,468 34,073
------- ------ ------
Discontinued operations:
(Loss) earnings from discontinued operations, net
of income tax(benefit) charge of ($355) in 2000
and $2,267 in 1998 -- Note C (529) -- 3,401
------- ------- -------
Net earnings $83,802 $51,468 $37,474
======= ======= =======
Earnings (loss) per share -- Note M
Basic:
Continuing operations $3.05 $1.87 $1.22
Discontinued operations (0.02) -- 0.12
----- ----- -----
Net earnings per share $3.03 $1.87 $1.34
===== ===== =====
Diluted:
Continuing operations $2.94 $1.80 $1.17
Discontinued operations (0.02) -- 0.11
----- ----- -----
Net earnings per share $2.92 $1.80 $1.28
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
20
Consolidated Balance Sheets
- ---------------------------
(In thousands of dollars)
December 31 December 31
2000 1999
----------- -----------
ASSETS
Current Assets
Cash and equivalents $ 20,564 $ 24,219
Accounts receivable, less allowances (2000 -- $1,837; 1999 -- $2,628) 145,920 124,682
Inventories
Finished goods 29,756 19,399
Work-in-process 16,490 20,288
Raw materials 58,070 39,255
------- -------
Total inventories 104,316 78,942
Other current assets 8,920 4,869
Deferred income taxes -- Note H 25,976 21,585
------- -------
Total current assets 305,696 254,297
Property, Plant and Equipment
Buildings and land 96,690 61,265
Machinery and equipment 317,390 240,619
------- -------
Total property, plant and equipment 414,080 301,884
Accumulated depreciation (189,219) (162,192)
-------- --------
Net property, plant and equipment 224,861 139,692
Other Assets
Prepaid pension expense -- Note G 84,301 68,990
Investment in discontinued operations -- Note C - 9,061
Intangible assets 64,177 53,336
Accumulated amortization (10,571) (5,493)
Other 4,465 2,769
Total other assets 142,372 128,663
-------- --------
Total Assets $672,929 $522,652
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt -- Note E $ 10,000 $ 5,000
Notes payable -- Note D 7,397 7,428
Accounts payable 100,394 68,315
Accrued salaries, wages and vacation 17,016 16,745
Income taxes payable 18,374 12,187
Other accrued liabilities 49,710 44,786
-------- --------
Total current liabilities 202,891 154,461
Long-term debt -- Note E 178,000 162,000
Other long-term obligations -- Note E 6,689 9,846
Deferred income taxes -- Note H 34,612 27,263
Postretirement benefits -- Note G 4,380 4,318
Contingencies -- Note L -- --
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; 48,436,908 shares issued
at December 31, 2000, and 48,419,604 shares issued at December 31, 1999 -- Note J 198,877 193,612
Additional contributed capital 14,558 9,005
Retained earnings 325,850 245,414
Cumulative translation adjustment (1,561) 291
------- -------
537,724 448,322
Cost of common stock held in treasury (2000 -- 20,655,721 shares; 1999
-- 20,957,649 shares) -- Note K (291,367) (283,558)
-------- --------
Total shareholders' equity 246,357 164,764
-------- --------
Total Liabilities and Shareholders' Equity $672,929 $522,652
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
Consolidated Statements of Cash Flows
- -------------------------------------
(In thousands of dollars)
Year Ended
----------
December 31 December 31 December 31
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 83,802 $ 51,468 $ 37,474
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss (earnings) from discontinued operations 529 -- (3,401)
Depreciation and amortization 44,325 33,907 19,155
Deferred income taxes 3,077 (5,337) 6,176
Income tax benefit related to exercised stock options 6,395 -- --
Acquired in-process research and development -- 12,940 --
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (21,238) (77,639) 4,271
Inventories (26,278) (24,853) 1,924
Prepaid pension asset (15,311) (6,368) (7,336)
Accounts payable and accrued liabilities 30,505 72,126 (7,548)
Income taxes payable 6,187 1,958 (4,088)
Other (1,456) (1,348) (15)
------- ------- -------
Total adjustments 26,735 5,386 9,138
------- ------- -------
Net cash provided by continuing operations 110,537 56,854 46,612
Net cash provided by (used in) discontinued operations 318 (1,161) 6,659
------- ------- -------
Net cash provided by operating activities 110,855 55,693 53,271
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment,
including discontinued operations, net 7,000 28,646 20,691
Payment for purchase of CTS Wireless -- Note B (11,200) (97,445) --
DCA acquisition costs (2,922) (2,932) (6,416)
Capital expenditures (119,216) (32,896) (21,330)
-------- -------- -------
Net cash used in investing activities (126,338) (104,627) (7,055)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations --
CTS Wireless acquisition -- 97,445 --
Proceeds from issuance of long-term obligations -- other 26,000 -- --
Payments of long-term obligations, net (5,000) (28,445) (5,206)
Dividends paid (3,337) (3,301) (3,421)
Purchases of treasury stock (9,284) (9,175) (56,273)
Stock options acquired -- -- (5,273)
Exercise of stock options 4,221 851 336
Other (31) -- (48)
------- -------- --------
Net cash provided by (used in) financing activities 12,569 57,375 (69,885)
Effect of exchange rate changes on cash (741) (495) 95
------- -------- --------
Net (decrease) increase in cash (3,655) 7,946 (23,574)
Cash and equivalents at beginning of year 24,219 16,273 39,847
-------- -------- --------
Cash and equivalents at end of year $ 20,564 $ 24,219 $ 16,273
======== ======== ========
Supplemental cash flow information Cash paid during the year for:
Interest $ 13,094 $ 9,711 $ 4,685
Income taxes -- net 13,914 24,195 17,218
Noncash investing and financing activities
Common stock issued in connection with DCA acquisition $ 199 $ 595 $ 3,059
The accompanying notes are an integral part of the consolidated financial statements.
22
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 31,1997 $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)
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)
Stock compensation 266 266
Acquired 3,535,028 shares for treasury stock (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 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 compensation 6 1,026 8 1,040
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
Net earnings 83,802 83,802 83,802
Cumulative translation adjustment
(net of tax benefit of $556) (1,852) (1,852) (1,852)
------
Comprehensive earnings $81,950
=======
Cash dividends of $0.12 per share (3,366) (3,366)
Returned 41,800 shares to treasury
forfeited from restricted stock and
cash bonus plan -- net 47 123 (170)
Issued 519,247 shares on exercise
of stock option -- net 4,369 4,632 1,615 10,616
Stock compensation 650 798 30 1,478
Acquired 190,000 shares for treasury
stock--Note K (9,284) (9,284)
Issued 17,304 shares to former DCA
shareholders 199 199
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $198,877 $325,850 $(1,561) $14,558 $(291,367)$246,357
===================================================================================================================================
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(In thousands 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 when title
transfers 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 events or changes in circumstances indicate 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
by law.
24
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.
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 the Financial Accounting Standards Board
("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 CTS' United Kingdom subsidiary are translated into U.S. dollars
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
long-term debt. The carrying value for cash and 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, 2000, and 1999 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 CTS 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 Motorola, Inc. ("Motorola") and Compaq Computer
Corporation("Compaq") were each approximately 21% of sales for the year ended
December 31, 2000, which exposes CTS to a concentration of credit risk. Sales to
Motorola and Compaq were 23% and 11%, respectively, of sales for the year ended
December 31, 1999. Management believes the likelihood of incurring material
losses due to concentration of credit risk is remote.
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.
25
See Note F for the required pro forma net income and earnings per share
disclosures required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation."
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 excludes 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 securities.
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 reporting and displaying comprehensive earnings and its
components. The components of comprehensive earnings for CTS include foreign
translation adjustments and net earnings and are reported within the Statements
of Shareholders' Equity in the columns titled "Comprehensive Earnings" and
"Accumulated Other Comprehensive Earnings."
Accounting Pronouncements: The FASB issued Statement No. 133, "Accounting for
Derivatives and Hedging Activities," which, as amended, is effective for CTS
January 1, 2001. This statement standardizes the accounting for derivative
instruments by requiring an entity to recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. CTS continues to evaluate the impact of adopting the standard, but does
not expect the impact to be material.
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 2000.
26
NOTE B--Acquisition
- -------------------
On February 26, 1999, CTS completed the acquisition of certain assets and
liabilities of the Component Products Division of Motorola ("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, CTS paid Motorola $94 million at the closing and
assumed approximately $49 million of debt (including pension obligations). CTS
may be obligated to pay additional amounts depending upon increased sales and
profitability of CTS Wireless through 2003. The calculation resulted in an
additional payment of $11.2 million for 1999 and an estimated liability of $15.0
million for 2000. The maximum remaining potential payment under the acquisition
agreement was $79.6 million at December 31, 2000. CTS 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 $ 19.9
Property, plant and equipment 78.7
Current technology 12.0
Identifiable intangible assets 49.2
In-process research and development (IPR&D) 12.9
------
Total $172.7
======
Identifiable intangible assets include trademarks, tradenames, technology rights
and customer lists that are amortized over 4 - 30 years. Current technology is
amortized over four years.
In-process research and development represented 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 being developed for next-generation products and
represented products that were in the development cycle that had not yet reached
a level of technological feasibility and had no alternative future use. CTS
Wireless' in-process research and development projects were initiated to address
27
the rapid technological change associated with the wireless communications
industry. The incomplete projects included 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 exceeded the
overall cost of capital for CTS.
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. Remaining efforts on the projects are significant and include
important phases of project design, development and testing. CTS 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 1999 follow:
Pro forma
Year ended
December 31, 1999
-----------------
Unaudited
Net sales (In millions) $ 722
Net earnings (In millions) $ 53
Diluted earnings per share $1.84
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, 1999, or of future operations of CTS giving
effect to the acquisition.
28
NOTE C--Discontinued Operations
- -------------------------------
During 1998, CTS finalized a plan to sell all of the businesses obtained in the
acquisition of Dynamics Corporation of America ("DCA") not strategic to CTS'
electronic components and electronic assemblies core business segments. During
the first quarter of 2000, the disposition of DCA acquired businesses was
completed resulting in a net loss of $0.5 million.
These noncore businesses are recorded as discontinued operations for all periods
presented in the consolidated financial statements. For the years ended December
31, 2000, 1999 and 1998, CTS received gross proceeds related to the sale of
discontinued operations of $4 million, $31 million and $22 million,
respectively.
Operating results for discontinued operations are summarized as follows:
Discontinued Operations 1999 1998
- ----------------------- ---- ----
Net sales $21,649 $102,984
======= ========
Earnings before income taxes -- 5,668
Income tax provision -- 2,267
------- --------
Total discontinued operations, net of income taxes $ -- $ 3,401
======= ========
Note D--Notes Payable
- ---------------------
CTS had unsecured line of credit arrangements of $18,317 and $20,312 at December
31, 2000, and 1999, respectively. 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 $3,438 and $3,017 during 2000 and 1999, respectively.
The weighted-average interest rate, computed by relating interest expense to
average daily short-term borrowings, was 8.8% in 2000 and 6.5% in 1999.
29
NOTE E--Long-term Debt and Other Long-term Obligations
- ------------------------------------------------------
Long-term debt and other long-term obligations were comprised of the following:
2000 1999
---- ----
Long-term debt:
Term loan at 6.84% (2000) and 6.82% (1999), due in quarterly
installments through 2004 $ 61,000 $ 66,000
Revolving credit agreement, average interest rate of 7.15% (2000) and
6.23% (1999), due in 2005 85,000 59,000
Industrial revenue bonds at a weighted-average rate of 7.50%, due in 2013 42,000 42,000
-------- --------
188,000 167,000
Less current maturities 10,000 5,000
-------- --------
Total long-term debt $178,000 $162,000
======== ========
Other long-term obligations:
Contractual DCA employee termination benefits, payable ratably
through 2007 $ 3,501 $ 6,423
Untendered shares of DCA 2,941 3,139
Other 247 284
-------- --------
Total other long-term obligations $ 6,689 $ 9,846
======== ========
The $61,000 term loan with nine banks matures as follows: 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 nine 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. CTS 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
CTS maintain a minimum net worth, a minimum fixed charge coverage ratio and a
minimum leverage ratio.
Debt relating to the industrial revenue bonds was assumed from Motorola (Note
B), and is collateralized by the land, building and equipment acquired with the
bonds.
30
NOTE F--Stock Plans
- -------------------
At December 31, 2000, CTS had four stock-based compensation plans. CTS applies
APB Opinion No. 25 in determining compensation costs for its plans. 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:
2000 1999 1998
---- ---- ----
Net earnings As reported $83,802 $51,468 $37,474
Pro forma $81,914 $50,825 $37,206
Net earnings per share --diluted As reported $2.92 $1.80 $1.28
Pro forma $2.86 $1.78 $1.28
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 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 2000, 1999 and
1998: dividend yield of 0.23%, 0.37% and 0.85%, respectively; expected
volatility of 33.17%, 19.82% and 30.49%, respectively; risk-free interest rate
of 5.12%, 5.86% and 5.30%, respectively and expected life of 5.1, 5.2 and 4.2
years, respectively.
CTS' 1996 Stock Option Plan ("1996 Plan") provides for grants of incentive stock
options or non-qualified 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 the 1996 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 CTS' 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 502,750 shares were
outstanding as of December 31, 2000. At December 31, 2000, 108,050 of these
shares were exercisable.
During 1997, in connection with the acquisition of DCA, CTS granted to certain
officers and key employees 2,400,000 options to acquire common shares. 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 acquisition 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, CTS
acquired 900,000 of these options at a cost of $5,273. Of the 2,400,000 options
granted, 1,233,447 are exercisable at December 31, 2000.
31
A summary of the status of stock options as of December 31, 2000, 1999 and 1998,
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.
2000 1999 1998
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning
of year 2,103,460 $ 12.61 2,138,208 $ 10.05 2,981,084 $ 9.48
Granted 193,500 51.44 213,700 33.61 281,000 14.09
Exercised (533,813) 9.64 (179,848) 6.46 (217,250) 5.45
Acquired -- -- -- -- (900,000) 10.42
Expired or canceled (26,950) 33.79 (68,600) 15.51 (6,626) 10.08
--------- ------- --------- ------ --------- ------
Outstanding at end of year 1,736,197 $ 17.53 2,103,460 $12.61 2,138,208 $10.05
========= ======= ========= ====== ========= ======
Options exercisable at
year end 1,341,497 1,745,360 1,769,708
Weighted-average fair value
of options granted during the year $19.14 $10.05 $ 4.26
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/00 Life (Years) Price at 12/31/00 Price
--------- ----------- ------------ --------- ----------- ---------
$10.42-15.00 1,375,247 5.96 $10.80 1,293,647 $10.59
24.47-35.97 158,550 8.43 32.04 44,750 32.04
42.69-66.75 197,400 9.42 51.37 1,700 48.89
71.00-79.25 5,000 8.95 71.83 1,400 72.18
32
CTS has a discretionary Restricted Stock and Cash Bonus Plan ("Plan") which
originally reserved 2,400,000 shares of CTS' common stock for sale, at market
price or below, or award to key employees. Effective December 31, 2000, CTS
reduced the number of remaining shares reserved for issuance under the Plan to
500,000 shares. 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. CTS recorded income (expense) of $132, ($3,644) and ($371) in
2000, 1999 and 1998, respectively, under the formula provisions of the Plan
which are based on the fair market value of a share of common stock.
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
compensation expense was $232, $363 and $54 in 2000, 1999 and 1998,
respectively.
NOTE G--Employee Retirement Plans
- ---------------------------------
Defined benefit plans
- ---------------------
CTS has a number of noncontributory defined benefit pension plans ("Pension
Plans") covering approximately 40% 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, CTS amended the Pension Plans to include certain employees of CTS
Wireless. CTS also amended the Pension Plans 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 CTS' domestic employees are eligible for
life insurance benefits. CTS funds life insurance benefits through term life
insurance policies. CTS plans to continue funding premiums on a pay-as-you-go
basis.
33
The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the Pension Plans and other postretirement benefits.
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at January 1 $143,747 $124,052 $ 4,130 $ 4,506
Service cost 6,303 5,483 38 42
Interest cost 10,641 9,574 297 293
Acquisitions -- 21,269 -- --
Plan amendments -- 7,997 -- --
Actuarial loss (gain) 2,323 (18,163) 2 (380)
Benefits paid (7,303) (6,465) (271) (331)
-------- -------- ------- -------
Benefit obligation at December 31 $155,711 $143,747 $ 4,196 $ 4,130
-------- -------- ------- -------
Change in plan assets:
Assets at fair value at January 1 $357,973 $245,880 $ -- $ --
Actual return on assets (48,166) 104,397 -- --
Acquisitions -- 14,019 -- --
Company contributions 784 392 271 331
Benefits paid (7,303) (6,465) (271) (331)
Administrative and other (198) (250) -- --
-------- -------- -------- -------
Assets at fair value at December 31 $303,090 $357,973 $ -- $ --
-------- -------- -------- -------
Reconciliation of prepaid (accrued) cost:
Funded status of the plan $147,379 $214,226 $(4,196) $(4,130)
Unrecognized net gain (70,843) (152,380) (442) (197)
Unrecognized prior service cost 9,041 10,047 8 9
Unrecognized transition asset (1,276) (2,903) -- --
-------- -------- ------- -------
Prepaid (accrued) cost $ 84,301 $ 68,990 $(4,630) $(4,318)
======== ======== ======= =======
34
Net pension income/postretirement expense in 2000, 1999 and 1998 includes the
following components:
Other
Postretirement
Pension Benefits Benefits
---------------- --------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost -- benefits earned
during the year $ 6,303 $ 5,483 $ 3,482 $ 38 $ 42 $ 35
Interest cost on projected
benefit obligation 10,641 9,574 7,830 297 293 296
Expected return on plan
assets (26,873) (18,758) (20,203) -- -- --
Net amortization and
deferral (4,598) (2,667) 1,555 (1) 1 (2)
-------- ------- -------- ----- ----- -----
Net (income) expense $(14,527) $(6,368) $ (7,336) $334 $336 $329
======== ======= ======== ===== ===== =====
Actuarial assumptions:
Discount rate as of
December 31 7.50 % 7.50% 6.75% 7.50 % 7.50% 6.75%
Expected return on
plan assets 9.75 % 9.75% 9.75% 9.75 % 9.75% 9.75%
Rate of compensation
increase 5%-7% 5%-7% 4%-7% -- -- --
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 $53 million and $110 million in CTS common stock
at December 31, 2000, and 1999, 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 that covers substantially all of its U.S. employees.
Additionally, CTS sponsors several other defined contribution plans covering
certain non-U.S. employees. 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 $4,082 in 2000, $2,821 in 1999 and
$2,457 in 1998.
35
NOTE H--Income Taxes
- --------------------
Earnings from continuing operations before income taxes consist of the
following:
2000 1999 1998
---- ---- ----
Domestic $ 39,568 $20,770 $26,789
Non-U.S. 77,559 53,285 22,652
-------- ------- -------
Total $117,127 $74,055 $49,441
======== ======= =======
Significant components of income taxes are as follows:
2000 1999 1998
---- ---- ----
Current:
Federal $1,158 $11,736 $ 1,041
State 619 2,975 928
Non-U.S. 27,941 13,079 7,654
------ ------ -----
Total current 29,718 27,790 9,623
------ ------ -----
Deferred:
Federal 4,604 (4,585) 5,737
State 597 (965) 902
Non-U.S. (2,123) 347 (894)
------ ------ ------
Total deferred 3,078 (5,203) 5,745
------- ------- -------
Total provision for income taxes $32,796 $22,587 $15,368
======= ======= =======
36
Significant components of CTS' deferred tax liabilities and assets at December
31, 2000, and 1999 are:
2000 1999
---- ----
Pensions $31,145 $ 26,920
Depreciation 6,698 2,805
Basis difference-acquired assets 2,073 1,385
Other 1,648 1,757
------ ------
Gross deferred tax liabilities 41,564 32,867
------ ------
Postretirement benefits