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CTS CORP — Interim / Quarterly Report 2004
Jul 21, 2004
32121_10-q_2004-07-21_41bcc0f7-9c5a-43e1-967a-66cd45cfd1b2.zip
Interim / Quarterly Report
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10-Q 1 form10q-2qtr2004.htm 2ND QUARTER 2004 HTML PUBLIC "-//W3C//DTD HTML 3.2 Final//EN" Created by EDGAR Ease Plus (EDGAR Ease+ 1.6a) Project: U:\PBAUCOM\Accounting\10Q\2004\Q2-2004\form10q-2qtr2004.eep Control Number: 24 Rev Number: Client Name: Project Name: Form 10-Q / 2nd Qtr. 2004 Firm Name: CTS Corporation Form 10-Q *********** MARKER PAGE="sheet: 1; page: 1" MARKER FORMAT-SHEET="Scotch Rule Top-TNR" FSL="Project" MARKER FORMAT-SHEET="Head Major Center Bold-TNR" FSL="Project"
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARKER FORMAT-SHEET="Head Major Center Bold 1-TNR" FSL="Project"
FORM 10-Q
MARKER FORMAT-SHEET="Head Left-TNR" FSL="Default"
(Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 27, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __ to __ MARKER FORMAT-SHEET="Head Minor Center-TNR" FSL="Project"
Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter)
| Indiana | 35-0225010 |
|---|---|
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
| 905 West Boulevard North, Elkhart, IN | 46514 |
|---|---|
| (Address of principal executive offices) | (Zip Code) |
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
Registrants telephone number, including area code: 574-293-7511
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Default"
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of July 20, 2004: 36,099,702
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CTS CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
| PART I . | FINANCIAL INFORMATION | Page | |
|---|---|---|---|
| Item 1 . | Financial Statements | 1 | |
| Condensed Consolidated Statements of Earnings | |||
| - For the Three Months and Six Months Ended June 27, 2004 and June 29, 2003 | 1 | ||
| Condensed Consolidated Balance Sheets | |||
| - As of June 27, 2004, and December 31, 2003 | 2 | ||
| Condensed Consolidated Statements of Cash Flows | |||
| - For the Six Months Ended June 27, 2004 and June 29, 2003 | 3 | ||
| Condensed Consolidated Statements of Comprehensive Earnings | |||
| - For the Three Months and Six Months Ended June 27, 2004 and June 29, 2003 | 4 | ||
| Notes to Condensed Consolidated Financial Statements | 5 | ||
| Item 2 . | Management's Discussion and Analysis of | ||
| Financial Condition and Results of Operations | 12 | ||
| Item 3 . | Quantitative and Qualitative Disclosure about Market Risk | 21 | |
| Item 4 . | Controls and Procedures | 21 | |
| PART II . | OTHER INFORMATION | ||
| Item 1 . | Legal Proceedings | 21 | |
| Item 4 . | Submission of Matters to a Vote of Security Holders | 22 | |
| Item 6 . | Exhibits and Reports on Form 8-K | 22 | |
| SIGNATURES | 24 |
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PART I - FINANCIAL INFORMATION Item 1. Financial Statements
CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED (In thousands, except per share amounts)
| Three Months Ended — June 27, 2004 | June 29, 2003 | June 27, 2004 | June 29, 2003 | |||||
|---|---|---|---|---|---|---|---|---|
| Net sales | $ 137,624 | $ | 116,697 | $ | 259,771 | $ | 222,466 | |
| Costs and expenses: | ||||||||
| Cost of goods sold | 108,707 | 92,177 | 206,245 | 176,863 | ||||
| Selling, general and administrative expenses | 16,622 | 14,623 | 31,499 | 27,471 | ||||
| Research and development expenses | 4,673 | 5,390 | 9,557 | 11,031 | ||||
| Gain on sales of assets Note D | (3,006 | ) | | (3,067 | ) | | ||
| Operating earnings | 10,628 | 4,507 | 15,537 | 7,101 | ||||
| Other (expense) income: | ||||||||
| Interest expense | (1,590 | ) | (1,899 | ) | (3,123 | ) | (3,871 | ) |
| Interest income | 233 | 101 | 335 | 150 | ||||
| Other | (401 | ) | (65 | ) | (519 | ) | 25 | |
| Total other expense | (1,758 | ) | (1,863 | ) | (3,307 | ) | (3,696 | ) |
| Earnings before income taxes | 8,870 | 2,644 | 12,230 | 3,405 | ||||
| Income tax expense Note J | 1,973 | 661 | 2,813 | 851 | ||||
| Net earnings | $ 6,897 | $ | 1,983 | $ | 9,417 | $ | 2,554 | |
| Net earnings per share Note K | ||||||||
| Basic | $ 0.19 | $ | 0.06 | $ | 0.26 | $ | 0.07 | |
| Diluted | $ 0.19 | $ | 0.06 | $ | 0.26 | $ | 0.07 | |
| Cash dividends declared per share | $ 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.06 | |
| Average common shares outstanding: | ||||||||
| Basic | 35,986 | 34,227 | 35,971 | 34,125 | ||||
| Diluted | 36,253 | 34,569 | 36,248 | 34,415 |
See notes to condensed consolidated financial statements. MARKER FORMAT-SHEET="Page Number Center" FSL="Project"
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CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
| June 27, 2004 | ||||
|---|---|---|---|---|
| (UNAUDITED) | ||||
| ASSETS | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ 48,199 | $ | 25,346 | |
| Accounts receivable, less allowances (2004 $1,523; 2003 $1,585) | 82,549 | 72,290 | ||
| Inventories Note C | 44,471 | 31,925 | ||
| Other current assets | 8,297 | 6,697 | ||
| Deferred income taxes | 28,523 | 28,508 | ||
| Total current assets | 212,039 | 164,766 | ||
| Property, plant and equipment, less accumulated depreciation (2004 $280,826; 2003 $261,838) | 116,914 | 122,481 | ||
| Other Assets | ||||
| Prepaid pension asset Note G | 137,885 | 132,960 | ||
| Intangible assets, net | 36,303 | 37,456 | ||
| Other assets Note D | 8,939 | 24,587 | ||
| Total other assets | 183,127 | 195,003 | ||
| Total Assets | $ 512,080 | $ | 482,250 | |
| LIABILITIES AND SHAREHOLDERS EQUITY | ||||
| Current Liabilities | ||||
| Accounts payable | $ 64,352 | $ | 52,252 | |
| Accrued liabilities | 43,584 | 43,437 | ||
| Total current liabilities | 107,936 | 95,689 | ||
| Long-term debt Note F | 85,000 | 75,880 | ||
| Other long-term obligations | 11,026 | 11,133 | ||
| Deferred income taxes | 5,414 | 5,357 | ||
| Shareholders Equity | ||||
| Preferred stock authorized 25,000,000 shares without par value; none issued | | | ||
| Common stock authorized 75,000,000 shares without par value; 52,640,014 shares issued at June 27, 2004 and 52,632,088 shares issued at December 31, 2003 | 263,040 | 262,748 | ||
| Additional contributed capital | 21,812 | 21,520 | ||
| Retained earnings | 270,677 | 263,430 | ||
| Accumulated other comprehensive earnings | 846 | 151 | ||
| 556,375 | 547,849 | |||
| Cost of common stock held in treasury (2004 16,568,326 shares; | ||||
| 2003 16,565,558 shares) | (253,671 | ) | (253,658 | ) |
| Total shareholders equity | 302,704 | 294,191 | ||
| Total Liabilities and Shareholders Equity | $ 512,080 | $ | 482,250 | |
| *The balance sheet at December 31, 2003, has been derived from the audited | ||||
| financial statements at that date. See | ||||
| notes to condensed consolidated financial statements. |
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CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands of dollars)
| Six Months Ended — June 27, 2004 | June 29, 2003 | |||
|---|---|---|---|---|
| Cash flows from operating activities: | ||||
| Net earnings | $ 9,417 | $ | 2,554 | |
| Adjustments to reconcile net earnings | ||||
| to net cash provided by operating activities: | ||||
| Depreciation and amortization | 14,009 | 17,321 | ||
| (Gain) loss on sale of assets | (3,067 | ) | | |
| Changes in assets and liabilities: | ||||
| Accounts receivable | (10,259 | ) | (1,942 | ) |
| Inventories | (12,546 | ) | 1,205 | |
| Other current assets | (1,181 | ) | (3,159 | ) |
| Prepaid pension asset | (4,925 | ) | (6,143 | ) |
| Accounts payable and accrued liabilities | 12,554 | (3,700 | ) | |
| Other | 706 | 753 | ||
| Total adjustments | (4,709 | ) | 4,335 | |
| Net cash provided by operations | 4,708 | 6,889 | ||
| Cash flows from investing activities: | ||||
| Capital expenditures | (6,213 | ) | (4,485 | ) |
| Proceeds from sales of assets | 19,036 | 3,974 | ||
| Other | | (123 | ) | |
| Net cash provided by (used in) investing activities | 12,823 | (634 | ) | |
| Cash flows from financing activities: | ||||
| Payments of long-term debt | (112,540 | ) | (62,125 | ) |
| Proceeds from issuance of long-term debt | 121,660 | 52,025 | ||
| Debt issue costs | (2,175 | ) | | |
| Issuance of common stock | | 3,043 | ||
| Dividends paid | (2,229 | ) | (2,047 | ) |
| Other | (48 | ) | (52 | ) |
| Net cash provided by (used in) financing activities | 4,668 | (9,156 | ) | |
| Effect of exchange rate on cash and cash equivalents | 654 | 341 | ||
| Net increase (decrease) in cash and cash equivalents | 22,853 | (2,560 | ) | |
| Cash and cash equivalents at beginning of year | 25,346 | 9,225 | ||
| Cash and cash equivalents at end of period | $ 48,199 | $ | 6,665 | |
| Supplemental cash flow information | ||||
| Cash paid during the period for: | ||||
| Interest | $ 2,905 | $ | 3,161 | |
| Income taxes--net | $ 3,800 | $ | 4,021 |
See notes to condensed consolidated financial statements. MARKER FORMAT-SHEET="Page Number Center" FSL="Project"
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CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED (In thousands of dollars)
| Three Months Ended — June 27, 2004 | June 29, 2003 | June 27, 2004 | June 29, 2003 | |||
|---|---|---|---|---|---|---|
| Net earnings | $ 6,897 | $ 1,983 | $ | 9,417 | $ 2,554 | |
| Other comprehensive earnings (loss): | ||||||
| Cumulative translation adjustment | 310 | 770 | 657 | 266 | ||
| Deferred gain (loss) on forward contracts | 7 | (37 | ) | 38 | (37 | ) |
| Comprehensive earnings | $ 7,214 | $ 2,716 | $ | 10,112 | $ 2,783 |
See notes to condensed consolidated financial statements. MARKER FORMAT-SHEET="Page Number Center" FSL="Project"
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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED June 27, 2004
NOTE ABasis of Presentation
The accompanying condensed consolidated interim financial statements have been prepared by CTS Corporation (CTS or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
The accompanying unaudited condensed consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
Certain reclassifications have been made for the periods presented in the financial statements to conform to the classifications adopted in 2004.
NOTE BStock-Based Employee Compensation
CTS accounts for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its related interpretations. CTS has adopted the disclosure requirements of the Financial Accounting Standards Boards (FASB) Financial Accounting Standard (FAS) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. Had employee compensation cost for CTS fixed, stock-based compensation plans been determined based on the fair value method, as defined by FAS No. 123, Accounting for Stock-Based Compensation, CTS net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below:
| Three Months Ended — June 27, 2004 | June 29, 2003 | June 27, 2004 | June 29, 2003 | |||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousands, except per share amounts) | ||||||||
| Net earnings, as reported | $ 6,897 | $ | 1,983 | $ | 9,417 | $ | 2,554 | |
| Deduct: | ||||||||
| Stock-based employee compensation cost, net of tax, if fair value based method were used | (297 | ) | (416 | ) | (585 | ) | (797 | ) |
| Proforma net earnings | $ 6,600 | $ | 1,567 | $ | 8,832 | $ | 1,757 | |
| Net earnings per share-basic, as reported | $ 0.19 | $ | 0.06 | $ | 0.26 | $ | 0.07 | |
| Proforma net earnings per share-basic | 0.18 | 0.05 | 0.25 | 0.05 | ||||
| Net earnings per share-diluted, as reported | 0.19 | 0.06 | 0.26 | 0.07 | ||||
| Proforma net earnings per share-diluted | $ 0.18 | $ | 0.05 | $ | 0.24 | $ | 0.05 |
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NOTE CInventories
Inventory consist of the following:
| June 27, 2004 | December 31, 2003 | |
|---|---|---|
| ($ in thousands) | ||
| Finished goods | $ 11,209 | $ 8,047 |
| Work-in-process | 8,498 | 7,779 |
| Raw materials | 24,764 | 16,099 |
| $ 44,471 | $ 31,925 |
NOTE DAsset Sales MARKER FORMAT-SHEET="Para Flush" FSL="Default"
The December 31, 2003 other assets balance sheet item included $17.6 million of assets held for sale. During the first six months of 2004, CTS sold approximately $16.5 million of assets held for sale, including its Longtan, Taiwan building. The proceeds on the assets sales approximated the carrying value. In addition, due to changes in circumstances, which were previously considered unlikely, $1.1 million of the assets held for sale at December 31, 2003 were reclassified to fixed assets during the first six months of 2004.
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During the first six months of 2004, CTS also sold excess land located near its Canadian facility for approximately $2.7 million. Cash proceeds related to the sale approximated $2.1 million, with the remaining proceeds of $0.6 million evidenced by a secured note receivable due in May 2006. A gain of $2.7 million was recognized on the sale.
NOTE EFinancial Instruments MARKER FORMAT-SHEET="Para Flush" FSL="Default"
In the first quarter of 2004, CTS entered into a series of forward exchange contracts to manage its risk to fluctuations in foreign currency exchange rates between the Euro and the United Kingdom Pound. These contracts, which expire monthly in 2004, are designed to hedge anticipated foreign currency transactions. In accordance with FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, these forward contracts for forecasted transactions are designated as cash flow hedges and recorded as assets or liabilities on the balance sheet at fair value. Changes in the contracts fair values, which totaled $38,000 for the six months ending June 27, 2004, are recognized in accumulated other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs.
NOTE FLong-Term Debt
CTS has a credit agreement containing a $55 million senior, secured revolving credit facility (Credit Facility). There were no outstanding balances under the Credit Facility at June 27, 2004. Any outstanding balances would be senior to CTS convertible debentures. The Credit Facility is collateralized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on the facility fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the Credit Facility. The commitment fee varies based on performance under certain financial covenants and is currently 0.375 percent per annum. The Credit Facility requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Credit Facility. Additionally, the Credit Facility limits the amounts allowed for dividends, capital expenditures and acquisitions. The Credit Facility expires in July 2006. MARKER FORMAT-SHEET="Para Flush" FSL="Default"
In April 2002, CTS issued $25 million of five-year, 6.5% convertible, subordinated debentures ($25 million Notes). These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right, after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock.
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In May 2004, CTS issued $60 million convertible senior subordinated debentures ($60 million Notes) in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. These unsecured debentures bear interest at an annual rate of 2.125%, payable semiannually on May 1 and November 1 of each year through the maturity date of May 1, 2024.
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The $60 million Notes are convertible, under certain circumstances, into CTS common stock at a conversion price of $15.00 per share (which is equivalent to an initial conversion rate of approximately 66.6667 shares per $1,000 principal amount of the notes). Upon conversion of the $60 million Notes, in lieu of delivering common stock, the Company may, at its discretion, deliver cash or a combination of cash and common stock.
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Holders may convert the $60 million Notes at any time during a conversion period if the closing price of CTS common stock is more than 120% of the conversion price ($18.00 per common share) for at least 20 of the 30 consecutive trading days immediately preceding the fist trading day of the conversion period. The conversion periods begin on February 15, May 15, August 15 and November 15 of each year. Holders may also convert the notes if certain corporate transactions occur. As of June 27, 2004, none of the conditions for conversion of the $60 million Notes were satisfied.
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CTS may, at its option, redeem all or a portion of the $60 million Notes for cash at any time on or after May 1, 2009, at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest at the redemption date. Holders may require CTS to purchase for cash all or part of their notes on May 1, 2009, 2014, and 2019, or upon the occurrence of certain events, at 100% of the principle amount of the notes plus accrued and unpaid interest up to, but not including, the date of purchase.
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CTS used a portion of the proceeds from the issuance of the $60 million Notes to repay $40 million of its industrial revenue bonds that were due in 2013. Another $2 million of industrial revenue bonds were repaid with cash flows from operations in the first quarter of 2004.
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In connection with the issuance of the $60 million Notes, CTS incurred $2.2 million of issuance costs, which primarily consisted of investment banker fees, legal and other professional fees. These costs are being amortized to interest expense over the five year period from May 1, 2004 through May 1, 2009.
NOTE GRetirement Plans
Net pension (income) / postretirement expense for the three and six months ended June 27, 2004 and June 29, 2003 include the following components:
| Three Months Ended — June 27, 2004 | June 29, 2003 | Six Months Ended — June 27, 2004 | June 29, 2003 | |||||
|---|---|---|---|---|---|---|---|---|
| PENSION PLANS | ($ in thousands) | |||||||
| Service cost | $ 1,340 | $ 1,227 | $ 2,680 | $ 2,454 | ||||
| Interest cost | 2,823 | 2,729 | 5,646 | 5,456 | ||||
| Expected return on plan assets (1) | (6,763 | ) | (6,731 | ) | (13,526 | ) | (13,462 | ) |
| Amortization of unrecognized: | ||||||||
| Transition obligation | (118 | ) | (140 | ) | (236 | ) | (280 | ) |
| Prior service cost | 225 | 221 | 450 | 442 | ||||
| Recognized (gain) loss | 160 | (234 | ) | 320 | (468 | ) | ||
| Net pension (income) | $ (2,333 | ) | $ (2,928 | ) | $ (4,666 | ) | $ (5,858 | ) |
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(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
| Three Months Ended — June 27, 2004 | June 29, 2003 | Six Months Ended — June 27, 2004 | June 29, 2003 | |
|---|---|---|---|---|
| OTHER POSTRETIREMENT BENEFIT PLAN | ($ in thousands) | |||
| Service cost | $ 7 | $ 10 | $ 14 | $ 20 |
| Interest cost | 78 | 79 | 156 | 158 |
| Net postretirement expense | $ 85 | $ 89 | $ 170 | $ 178 |
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NOTE HBusiness Segments
FAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires companies to provide certain information about their operating segments. CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).
Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies. Components and sensors consist principally of automotive sensors and actuators used in commercial or consumer vehicles; electronic components used in cellular handsets, communications infrastructure and computer markets; low temperature cofired ceramic (LTCC) electronic substrates used in various communications and automotive applications; pointing sticks/cursor controls for computers and games for the computer market; terminators, including ClearONE terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets.
EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer. EMS also includes design of interconnect systems and complex backplanes, global supply-chain management services and related manufacturing and design services as may be required by the customer.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's annual report on Form 10-K. Management evaluates performance based upon operating earnings before interest and income taxes.
Summarized financial information concerning CTS reportable segments, is shown in the following table:
| Components and Sensors | EMS | Total | |
|---|---|---|---|
| ($ in thousands) | |||
| Second Quarter 2004 | |||
| Net sales to external customers | $ 68,194 | $ 69,430 | $ 137,624 |
| Segment operating earnings | $ 8,739 | $ 1,889 | $ 10,628 |
| Total assets | $ 413,244 | $ 98,836 | $ 512,080 |
| Second Quarter 2003 | |||
| Net sales to external customers | $ 63,994 | $ 52,703 | $ 116,697 |
| Segment operating earnings | $ 1,787 | $ 2,720 | $ 4,507 |
| Total assets | $ 407,263 | $ 72,760 | $ 480,023 |
| First Six Months of 2004 | |||
| Net sales to external customers | $ 131,713 | $ 128,058 | $ 259,771 |
| Segment operating earnings | $ 11,790 | $ 3,747 | $ 15,537 |
| Total assets | $ 413,244 | $ 98,836 | $ 512,080 |
| First Six Months of 2003 | |||
| Net sales to external customers | $ 124,319 | $ 98,147 | $ 222,466 |
| Segment operating earnings | $ 2,110 | $ 4,991 | $ 7,101 |
| Total assets | $ 407,263 | $ 72,760 | $ 480,023 |
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Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table:
| Three Months Ended — June 27, 2004 | June 29, 2003 | June 27, 2004 | June 29, 2003 | |||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | ||||||||
| Total segment operating earnings | $ 10,628 | $ | 4,507 | $ | 15,537 | $ | 7,101 | |
| Interest expense | (1,590 | ) | (1,899 | ) | (3,123 | ) | (3,871 | ) |
| Other income (expense) | (168 | ) | 36 | (184 | ) | 175 | ||
| Earnings before income taxes | $ 8,870 | $ | 2,644 | $ | 12,230 | $ | 3,405 |
NOTE IContingencies
Certain processes in the manufacture of CTS current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position, results of operations or cash flows of CTS.
Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business. For all claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS consolidated financial position, results of operations or cash flows. MARKER FORMAT-SHEET="Page Number Center" FSL="Project"
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NOTE JIncome Taxes
During the second quarter of 2004, CTS changed the estimate of its 2004 effective tax rate from 25% to 23%. The lower effective tax rate reflects the transfer of certain business operations to jurisdictions with lower statutory tax rates and the notification that manufacturing incentives in one foreign jurisdiction qualified CTS for a lower statutory rate, expiring in 2011, subject to certain conditions.
NOTE KEarnings Per Share
FAS No. 128, Earnings per Share, requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the quarters and six-month periods ending June 27, 2004 and June 29, 2003.
| Net — Earnings | Shares — (in thousands) | Per Share | |
|---|---|---|---|
| (Numerator) | (Denominator) | Amount | |
| ($ in thousands, except per share amounts) | |||
| Second Quarter 2004 | |||
| Basic EPS | $ 6,897 | 35,986 | $ 0.19 |
| Effect of dilutive securities issuable in | |||
| connection with stock purchase plans | 267 | (1) | |
| Diluted EPS | $ 6,897 | 36,253 | $ 0.19 |
| Second Quarter 2003 | |||
| Basic EPS | $ 1,983 | 34,227 | $ 0.06 |
| Effect of dilutive securities issuable in connection with stock purchase plans | 342 | ||
| Diluted EPS | $ 1,983 | 34,569 | $ 0.06 |
| First Six Months of 2004 | |||
| Basic EPS | $ 9,417 | 35,971 | $ 0.26 |
| Effect of dilutive securities issuable in | |||
| connection with stock purchase plans | 277 | (1) | |
| Diluted EPS | $ 9,417 | 36,248 | $ 0.26 |
| First Six Months of 2003 | |||
| Basic EPS | $ 2,554 | 34,125 | $ 0.07 |
| Effect of dilutive securities issuable in connection with stock purchase plans | 290 | ||
| Diluted EPS | $ 2,554 | 34,415 | $ 0.07 |
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(1) Includes 28 and 151 shares of CTS common stock for the quarters and six-month periods ending June 27, 2004 and June 29, 2003, respectively, to be issued to the former DCA shareholders.
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The following table shows the potentially dilutive securities which have been excluded from the diluted earnings per share calculation for the three and six month periods ending June 27, 2004 and June 29, 2003 because they are either anti-dilutive, the exercise price exceeds the average market price or the conversion criteria have not been met.
| June 27, 2004 | June 29, 2003 | June 27, 2004 | June 29, 2003 | |
|---|---|---|---|---|
| (Number of shares in thousands) | ||||
| Stock options where the exercise price | ||||
| exceeds the average market price of | ||||
| common shares during the period | 771 | 1,430 | 723 | 1,503 |
| Securities related to the $25 million Notes | 1,247 | 1,247 | 1,247 | 1,247 |
| Securities related to the $60 million Notes | 2,110 | | 1,073 | |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview MARKER FORMAT-SHEET="Para Default" FSL="Default"
CTS is a global manufacturer of components and sensors to the automotive, communications and computer markets. The Company also offers specialized electronic manufacturing, design and supply-chain services to industrial, communications and computing infrastructure original equipment manufacturers (OEMs). Sales and marketing is accomplished through CTS sales engineers, independent manufacturers representatives and distributors. Sales are reported through two business segments, Components and Sensors and Electronics Manufacturing Services (EMS), which represent 49.6% and 50.4%, respectively, of CTS total sales in the second quarter of 2004 and 54.8% and 45.2%, respectively, in the second quarter of 2003.
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As discussed in more detail throughout the Managements Discussion and Analysis
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Sales increased $20.9 million, or 17.9%, in the second quarter of 2004 over the same period last year, primarily in EMS.
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Gross margins, as a percentage of sales, were 21.0% in the second quarter of 2004, unchanged from the same period last year.
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Selling, general and administrative expenses increased $2.0 million in the second quarter of 2004 compared to the corresponding period last year.
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The second quarter of 2004 includes a gain of $3.0 million on the sale of assets, of which $2.7 million relates to the sale of excess land in Canada.
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During the second quarter of 2004, CTS lowered its estimate of the 2004 effective tax rate from 25% to 23%.
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The second quarter of 2004 net earnings are $6.9 million, compared with $2.0 million in the second quarter of 2003.
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Cash and cash equivalents increased $22.9 million to $48.2 million at the end of the second quarter of 2004, compared to a balance of $25.3 million on December 31, 2003.
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Convertible notes of $60 million were issued in the second quarter of 2004, with proceeds used to repay and reduce higher interest-bearing debt.
Outlook MARKER FORMAT-SHEET="Para Default" FSL="Default"
CTS currently expects sales growth and earnings for the full year of 2004 as follows:
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Following the first half-year results, the Company has increased its expectation for full year 2004 sales growth to be in the 10-14% range for 2004 over 2003.
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Net earnings per share are expected to improve for the full year of 2004, to $0.50-$0.54, primarily as a result of increased volumes and improved cost structure. The full year estimate includes a gain of $0.06 earnings per share from the sale of excess land in Canada.
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Critical Accounting Policies MARKER FORMAT-SHEET="Para Default" FSL="Default"
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
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Management believes that judgment and estimates related to the following critical accounting policies could materially affect its consolidated financial statements.
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Estimating inventory valuation, the allowance for doubtful accounts and other accrued liabilities
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Valuation of long-lived and intangible assets and depreciation / amortization periods
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Income taxes
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Retirement plans
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In the first six months of 2004, there have been no changes in the above critical accounting policies.
Results of Operations Comparison of Second Quarter 2004 and Second Quarter 2003 Business Segment Discussion
Refer to Note H, Business Segment, for a description of the Companys business segments.
The following table highlights the segment results for the three-month periods ending June 27, 2004 and June 29, 2003:
| Components & Sensors | Electronics Manufacturing Services | Consolidated Total | |
|---|---|---|---|
| ($ in thousands) | |||
| Second Quarter 2004 | |||
| Sales | $ 68,194 | $ 69,430 | $ 137,624 |
| Segment operating earnings | 8,739 | 1,889 | 10,628 |
| % of sales | 12.8 % | 2.7 % | 7.7 % |
| Second Quarter 2003 | |||
| Sales | $ 63,994 | $ 52,703 | $ 116,697 |
| Segment operating earnings | 1,787 | 2,720 | 4,507 |
| % of sales | 2.8 % | 5.2 % | 3.9 % |
Components and Sensors business segment sales increased $4.2 million or 6.6% from the prior year quarter, primarily driven by strong automotive products and communications infrastructure component sales. The operating earnings of $8.7 million increased $7.0 million. The increase is primarily from the impact of approximately $1.0 million relating to the contribution from incremental sales, the gain on the sale of excess land in Canada of $2.7 million, lower depreciation and amortization expense of $2.0 million, and a favorable impact for the Singapore cost allocation incurred by EMS.
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EMS business segment sales increased $16.7 million, or 31.7% from the prior year quarter. The revenue increase resulted primarily from higher demand for communications infrastructure systems and networking equipment, partially offset by price reductions. The operating earnings of $1.9 million decreased $0.8 million from the prior year quarter. The decrease in earnings was driven by initial start-up costs related to CTS EMS Singapore operation, some unfavorable currency exchange, and price reductions not fully offset by cost reductions, partially benefitted by the favorable impact of higher sales volume.
Total Company Discussion
The following table highlights changes in significant components of the condensed consolidated statements of earnings for the three-month periods ended June 27, 2004 and June 29, 2003:
| June 27, 2004 | Increase (Decrease) | ||||
|---|---|---|---|---|---|
| ($ in thousands) | |||||
| Net sales | $ 137,624 | $ | 116,697 | $ 20,927 | |
| Gross margin | 28,917 | 24,520 | 4,397 | ||
| % of net sales | 21.0 | % | 21.0 % | | % |
| Selling, general and administrative expenses | 16,622 | 14,623 | 1,999 | ||
| % of net sales | 12.1 | % | 12.5 % | (0.4 | )% |
| Gain on sale of assets | (3,006 | ) | | (3,006 | ) |
| Research and development expenses | 4,673 | 5,390 | (717 | ) | |
| % of net sales | 3.4 | % | 4.6 % | (1.2 | )% |
| Operating earnings | 10,628 | 4,507 | 6,121 | ||
| % of net sales | 7.7 | % | 3.9 % | 3.8 | % |
| Interest expense | 1,590 | 1,899 | (309 | ) | |
| Earnings before income taxes | 8,870 | 2,644 | 6,226 | ||
| Income tax expense | 1,973 | 661 | 1,312 | ||
| Income tax rate | 22.2 | % | 25.0 % | (2.8 | )% |
| Net earnings | $ 6,897 | $ | 1,983 | $ 4,914 |
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Net sales increased by $20.9 million in the second quarter of 2004, or 17.9% from the second quarter of 2003, primarily due to the EMS increase of $16.7 million, related to increased demand for communications infrastructure systems and networking equipment. In addition, Components and Sensors sales increased $4.2 million, primarily related to increased demand for automotive products and communications infrastructure components during the second quarter of 2004.
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Gross margin increased $4.4 million in the second quarter of 2004 from the second quarter of 2003, primarily due to increased sales. Other favorable factors include lower depreciation expense of $1.3 million, better product mix within the Components and Sensors segment and higher absorption of manufacturing fixed costs. CTS continues to benefit from a decreasing cost structure resulting from improved operational efficiencies. These favorable items were offset partially by the unfavorable impact of reduced pension income as well as the pricing and some unfavorable currency exchange impact at EMS, and a higher percent of EMS segment sales, which inherently have a lower gross margin percentage than Components and Sensors segment sales.
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Selling, general and administrative expenses increased by $2.0 million, primarily due to increased expenses for incentive compensation and professional services. The second quarter of 2004 includes a gain of $3.0 million on sale of assets, of which $2.7 million relates to the sale of excess land in Canada.
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Research and development expenses of $4.7 million, or 3.4% of sales, decreased $0.7 million from the second quarter of 2003, primarily due to the realignment and refocusing of research and development efforts around key business development initiatives and opportunities within the Components and Sensors business segment. Significant ongoing research and development activities continue in Components and Sensors to support expanded application and new product development. Research and development expenditures in the EMS business segment are typically much lower than in the Components and Sensors business segment.
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Operating earnings increased $6.1 million compared to the prior year quarter, due to gross margin improvement, as noted above, and the gain on the sale of assets of $3.0 million, including $2.7 million on the sale of excess land in Canada, partially offset by increased selling, general and administrative expenses.
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Interest expense decreased $0.3 million in the second quarter, primarily due to lower interest rates.
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During the second quarter of 2004, CTS changed the estimate of its 2004 effective tax rate from 25% to 23%. The lower effective tax rate reflects the transfer of certain business operations to jurisdictions with lower statutory tax rates and the notification that manufacturing incentives in one foreign jurisdiction qualified CTS for a lower statutory rate, expiring in 2011, subject to certain conditions.
Comparison of First Half 2004 and First Half 2003
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Business Segment Discussion
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The following table highlights the business segment results for the six-month periods ending June 27, 2004 and June 29, 2003:
| Components & Sensors | Electronics Manufacturing Services | Consolidated Total | |
|---|---|---|---|
| ($ in thousands) | |||
| First Six Months 2004 | |||
| Sales | $ 131,713 | $ 128,058 | $ 259,771 |
| Segment operating earnings | 11,790 | 3,747 | 15,537 |
| % of sales | 9.0 % | 2.9 % | 6.0 % |
| First Six Months 2003 | |||
| Sales | $ 124,319 | $ 98,147 | $ 222,466 |
| Segment operating earnings | 2,110 | 4,991 | 7,101 |
| % of sales | 1.7 % | 5.1 % | 3.2 % |
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During the first six months of 2004, sales of Components and Sensors and EMS products, as a percentage of total sales, were 50.7% and 49.3% respectively. The first six months of 2003 sales of Components and Sensors and EMS products, as a percentage of total sales, were 55.9% and 44.1% respectively.
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Components and Sensors business segment sales increased $7.4 million or 5.9% from the prior year. The increase was primarily due to increased sales of automotive products and communications infrastructure components. Operating earnings increased $9.7 million from the impact of approximately $2.0 million relating to the contribution from incremental sales, lower depreciation and amortization expense of $3.8 million, the gain of $3.1 million on the sale of assets, including $2.7 million on the sale of excess land in Canada, and reduced manufacturing costs.
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EMS business segment sales increased $29.9 million, or 30.5% from the prior year primarily due to higher demand for communications infrastructure systems and networking equipment, partially offset by price reductions. The operating earnings of $3.7 million decreased $1.2 million from the prior year period. The decrease in earnings was driven by Singapore start-up costs, some unfavorable currency exchange, price reductions not fully offset by cost reductions, and slightly higher depreciation, partially benefitted by the favorable impact of higher sales volume.
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Total Company Discussion
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The following table highlights changes in significant components of the condensed consolidated statements of earnings for the six-month periods ended June 27, 2004 and June 29, 2003:
| June 27, 2004 | Increase (Decrease) | ||||
|---|---|---|---|---|---|
| ($ in thousands) | |||||
| Net sales | $ 259,771 | $ | 222,466 | $ 37,305 | |
| Gross margin | 53,526 | 45,603 | 7,923 | ||
| % of net sales | 20.6 | % | 20.5 % | 0.1 | % |
| Selling, general and administrative expenses | 31,499 | 27,471 | 4,028 | ||
| % of net sales | 12.1 | % | 12.3 % | (0.2 | )% |
| Gain on sale of assets | (3,067 | ) | | (3,067 | ) |
| Research and development expenses | 9,557 | 11,031 | (1,474 | ) | |
| % of net sales | 3.7 | % | 5.0 % | (1.3 | )% |
| Operating earnings | 15,537 | 7,101 | 8,435 | ||
| % of net sales | 6.0 | % | 3.2 % | 2.8 | % |
| Interest expense | 3,123 | 3,871 | (748 | ) | |
| Earnings before income taxes | 12,230 | 3,405 | 8,824 | ||
| Income tax expense | 2,813 | 851 | 1,962 | ||
| Income tax rate | 23.0 | % | 25.0 % | (2.0 | )% |
| Net earnings | $ 9,417 | $ | 2,554 | 6,863 |
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Net sales increased by $37.3 million for the first half of 2004, or 16.8% from the first half of 2003. The increase in sales is primarily due to the higher demand for communications infrastructure systems and networking equipment of $29.9 million. Components and Sensors sales increased $7.4 million, primarily related to increased demand for automotive products and communications infrastructure components during the second quarter of 2004.
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Gross margin increased $7.9 million, or 17.4%, for the first half of 2004. The 2004 gross margin dollar and slight percentage improvement were primarily due to higher sales, coupled with lower depreciation expense of $2.4 million and a decreasing cost structure. These favorable factors were partially offset by reduced pension income, pricing and unfavorable currency exchange impact at EMS, and a higher percentage of EMS segment sales.
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Selling, general and administrative expenses increased by $4.0 million, primarily due to higher expense for incentive compensation and professional services. The first half of 2004 included the gain of $3.1 million on the sale of assets, primarily $2.7 million on the sale of excess land in Canada.
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Research and development expenses of $9.6 million decreased $1.5 million from the first half of 2003, primarily due to realignment and refocusing of research and development efforts around key business development initiatives and opportunities within the Components and Sensors business segment. Significant ongoing research and development activities continue in Components and Sensors to support expanded application and new product development. Research and development expenditures in the EMS business segment are typically much lower than in the Components and Sensors business segment.
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Operating earnings of $15.5 million increased $8.4 million compared to the first half of 2003, primarily due to the gross margin improvement and the gain on the sale of excess land in Canada, partially offset by higher operating expenses.
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Interest expense of $3.1 million decreased $0.7 million, primarily due to lower interest rates.
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Liquidity and Capital Resources
Overview
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Cash and cash equivalents increased to $48.2 million at June 27, 2004 from $25.3 at December 31, 2003. Total debt was $85.0 million, up from $75.9 million at the end of 2003. Total debt as a percentage of total capitalization was 21.9% at the end of the second quarter of 2004, compared with 20.5% at the end of 2003.
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During the first half of 2004:
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CTS completed the sale of the Longtan, Taiwan facility, and received net cash proceeds of $16.4 million. CTS also completed the sale of excess land in Canada, and received $2.1 million, with the remaining $0.6 million in note receivable due May 2006.
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In May, CTS issued $60.0 million convertible senior subordinated notes ($60 million Notes) due 2024. The net proceeds of $57.8 million were used to repay, in full, the outstanding principal of industrial revenue bonds and reduce amounts outstanding under its Credit Facility.
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Working capital increased $35.0 million in the first six months of 2004, primarily driven by a $22.9 million increase in cash and cash equivalents and the net impact of accounts receivable, inventory and accounts payable of $10.7 million to support higher sales and the new EMS operation in Singapore.
Free Cash Flow
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The following table summarizes free cash flow for the Company:
| Six Months Ended — June 27, 2004 | June 29, 2003 | ||
|---|---|---|---|
| ($ in millions) | |||
| Net cash provided by operations | $ 4.7 | $ 6.9 | |
| Net cash provided by (used in) investing activities | 12.8 | (0.6 | ) |
| Free cash flow | $ 17.5 | $ 6.3 |
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Management believes that free cash flow provides useful information to investors regarding the Companys ability to generate cash from business operations that is available for internal growth, service of debt principal, dividends, share repurchases and acquisitions and other investments. Management uses free cash flow as one measure to monitor and evaluate the performance of the Company.
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During the first six months of 2004, net cash provided by operations was $4.7 million, despite funding the working capital required for business growth. Within net cash provided by investing activities, capital expenditures of $6.2 million were more than offset by the proceeds from the sales of the Longtan, Taiwan building and excess land in Canada.
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During the first six months of 2003, net cash provided by operations was $6.9 million after funding the working capital required for business growth. The capital expenditures of $4.5 million were partially offset by the proceeds from the sale of TCXO production assets.
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Operating Activities
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Cash flows provided by operations were $4.7 million in the first half of 2004. Components of cash flows from operations include earnings of $9.4 million and depreciation and amortization of $14.0 million partially offset by unfavorable changes in current assets and current liabilities of $11.4 million, primarily due to increased accounts receivable and inventory to support higher sales and the new EMS operation in Singapore. In addition, the prepaid pension asset increased $4.9 million, and there was a gain of $3.1 million on sale of assets.
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In the first half of 2003, cash flows provided by operations were $6.9 million. Components of cash flows from operations include earnings of $2.6 million, depreciation and amortization of $17.3 million partially offset by unfavorable changes in current assets and current liabilities of $6.8 million, and a $6.1 million increase in the prepaid pension asset.
Investing Activities
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Cash flows provided by investing activities totaled $12.8 million through the first half of 2004, including $16.4 million of net proceeds from the sale of the Longtan, Taiwan facility and $2.1 million from the sale of excess land in Canada, partially offset by $6.2 million of capital expenditures. Through the first half of 2003, cash flows used in investing activities totaled $0.6 million, including $4.5 million of capital expenditures partially offset by $4.0 million of proceeds from the sale of assets.
Financing Activities
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Cash flows provided by financing activities for the first half of 2004 were $4.7 million, consisting primarily of $57.8 million proceeds from the $60 million Notes due 2024, $42.0 million repayment of the 7.5% industrial revenue bond, $8.9 million repayment of the Credit Facility, and $2.2 million in dividend payments. In the first half of 2003, cash flows used by financing activities were $9.2 million, consisting primarily of the net repayment of debt of $10.1 million and dividend payments of $2.0 million, partially offset by proceeds from issuance of stock of $3.0 million.
Capital Resources
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The following table shows the long-term borrowings and related average interest rates as of June 27, 2004 and December 31, 2003:
| June 27, 2004 — Balance ($) | Average interest rate (%) | December 31, 2003 — Balance ($) | Average interest rate (%) | |
|---|---|---|---|---|
| ($ in millions) | ||||
| $55 million Credit Facility | $ | 3.1 % | $ 8.9 | 3.6 % |
| Industrial Revenue Bonds | | | 42.0 | 7.5 |
| Convertible Debentures Due 2007 | 25.0 | 6.5 | 25.0 | 6.5 |
| Convertible Debentures Due 2024 | 60.0 | 2.1 | | |
| Total long-term debt | $ 85.0 | $ 75.9 |
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CTS has a credit agreement containing a $55 million Credit Facility. There were no outstanding balances under the Credit Facility at June 27, 2004. Any outstanding balances would be senior to CTS convertible debentures. The Credit Facility is collateralized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on the facility fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the Credit Facility. The commitment fee varies based on performance under certain financial covenants and is currently 0.375 percent per annum. The Credit Facility requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio and a minimum tangible net worth covenants. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Credit Facility. Additionally, the Credit Facility limits the amounts allowed for dividends, capital expenditures and acquisitions. The Credit Facility expires in July 2006.
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During the second quarter of 2004, CTS issued the $60 million Notes due 2024. The debt is an unsecured senior subordinated obligation of CTS and was sold to qualified institutional purchasers pursuant to Rule 144A under the Securities Act of 1933. The notes bear interest at a rate of 2.125% per year and will be convertible, under certain circumstances, into CTS common stock, at the option of the holder, at a price of $15.00 per share, which is equivalent to an initial conversion rate of approximately 66.6667 shares per $1,000 principal amount of the notes. The conversion price represents a 36.24% premium over the closing price of CTS common stock on May 5, 2005. The offering was closed on May 11, 2004. With the proceeds, CTS repaid outstanding debt, including its industrial revenue bonds of $40 million due in 2013 at a weighted average interest rate of 7.5% and reduced its outstanding Credit Facility.
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CTS believes cash flows from operations and available borrowings under its Credit Facility will be adequate to fund its working capital and capital expenditure requirements. CTS may choose to pursue additional equity and/or debt financing to fund acquisitions and/or to reduce its overall interest expense or improve its capital structure.
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On December 14, 1999, CTS shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission. CTS could initially offer up to $500.0 million in any combination of debt securities, common stock, preferred stock or warrants under the registration statement. During the first half of 2004, CTS did not issue any securities under this registration statement. As of June 27, 2004, CTS could offer up to $435 million of additional debt and/or equity securities under this registration statement.
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On November 13, 2001, CTS Form S-3 registration statement registering two million shares of CTS common stock to be issued under CTS Direct Stock Purchase Plan was declared effective by the Securities and Exchange Commission. As of June 27, 2004, CTS could issue up to approximately 48,400 additional shares of common stock under this registration statement.
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On July 9, 2004, CTS Board of Directors authorized the repurchase of up to one million shares of its outstanding shares of common stock.
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Forward-Looking Statements
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Statements about the Companys earnings outlook and its plans, estimates and beliefs concerning the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on managements expectations, certain assumptions and currently available information. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of geopolitical, economic, health, industry and other factors which could affect the Companys operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statement. Examples of factors which may affect future results include, but are not limited to: rapid technological change, general market conditions in the automotive, communications and computer industries; reliance on key customers; the ability to protect our intellectual property; pricing pressures and demand for our products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Investors are encouraged to examine the Companys Current Report on form 8-K, filed May 6, 2004, Exhibit 99.01, which more fully describes the risks and uncertainties associated with the Companys business.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the first quarter of 2004, CTS entered into a series of forward exchange contracts. Refer also to Note E, "Financial Instruments," of the Notes to the Condensed Consolidated Financial Statements, for a discussion relating to these contracts. There have been no other material changes in CTS market risk since December 31, 2003.
Item 4. Controls and Procedures MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
CTS maintains a set of disclosure controls and procedures designed to ensure information required to be disclosed by CTS in reports that it files or submits under the Securities Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As of June 27, 2004, the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of CTS management, including the chief executive officer and chief financial officer, of the effectiveness of CTS disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that CTS disclosure controls and procedures are effective at the reasonable assurance level referred to above. Subsequent to the date of their evaluation, there have been no significant changes in CTS internal controls over financial reporting or in other factors that could significantly affect these controls.
PART II - OTHER INFORMATION Item 1. Legal Proceedings MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
Certain processes in the manufacture of CTS current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position, results of operations or cash flows of CTS.
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Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business. For all claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS consolidated financial position, results of operations, or cash flows.
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Item 4. Submission of Matters to a Vote of Security Holders MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
The Annual Meeting of Shareholders of CTS Corporation was held on April 28, 2004. At the meeting, the following matter was submitted to a vote of the stockholders of CTS:
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- The election of nine directors to serve for one year beginning at the 2004 annual shareholders' meeting and expiring at the 2005 annual shareholders' meeting. A summary of votes by directors is shown below:
| Director | For | Withheld |
|---|---|---|
| Walter S. Catlow | 30,115,329 | 3,613,355 |
| Lawrence J. Ciancia | 31,098,635 | 2,630,049 |
| Thomas G. Cody | 30,680,585 | 3,048,099 |
| Gerald H. Frieling | 31,064,319 | 2,664,365 |
| Roger R. Hemminghaus | 30,665,839 | 3,062,845 |
| Michael A. Henning | 31,037,879 | 2,690,805 |
| Robert A. Profusek | 24,306,826 | 9,421,858 |
| Donald K. Schwanz | 31,582,956 | 2,145,728 |
| Patricia K. Vincent | 31,648,765 | 2,079,919 |
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
- The CTS Corporation 2004 Omnibus Long-Term Incentive Plan was approved by the shareholders with 19,801,756 affirmative votes, 8,511,121 votes against, 943,512 abstaining votes, and 4,472,294 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
a. Exhibits
MARKER FORMAT-SHEET="Para Large Hang Level 1" FSL="Default" MARKER FORMAT-SHEET="Exhibit Index Hang" FSL="Project"
10(a) First Amendment to the Credit Agreement dated July 14, 2003, by and among CTS Corporation, the Lenders named therein, and Harris Trust and Savings Bank, as L/C Issuer and Administrative Agent.
MARKER FORMAT-SHEET="Exhibit Index Hang" FSL="Project"
31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
MARKER FORMAT-SHEET="Exhibit Index Hang" FSL="Project"
31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
MARKER FORMAT-SHEET="Exhibit Index Hang" FSL="Project"
32(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
MARKER FORMAT-SHEET="Exhibit Index Hang" FSL="Project"
32(b) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Item 6. Exhibits and Reports on Form 8-K MARKER FORMAT-SHEET="Para Flush Lv 0-TNR" FSL="Project"
b. Reports on Form 8-K During the three-month period ending June 27, 2004, CTS filed the following reports on Form 8-K:
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Report dated March 31, 2004, under Item 9., Regulation FD Disclosure, containing a copy of material used in an investor relations presentation. The Form 8-K also contained a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated April 20, 2004, under Item 5., Other Events and Regulation FD Disclosure, reporting CTS Components Taiwan, Ltd., a wholly-owned subsidiary of CTS Corporation organized under the laws of Taiwan, received the final payment due under an agreement for the sale of its unused Longtan, Taiwan facility.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated April 21, 2004, under Item 12., Results of Operations and Financial Condition, containing a press release announcing financial results for the first quarter of 2004.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated May 5, 2004, under Item 5., Other Events and Regulation FD Disclosure, containing a press release announcing its intention to offer, subject to market and other conditions, $60 million aggregate original principal amount of its Convertible Senior Subordinated Notes due 2024 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated May 5, 2004, under Item 5., Other Events, containing supplemental business disclosure and risk factors relating to CTS Corporation, an Indiana corporation.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated May 5, 2004, under Item 5., Other Events and Regulation FD Disclosure, containing a press release announcing the pricing of its offering of $60 million aggregate original principal amount of its 2.125% Convertible Senior Subordinated Notes due 2024 in a private placement to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated May 12, 2004, under Item 5., Other Events and Regulation FD Disclosure, containing a press release announcing that it completed its offering of $60 million aggregate original principal amount of its 2.125% Convertible Senior Subordinated Notes due 2024 in a private placement to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated May 18, 2004, under Item 5., Other Events and Regulation FD Disclosure, announced it had closed its offering of $60 million aggregate original principal amount of its 2.125% Convertible Senior Subordinated Notes due 2024 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Form 8-K also contained agreements relating to the offering and a description of capital stock relating to CTS Corporation.
MARKER FORMAT-SHEET="Para Hang Level 1" FSL="Default"
Report dated June 15, 2004, under Item 9., Regulation FD Disclosure, containing a copy of material used in an investor relations presentation. The Form 8-K also contained a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CTS Corporation | CTS Corporation |
|---|---|
| /s/ Richard G. Cutter III | /s/ Vinod M. Khilnani |
| Richard G. Cutter III Vice President, Secretary and General Counsel | Vinod M. Khilnani Senior Vice President and Chief Financial Officer |
| Dated: July 21, 2004 |
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