EXHIBIT (13)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (1999-2001)
CTS' Management's Discussion and Analysis is based on its consolidated financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgements that affect the
reported amounts of assets, liabilities, revenues and expenses and the related
disclosure of contingent assets and liabilities. CTS evaluates its estimates on
an ongoing basis, based on historical experience and other assumptions believed
to be relevant under the circumstances. Actual results may differ, perhaps
materially, from the estimates under different assumptions or conditions.
CTS is a global electronic components and electronic assemblies manufacturer
serving the automotive, communications and computer markets. The communications
and computer markets are characterized by rapid technological change and
frequent new product introductions and enhancements. These characteristics,
along with the global economic slowdown, are risks that require management
judgement when determining appropriate accounting estimates.
Critical Accounting Policies
- ----------------------------
Management believes that judgement and estimates related to the following
critical accounting policies could materially affect its consolidated financial
statements:
Estimating inventory valuation, the allowance for doubtful accounts and other
- -----------------------------------------------------------------------------
accrued liabilities
- -------------------
CTS management makes estimates of the carrying value of its inventory based upon
historical usage, new product introductions and projected customer purchase
levels throughout the year. The ever-changing technology environment of the
markets we serve affects these estimates. Similarly, management makes estimates
of the collectability of its accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts.
Finally, CTS is involved in litigation in the normal course of business and is
regulated under a number of environmental and safety laws. Accruals for known
exposures are established based on management's best estimate after considering
the advice of legal counsel.
Valuation of long-lived and intangible assets and depreciation/amortization
- ---------------------------------------------------------------------------
periods
- -------
CTS assesses the carrying value of long-lived and intangible assets and the
remaining useful lives whenever events or changes in circumstances indicate the
carrying value may not be recoverable or the estimated useful life may no
life may no longer be appropriate. Factors considered important which could
trigger this review include significant decreases in operating results,
significant changes in its use of the assets, competitive factors and the
strategy of its business, and significant negative industry or economic trends.
In 2001, CTS reduced the carrying value of certain assets to estimated fair
value through impairment charges. Estimates are based on management judgement,
published third party sources, third party offers and information furnished by
independent brokers/dealers. Such assets were taken out of service and are held
for sale. CTS is taking measures it considers appropriate to sell these assets
at amounts approximating these estimated fair values; however, there are no
assurances that CTS will be able to sell the assets for these amounts.
Income Taxes
- ------------
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and income tax bases of assets and liabilities
and carryforwards using currently enacted tax rates. CTS must also estimate its
current tax exposure for situations where taxing authorities would assert tax
positions different than those taken by the Company. CTS estimates its income
tax valuation allowance by assessing which deferred tax assets are more likely
than not to be recovered in the future. The valuation allowance is based on CTS'
estimates of taxable income in each jurisdiction in which it operates and the
period over which the deferred tax assets will be recoverable. In the event that
actual results differ from these estimates in future periods, CTS may need to
establish an additional valuation allowance or reduce the valuation allowance,
which could materially impact the results of operations or financial position.
Retirement Plans
- ----------------
Actuarial assumptions are used in determining pension income and the benefit
obligation. CTS, after considering the advice of its actuaries, assumes a
discount rate, expected rate of return on plan assets and a rate of compensation
increase in determining its annual pension income and the projected benefit
obligation.
Results of Operations
- ---------------------
Overview
- --------
The global economic slowdown experienced in 2001 had a substantially greater
impact on the markets we serve than we and, we believe, others in our industry
had initially anticipated. Technology companies were severely hurt by the
combination of a general economic recession, a sharp drop in information and
communication-related technology spending and the effects from the September 11
terrorist attack. Among other things, this required that we aggressively
implement actions over the course of the year to reduce our cost structure to
the maximum extent possible while continuing to put a priority on positioning
the business to be successful as the economy recovers and market growth returns.
Certain of our product lines, particularly those focused on the communications
market, experienced rapid and severe decreases in demand levels. Other product
lines, such as those serving the
automotive market, did not experience such dramatic declines in customer buying
patterns. However, we believe negative general economic conditions made OEMs and
our other customers generally more cautious in 2001, often delaying new product
introductions, as they worked to reduce excess inventory levels.
Business Segment Discussion
- ---------------------------
(In thousands of dollars)
Electronic Components Electronic Assemblies
--------------------- ---------------------
2001
Sales $313,573 $264,081
Segment operating earnings (loss) (1) (5,893) 8,119
Segment operating earnings (loss) % of sales (1) (1.9 )% 3.1%
2000
Sales $536,703 $329,820
Segment operating earnings 98,157 30,473
Segment operating earnings % of sales 18.3% 9.2%
1999
Sales $507,344 $169,732
Segment operating earnings (2) 81,025 14,711
Segment operating earnings % of sales (2) 16.0% 8.7%
(1) Excludes restructuring and asset impairment charges of $40.0 million
pre-tax, and related one-time charges of $10.7 million pre-tax. Refer to
Note K, "Business Segments."
(2) Excludes the effect of a one-time, noncash write-off of $12.9 million
pre-tax for acquired in-process research and development (IPR&D), related to
the acquisition of CTS Wireless.
The 2001 electronic component sales decreased by $223.1 million, or 42% from
2000; segment operating earnings decreased by $104.1 million from 2000 primarily
due to reduced customer demand for hand-held wireless devices. End-product
demand for the Company's electronic components products which address the served
markets of computer, automotive and the infrastructure segment of the
communications market also decreased during 2001, though to a lesser degree. The
Company believes the overall causes of the lower end-product demand were
primarily due to the recessionary market conditions and higher and sometimes
excess levels of inventory held by customers.
The 2001 electronic assembly sales decreased $65.8 million, or 20% from 2000;
while the segment operating earnings decreased $22.4 million from 2000. This
decrease is also driven by the reduced customer demand for hand-held wireless
devices and, in addition, by the substantial reduction in the capital budgets of
companies that use computer and communications equipment.
The 2000 electronic component sales increased by $29.4 million, or 6%, from
1999, while the segment operating earnings increased by $17.1 million, or 21%
from 1999. The 2000 electronic assembly sales increased $160.1 million, or 94%
from 1999, while the segment operating earnings increased $15.8 million, or 107%
from 1999. The increase in the electronic assemblies segment was primarily due
to the increased demand during 2000 for the integrated interconnect systems
which serve the computer and communications markets, and RF integrated modules
which serve the communications handset market.
The following table provides a breakdown of net sales by business segment and
market as a percent of consolidated net sales:
Electronic Components Electronic Assemblies
--------------------- ---------------------
Markets 2001 2000 1999 2001 2000 1999
- ------- ---- ---- ---- ---- ---- ----
Communications 26% 37% 45% 17% 15% 10%
Computer 3% 5% 5% 28% 22% 13%
Automotive 20% 15% 19% -- -- --
Other 5% 5% 6% 1% 1% 2%
Net Sales by Segment as a % 54% 62% 75% 46% 38% 25%
of Consolidated Net Sales
Within the electronic components segment, sales into the communications market
comprise 26% of total sales in 2001, compared to 37% in 2000 and 45% in 1999,
with the decline resulting primarily from reduced customer demand for hand-held
wireless devices. Sales of electronic components into the automotive market were
20% in 2001 versus 15% in 2000 and 19% in 1999, although revenue dollars
actually decreased by $14.3 million in the three year period. Within the
electronic assemblies segment, sales into the communications market were 17% of
total sales in 2001, compared to 15% in 2000 and 10% in 1999, a result of the
growing demand since 1999 for integrated interconnect products for
infrastructure systems, such as base stations, switching equipment and fiber-
optic transmission equipment. Electronic assemblies sold into the computer
market were 28% of total sales in 2001, compared to 22% in 2000 and 13% in 1999,
the result of increased demand for integrated interconnect products for mass
data storage systems, internet access systems and network servers.
Most Recent Three Fiscal Years Discussion
- -----------------------------------------
The following table highlights significant information with regard to CTS'
overall results of operations during the past three fiscal years:
(In thousands of dollars)
December 31,
2001 2000 1999
---- ---- ----
Net sales $577,654 $866,523 $677,076
Cost of goods sold, excluding one-time charges 455,687 605,598 471,543
Cost of goods sold, one-time charges 10,676 -- --
Gross profit 111,291 260,925 205,533
Gross profit as a percent of sales 19.3% 30.1% 30.4%
Operating expenses 119,741 132,295 109,797
Restructuring and impairment charges 40,039 -- --
Acquired IPR&D -- -- 12,940
Operating earnings (loss) (48,489) 128,630 82,796
Earnings (loss) before income taxes (60,491) 117,127 74,055
Earnings (loss) from continuing operations (45,375) 84,331 51,468
Net loss from discontinued operations -- (529) --
Net earnings (loss) (45,375) 83,802 51,468
The 2001 net sales decreased $288.9 million, or 33%, from 2000. Of this
decrease, approximately $223.1 million resulted primarily from overall softness
in the demand for electronic components for wireless handsets and the associated
infrastructure equipment serving the communications market. In addition, $65.8
million of the decrease is due to lower demand for electronic assemblies serving
both the computer and communications markets.
The 2000 net sales increased $189.4 million, or 28% from 1999. This increase was
primarily due to growth during 2000 in electronic assemblies driven by
integrated interconnect systems which serve both the computer and communications
markets.
Sales into the computer market increased from 18% of total sales in 1999 to 31%
in 2001, while automotive market sales increased from 19% of total sales in 1999
to 20% in 2001. During this three-year comparative period, sales into the
automotive market decreased by $14.3 million, or 11%, as a result of lower
customer demand during 2001 and adjustments to customer inventory levels. Sales
into the computer market increased by $59.7 million, or 50%, primarily due to
the significant increase in integrated interconnect product sales within the
electronic assemblies
segment, related to storage and server end products. During the three-year
comparative period, sales into the communications market decreased by $124.7
million, or 33%, as demand for handset and infrastructure products declined
substantially during 2001 due to the overall economic and market conditions, as
well as excessive inventories held by service providers and handset and
equipment manufacturers.
CTS' 15 largest customers represented approximately 75% of net sales in 2001 and
2000 and 71% of net sales in 1999. Sales to Compaq accounted for 28% of total
net sales in 2001, 21% in 2000 and 11% in 1999. Sales to Motorola accounted for
17% of total net sales in 2001, 21% in 2000 and 23% in 1999.
CTS' products are usually priced with consideration to expected or required
profit margins, customer expectations and market competition. Pricing for most
of CTS' electronic component and assembly products generally decreases over time
and also fluctuates in accordance with total industry utilization of
manufacturing capacity. During 2001, pricing pressure for some of CTS'
electronic components was more significant than in prior periods due to excess
capacity within the electronics industry.
In 2001, gross profit decreased by $149.6 million from 2000 due to the reduced
sales volume, substantial and unusual pricing pressures and lower absorption of
fixed manufacturing overhead expenses. The 2001 decrease also includes $10.7
million of restructuring-related one-time costs. In 2000, gross profit dollars
were substantially improved over 1999, due primarily to the higher volume within
the integrated interconnect and RF integrated module product lines. However,
gross profit as a percent of sales in 2000 was slightly under 1999 due to the
lower margins within the integrated interconnect product lines.
Selling, general and administrative expenses decreased to $80.2 million in 2001
versus $94.5 million in 2000, reflecting Company initiatives to reduce costs in
the face of declining sales. This compares to $80.9 million in 1999.
Research and development expenses were $32.8 million in 2001 versus $32.6
million in 2000 and $25.3 million in 1999. Significant ongoing R&D activities
continue in our CTS Wireless business, and in the automotive and resistor
product lines, to support current product and process enhancements, expanded
applications and new product development.
Restructuring, Asset Impairment and Related One-Time Charges
- ------------------------------------------------------------
During the second quarter of 2001, CTS announced a restructuring plan designed
to size the Company to then-existing market realities, while continuing to put a
priority on positioning the Company to be successful as the economy recovers and
market growth returns. This plan consisted of $14.0 million of restructuring and
asset impairment charges and $13.0 million of related one-time charges. Of the
$13.0 million of related one-time charges,
$10.7 million was recorded in cost of goods sold during 2001, consisting
primarily of inventory write downs, equipment relocation and other
employee-related costs relating to restructuring activities. The remaining $2.3
million of related one-time charges is expected to be expensed during the first
half of 2002.
In the fourth quarter of 2001, CTS took additional steps to improve operational
efficiency and effectiveness by making organizational changes at several
business units that will allow us to further reduce operating expenses. CTS also
completed an assessment of the carrying value of its assets, in light of current
and expected market conditions. The review highlighted certain assets for which
no production demand or use currently exists or is forecasted to exist before
economic obsolescence of the asset. The fourth quarter 2001 actions resulted in
$26.0 million of restructuring and asset impairment charges.
The major actions under the 2001 restructuring plan include closing CTS'
Chung-Li, Taiwan, facility in the fourth quarter of 2001, and a decision to
dispose of its Longtan, Taiwan, building. The plan also covers ceasing
production at its Sandwich, Illinois; and Carlisle, Pennsylvania, facilities in
the second quarter of 2002 and discontinuing the manufacture of intermediate
frequency surface acoustical wave ("IF SAW") filters. IF SAW filter production
was stopped at the end of the second quarter of 2001. Amounts included in the
Consolidated Statement of Earnings (Loss) relating to the manufacture of IF SAW
filters were insignificant in 2001. The restructuring plan provides that
production formerly completed at its Chung-Li, Taiwan; Sandwich, Illinois; and
Carlisle, Pennsylvania, facilities be transferred to other existing CTS
manufacturing locations. CTS completed a substantial portion of these
consolidations and transfers within fiscal 2001 and the remainder is expected to
be completed in the first half of 2002.
The following table displays the 2001 restructuring and asset impairment
activity and restructuring reserve balances as of December 31, 2001:
($ in Millions) Total
Other Pension Restructuring
Workforce Exit Total Asset Curtailment and Asset
Reductions Costs Restructuring Impairment Gain Impairment
---------- ----- ------------- ---------- ---- ----------
Second quarter charge $6.4 $2.0 $8.4 $7.4 $(1.8) $14.0
Fourth quarter charge 3.2 0.4 3.6 23.6 (1.2) 26.0
---- ---- ---- ---- ---- ----
Total 2001 restructuring charge 9.6 2.4 12.0 $31.0 $(3.0) $40.0
Items paid in 2001 (6.8) (1.4) (8.2) ===== ===== =====
---- ---- ----
Accrual balance at December 31 $2.8 $1.0 $3.8
==== ==== ====
The $12.0 million restructuring charge relates to facility consolidations,
including plant closures and product consolidations. Included in this amount is
approximately $9.6 million of severance benefits associated with the separation
of approximately 1,500 employees. Approximately 12% of the employees to be
terminated are managerial employees and 88% are nonmanagement employees. As of
December 31, 2001, approximately $6.8 million of severance benefits, relating to
approximately 1,200 employees, has been paid. Of the $2.4 million of other exit
costs, which consists primarily of costs associated with the closing of the
plants, $1.4 million has been paid as of December 31, 2001.
The plan also includes $31.0 million of asset impairment charges. The impairment
charge includes $26.9 million to reduce certain assets held for sale to their
estimated fair value. See further discussion in Note E, "Assets Held for Sale."
An additional $1.2 million relates to the write-off of leasehold improvements,
primarily at its Chung-Li, Taiwan, facility. The remaining $2.9 million relates
to impairment of certain intangible assets associated with obsolete product and
technology acquired in the acquisition of the Component Product Division of
Motorola (see Note C, "Acquisition").
CTS also recognized a pension plan curtailment gain of approximately $3.0
million in 2001 resulting from plant closures under the restructuring plan.
The expected pre-tax profitability improvement associated with the second
quarter 2001 restructuring, asset impairment and related one-time charges is
estimated to be approximately $25 million annually beginning in 2003, based on
volume levels and mix in the fourth quarter of 2000. However, based on the
expected lower 2002 volume, the 2002 pre-tax profitability improvement is
estimated to be approximately $7 million. Additionally, the expected pre-tax
profitability improvement associated with the fourth quarter restructuring and
asset impairment charge is estimated to be approximately $8 million in 2002.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities in 2001 was $65.9 million, as CTS' net
loss of $45.4 million, adjusted for depreciation and amortization, restructuring
and impairment charges and deferred income taxes, provided $20.2 million.
Favorable working capital and other changes added $45.7 million.
Net cash provided by operating activities in 2000 was $110.9 million, as net
earnings of $83.8 million, adjusted for depreciation and amortization, and
deferred income taxes provided $131.2 million. This was partially offset by
unfavorable working capital and other changes of $20.3 million.
The 2001 cash used in investing activities was $66.9 million. This consisted
primarily of $77.7 million of capital expenditures including approximately $37.6
million for new products, technologies and selected capacity expansion, and
$40.1 million for land and building projects primarily in Asia. The 2000 use of
$126.3 million for investing activities consisted primarily of $119.2 million of
capital expenditures. These capital expenditures included approximately $83
million for new products, technologies and capacity expansion and $36 million
for land and building projects in Asia and the U.S. During 2001, certain
manufacturing equipment and the Company aircraft were sold for $15.5 million.
These proceeds were used to reduce outstanding indebtedness. These same assets
were subsequently leased back by the Company.
CTS expects its 2002 capital expenditures to approximate $35 million. These
capital expenditures will primarily be for new products and investments in cost
reduction programs.
In 2001, CTS' net cash used by financing activities totaled $6.3 million,
consisting primarily of an increase in borrowings of $34.0 million under the
revolving credit facility, net proceeds of 1.8 million shares issued to an
institutional investor for $25.8 million, and proceeds of stock option exercises
of $10.7 million. This was offset by the repayment of long-term obligations of
$69.5 million, repayment of short-term borrowings of $7.4 million and dividend
payments of $3.4 million.
In 2000, CTS' net cash provided by financing activities totaled $12.6 million,
consisting primarily of an increase in borrowings of $26.0 million under the
revolving credit facility and proceeds of stock option exercises of $4.2
million. This was offset by the installment repayment of a long-term loan of
$5.0 million, dividend payments of $3.3 million and the repurchase of 190,000
shares of common stock at a total cost of $9.3 million. Refer to Note M,
"Treasury Stock," for a description of CTS' stock repurchase plan.
Undistributed earnings of certain non-U.S. subsidiaries amount to approximately
$125 million at December 31, 2001. Prior year earnings are intended to be
invested indefinitely and, accordingly, no provision has been made for non- U.S.
withholding taxes. In the event all undistributed earnings were remitted,
approximately $7 million of withholding tax would be imposed.
As described in Note C, "Acquisition," CTS acquired the Component Products
Division of Motorola for $94.0 million and assumed approximately $49 million of
Motorola obligations. In addition, CTS may be obligated to pay additional
amounts in 2003 and 2004 depending upon increased sales and profitability of CTS
Wireless in 2002 and 2003. This obligation resulted in an additional payment of
$11.2 million for 1999, which was paid in 2000. The calculated obligation for
2000 resulted in an amount due to Motorola of $14.9 million for 2000, which CTS
offset against amounts due from Motorola in September 2001. No amounts are due
Motorola under the
calculation for 2001. The maximum remaining potential payment under the
acquisition agreement was $34.8 million at December 31, 2001.
On December 20, 2001, CTS amended its credit agreement with its existing nine
banks. The agreement includes a revolving credit facility commitment totaling
$125 million, expiring in December 2003, and term loans, which expire in
December 2004, with outstanding balances of $56.5 million at December 31, 2001,
after prepayments of principal made during the third and fourth quarters of 2001
totaling $44.5 million. The $56.5 million of term loans mature as follows:
2002--$27.5 million; 2003--$25.5 million; and 2004--$3.5 million.
These debt agreements contain financial covenants as described in Note G,
"Long-term Debt and Other Long-term Obligations." Although CTS management
currently expects to be in compliance with all financial covenants through
December 31, 2002, there can be no assurance of this. Certain factors, such as
forecasted future operating results, are dependent upon future events, some of
which are beyond CTS' ability to control. If CTS is unable to comply with its
financial covenants, it will seek to obtain amendments or waivers from the
lenders and/or identify other sources of liquidity such as raising additional
capital or disposing of assets, including assets held for sale.
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 fourth
quarter of 2001, CTS issued $29.5 million of common stock under this
registration statement and received net proceeds of $29.3 million. Thus far
during the first quarter of 2002 (through March 4, 2002), CTS issued $28.3
million of common stock under this registration statement and received net
proceeds of $28.1 million. CTS used the net proceeds of each of these equity
issuances to repay term loans under its credit agreement. As of March 4, 2002,
CTS could offer up to approximately $442.2 million of additional debt and/or
equity securities under this registration statement.
During 2002, CTS is required to repay $27.5 million of term loans under its
credit agreement and to make $5.9 million of lease payments. Of the $28.1
million of debt repaid during the first quarter of 2002 (as of March 4, 2002),
$12.6 million was allocated to the $27.5 million of term loans required to be
repaid during 2002, leaving $14.9 million of term loans to be repaid during the
remainder of 2002. CTS expects total capital expenditures of $35 million during
2002. CTS has historically been able to fund its capital and operating needs
through its cash flows from operations and available credit under its bank
credit facilities.
The covenants under the credit agreement become more restrictive at March 31,
2002 and at quarterly intervals thereafter, as CTS' forecasted EBITDA and
projected debt repayments reduce CTS' need for additional borrowings under the
credit agreement. Management believes that these covenants will result in a
portion of additional
borrowings under its revolving credit facility being unavailable at March 31,
2002 and, perhaps, thereafter. Nonetheless, CTS believes that cash flow from
operations and available borrowings under its revolving credit facility will be
adequate to fund its working capital, restructuring activities, capital
expenditures and debt service requirements through December 31, 2002. However,
if customer demand decreases significantly from forecasted levels or pricing
pressures continue to reduce revenues or profit margins significantly, CTS may
need to find an alternative funding source. In this event, CTS may choose to
pursue additional equity and/or debt financing. CTS may not be able to obtain
additional financing, which would be affected by general economic and market
conditions, on terms acceptable to CTS or at all.
Market Risk
- -----------
CTS is exposed to market risk, including changes in foreign currency exchange
rates, forward contracts and interest rates. As discussed in Note A, "Summary of
Significant Accounting Policies" to the consolidated financial statements, the
financial statements of all 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. The market risk associated with foreign currency
exchange rates is not material in relation to CTS' consolidated financial
position, results of operations or cash flows. The Company does not have any
significant trade accounts receivable, trade accounts payable, commitments, or
borrowings in a currency other than that of the reporting unit's functional
currency. As such, CTS does not utilize a significant number of derivative
financial instruments to manage the exposure in the United Kingdom or its other
non- U.S. operations.
CTS has forward contracts in place to mitigate the risk of market price
fluctuations of palladium, which is used in its manufacturing process. These
forward contracts, which are not material, are fully described in Note A,
"Summary of Significant Accounting Policies," under " Financial Instruments."
As part of CTS' risk management program, CTS performs sensitivity analyses to
assess potential gains and losses in earnings and changes in fair value relating
to hypothetical movements in interest rates. A 65-basis-point increase in
interest rates (approximately 10% of CTS' weighted-average interest rate) on
variable-rate debt instruments would have increased CTS' 2001 and 2000 interest
expense by $1.4 million and $1.1 million, respectively, and would have an
immaterial effect on the fair value of the debt instruments as of the end of
such fiscal years.
# # # # # # #
Statements about the Company's earnings outlook and its plans, estimates and
beliefs concerning the future are forward-looking statements, within the meaning
of the Private Securities Litigations Reform Act of 1995, based on the Company's
current expectations. Actual results may differ materially from those stated in
the forward-looking
statements due to a variety of factors which could affect the Company's
operating results, liquidity and financial condition. We undertake no
obligations to publicly update or revise any forward-looking statements. Factors
that could impact future results include among others: the impact of the
September 11 terrorist attacks, the U.S. response to the attacks, and the
general slowdown in the communications, computer and automotive markets, and in
the overall economy; whether the Company is able to implement measures to
improve its financial condition and flexibility; the Company's successful
execution of its restructuring, consolidation and cost-reduction plans; pricing
pressures and demand for the Company's products, especially if economic
conditions worsen or do not recover in the key markets for the Company's
products; the ability to access additional sources of liquidity, if necessary,
through borrowings and/or sales of equity securities on terms acceptable to the
Company; and risks associated with our international operations, including trade
and tariff barriers, exchange rates and political risks. Investors are
encouraged to examine the Company's SEC filings, which more fully describe the
risks and uncertainties associated with the Company's business.
The management's discussion and analysis of financial condition and results of
operations (1999-2001) included in the printed and bound annual report also
includes four graphs, which are briefly described below:
Graph #1: Entitled "Sales Per Employee (based on employees at year end)" shows a
bar graph of annual sales per employee for each year ending December 31, 1999,
2000 and 2001, based on the number of employees at year end. The amounts shown
are $88,000 in 1999, $96,000 in 2000 and $99,000 in 2001.
Graph #2: Entitled "R&D Expenses" shows a bar graph of annual research and
development expenses in dollars and as a percentage of sales for each year
ending December 31, 1999, 2000 and 2001. The amounts shown are $25.3 million, or
3.7% of sales in 1999, $32.6 million, or 3.8% of sales in 2000 and $32.8
million, or 5.7% of sales in 2001.
Graph #3: Entitled "Working Capital as a Percent of Sales - Year End" shows a
bar graph of working capital at year end as a percentage of sales for each year
ending December 31, 1999, 2000 and 2001. The amounts shown are 14.7% in 1999,
11.9% in 2000 and 8.1% in 2001.
Graph #4: Entitled "Debt/Capitalization Ratio - Year End" shows a bar graph of
the debt/capitalization percentage at December 31, 1999, 2000 and 2001. The
amounts shown are 51.4% for 1999, 44.2% for 2000 and 38.6% for 2001.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of CTS Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings (loss), shareholders' equity and cash flows
present fairly, in all material respects, the financial position of CTS
Corporation and its subsidiaries at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/S/
- --------------------------------------
[PricewaterhouseCoopers LLP (signed)]
February 27, 2002
Consolidated Statements of Earnings (Loss)
- ------------------------------------------
(In thousands of dollars except per share amounts)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net sales $ 577,654 $ 866,523 $ 677,076
Costs and expenses:
Cost of goods sold 466,363 605,598 471,543
Selling, general and administrative expenses 80,214 94,501 80,866
Research and development expenses 32,762 32,583 25,348
Amortization of intangible assets 6,765 5,211 3,583
Restructuring and impairment charges - Note B 40,039 - -
Acquired in-process research and development (IPR&D) - - 12,940
-------- -------- --------
Operating earnings (loss) (48,489) 128,630 82,796
-------- -------- --------
Other (expense) income:
Interest expense (12,775) (13,050) (9,944)
Interest income 744 846 865
Other 29 701 338
-------- -------- --------
Total other expense (12,002) (11,503) (8,741)
-------- -------- --------
Earnings (loss) before income taxes (60,491) 117,127 74,055
Income tax expense (benefit) -- Note J (15,116) 32,796 22,587
-------- -------- --------
Earnings (loss) from continuing operations (45,375) 84,331 51,468
-------- -------- --------
Discontinued operations:
Loss from discontinued operations, net of income tax
benefit of $355 -- Note D
- (529) -
-------- ------- --------
Net earnings (loss) $ (45,375) $ 83,802 $ 51,468
========= ======== ========
Earnings (loss) per share -- Note P
Basic:
Continuing operations ($1.61) $3.05 $1.87
Discontinued operations - (0.02) -
-------- -------- --------
Net earnings (loss) per share ($1.61) $3.03 $1.87
======== ======== ========
Diluted:
Continuing operations ($1.61) $2.94 $1.80
Discontinued operations - (0.02) -
-------- -------- --------
Net earnings (loss) per share ($1.61) $2.92 $1.80
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheets
- ---------------------------
(In thousands of dollars)
December 31,
------------
2001 2000
---- ----
ASSETS
Current Assets
Cash and equivalents $ 13,255 $ 20,564
Accounts receivable, less allowances
(2001 -- $1,470; 2000 -- $1,837) 81,563 145,920
Inventories
Finished goods 19,660 29,756
Work-in-process 3,610 16,490
Raw materials 26,879 58,070
---------- ----------
Total Inventories 50,149 104,316
Other current assets 4,371 8,920
Deferred income taxes -- Note J 51,336 25,976
---------- ----------
Total current assets 200,674 305,696
Property, Plant and Equipment
Buildings and land 111,346 96,690
Machinery and equipment 287,824 317,390
---------- ----------
Total property, plant and equipment 399,170 414,080
Accumulated depreciation (207,212) (189,219)
---------- ----------
Net property, plant and equipment 191,958 224,861
Other Assets
Prepaid pension asset -- Note I 102,196 84,301
Intangible assets 63,589 64,177
Accumulated amortization (19,585) (10,571)
Assets held for sale -- Note E 21,940 -
Other 7,159 4,465
---------- ----------
Total other assets 175,299 142,372
---------- ----------
Total Assets $567,931 $672,929
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt -- Note G $ 27,500 $ 10,000
Notes payable -- Note F - 7,397
Accounts payable 50,842 100,394
Accrued salaries, wages and vacation 12,847 17,016
Income taxes payable 23,921 18,374
Other accrued liabilities 38,747 49,710
--------- ---------
Total current liabilities 153,857 202,891
Long-term debt -- Note G 125,013 178,000
Other long-term obligations -- Note G 2,836 6,689
Deferred income taxes -- Note J 38,914 34,612
Postretirement benefits -- Note I 4,438 4,380
Contingencies -- Note N - -
Shareholders' Equity
Preferred stock -- authorized 25,000,000 shares without
par value; none issued -- Note L - -
Common stock -- authorized 75,000,000 shares without par
value; 48,531,936 shares issued
at December 31, 2001 and 48,436,908 share issued at
December 31, 2000 -- Note L 213,947 198,877
Additional contributed capital 24,153 14,558
Retained earnings 276,988 325,850
Accumulated other comprehensive loss (1,702) (1,561)
--------- ---------
513,386 537,724
Cost of common stock held in treasury
(2001 -- 17,630,192 shares; 2000 -- 20,655,721 shares) (270,513) (291,367)
-- Note M --------- ---------
Total shareholders' equity 242,873 246,357
--------- ---------
Total Liabilities and Shareholders' Equity $567,931 $672,929
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows
- -------------------------------------
(In thousands of dollars)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $(45,375) $ 83,802 $ 51,468
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 51,674 44,325 33,907
Restructuring and impairment charges 40,039 - -
Deferred income taxes (26,201) 3,077 (5,337)
Income tax benefit related to exercised stock options 3,687 6,395 -
Acquired in-process research and development - - 12,940
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable 64,357 (21,238) (77,639)
Inventories 44,780 (26,278) (24,853)
Prepaid pension asset (14,937) (15,311) (6,368)
Accounts payable and accrued liabilities (62,275) 30,505 72,126
Income taxes payable 5,547 6,187 1,958
Net loss from discontinued operations - 529 -
Other 4,556 (1,456) (1,348)
-------- -------- --------
Total adjustments 111,227 26,735 5,386
-------- -------- --------
Net cash provided by continuing operations 65,852 110,537 56,854
Net cash provided by (used in) discontinued operations - 318 (1,161)
-------- -------- --------
Net cash provided by operating activities 65,852 110,855 55,693
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment,
including discontinued operations 15,499 7,000 28,646
Payment for purchase of CTS Wireless - (11,200) (97,445)
Capital expenditures (77,654) (119,216) (32,896)
Other (4,758) (2,922) (2,932)
-------- -------- --------
Net cash used in investing activities (66,913) (126,338) (104,627)
-------- -------- --------
Cash flows from financing activities:
Payments of short-term borrowings (7,396) (31) -
Proceeds from issuance of long-term debt 34,000 26,000 97,445
Payments of long-term debt (69,487) (5,000) (28,445)
Issuance of common stock 29,304 - -
Dividends paid (3,429) (3,337) (3,301)
Purchases of treasury stock - (9,284) (9,175)
Exercise of stock options 10,684 4,221 851
-------- -------- --------
Net cash provided by (used in) financing activities (6,324) 12,569 57,375
Effect of exchange rate changes on cash 76 (741) (495)
-------- -------- --------
Net increase (decrease) in cash (7,309) (3,655) 7,946
Cash and equivalents at beginning of year 20,564 24,219 16,273
-------- -------- --------
Cash and equivalents at end of year $ 13,255 $ 20,564 $ 24,219
======== ======== ========
Supplemental cash flow information
Cash paid (received) during the year for:
Interest $ 13,285 $ 13,094 $ 9,711
Income taxes -- net (1,661) 13,914 24,195
Noncash investing and financing activities
Common stock issued in connection with DCA acquisition $ 1,090 $ 199 $ 595
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
(In thousands of dollars)
Accumulated
Other
Additional Comprehensive Comprehensive
Common Contributed Retained Earnings Earnings Treasury
Stock Capital Earnings (Loss) (Loss) Stock Total
----- ------- -------- ------------- ----------- --------- -----
===================================================================================================================================
Balances at December 31, 1998 $190,347 $ 10,872 $197,285 $ 806 $(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 M (9,175) (9,175)
Issued 51,816 shares to former DCA shareholders 595 595
===================================================================================================================================
Balances at December 31, 1999 193,612 9,005 245,414 291 (283,558) 164,764
Net earnings 83,802 83,802 83,802
Cumulative translation adjustment (net of tax 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 M (9,284) (9,284)
Issued 17,304 shares to former DCA
shareholders 199 199
===================================================================================================================================
Balances at December 31, 2000 198,877 14,558 325,850 (1,561) (291,367) 246,357
Net loss (45,375) (45,375) (45,375)
Cumulative translation adjustment (net of tax of $203) (474) (474) (474)
Deferred gain on forward contract (net of tax of $222) 333 333 333
---------
Comprehensive loss $(45,516)
=========
Cash dividends of $0.12 per share (3,487) (3,487)
Returned 16,950 shares to treasury forfeited from
restricted stock and cash bonus plan -- net 59 (17) (42)
Issued 1,015,531 shares on exercise
of stock option -- net 13,575 (3,026) 3,822 14,371
Stock compensation 346 408 754
Issued 1,800,000 shares under shelf registration 9,585 16,208 25,793
Issued 226,948 shares under Direct Stock Purchase Plan 2,645 866 3,511
Issued 94,956 shares to former DCA shareholders 1,090 1,090
===================================================================================================================================
Balances at December 31, 2001 $213,947 $24,153 $276,988 $(1,702) $(270,513) $242,873
===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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 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. Refer to Note I, "Employee Retirement Plans."
Intangible Assets: Intangible assets include tradenames, technology and customer
lists that are amortized over 4- 30 years. The Company reviews the carrying
value of the intangible assets whenever events or changes in circumstances
indicate an impairment may have occurred.
Assets Held for Sale: CTS classifies assets which have been removed from
service and are to be disposed of as assets held for sale. Refer to Note E,
"Assets Held for Sale."
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 pursuant to the requirements of
the Financial Accounting Standards Board ("FAS") Statement No. 109, "Accounting
for Income Taxes." Under FAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and income
tax bases of assets and liabilities and carryforwards using currently enacted
tax rates. CTS estimates its income tax valuation allowance by assessing which
deferred tax assets are more likely than not to be recovered in the future.
Refer to Note J, "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 "accumulated other comprehensive loss"
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, obligations under long-term
debt, and forward contracts on palladium purchases. 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, 2001 and 2000 approximates fair
value where fair value is based on market prices for the same or similar debt
and maturities.
At December 31, 2001, the Company had forward contracts in place to mitigate the
risk of market price fluctuations of palladium, which is used in its
manufacturing process. Changes in the market value of these contracts, which
expire monthly in 2002, are deferred until the gain or loss is recognized on the
hedged commodity. No amounts were recorded in the Consolidated Statement of
Earnings (Loss) related to these forward contracts for the year ended December
31, 2001. The estimated fair value of the palladium forward contracts is based
on the difference between the contractual forward rate and the applicable
forward rate on December 31, 2001. In accordance with FAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," the Company has classified
these forward contracts as cash-flow hedges and recorded them at their estimated
fair value at December 31, 2001, and recorded the fair value as a component of
comprehensive earnings (loss) as shown in the Consolidated Statement of
Shareholders' Equity.
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 markets, primarily in
North America, Europe and Asia. CTS performs ongoing credit evaluations of its
customers to minimize credit risk. CTS generally does not require collateral.
Sales to Compaq Computer Corporation ("Compaq") were approximately 28% and sales
to Motorola, Inc. ("Motorola") were approximately 17% of sales for the year
ended December 31, 2001. Amounts due from Compaq and Motorola aggregated $36
million at December 31, 2001. Sales to Motorola and Compaq were each
approximately 21% of sales for the year ended December 31, 2000. Sales to
Motorola and Compaq were 23% and 11%, respectively, of sales for the year ended
December 31, 1999. Significant sales to a single customer expose CTS to a
concentration of credit risk. Management, however, 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. See Note H, "Stock Plans," for pro forma net earnings and net
earnings per share disclosures required by FAS No. 123, "Accounting for
Stock-Based Compensation."
Earnings Per Share: Basic and diluted earnings per common share are reported in
conformity with FAS No. 128, "Earnings per Share." Basic earnings per share
exclude any dilution and is computed by dividing net earnings available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common stock resulted in
the issuance of common stock that shared in the earnings of CTS. Diluted
earnings per share is computed by dividing net earnings by the weighted-average
number of common shares outstanding during the period plus the incremental
shares that would have been outstanding upon the assumed exercise of dilutive
securities. If the common stock equivalents have an anti-dilutive effect, they
are excluded from the computation of
diluted earnings per share. Refer to Note P, "Earnings Per Share," for the
reconciliation of the numerator and denominator of the basic and diluted EPS
computations.
Comprehensive Earnings: CTS reports comprehensive earnings in accordance with
FAS No. 130, "Reporting Comprehensive Income." The components of comprehensive
earnings for CTS include foreign translation adjustments, unrealized gains on
forward contracts and net earnings and are reported within the Statements of
Shareholders' Equity in the columns titled "Comprehensive Earnings (Loss)" and
"Accumulated Other Comprehensive Earnings (Loss)."
Accounting Pronouncements: In 2001, the FASB issued Statements No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."
FAS No. 141 requires business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill. FAS No. 142 requires goodwill and certain
intangibles no longer be amortized, but instead be tested for impairment at
least annually. The FASB also issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS No. 144 defines impairment of
long-lived assets and provides guidance on the measurement of asset impairments.
The Company does not expect the impact of adopting these new standards, which
are effective for CTS on January 1, 2002, 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.
NOTE B--Restructuring and Impairment Charges:
- ---------------------------------------------
In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment
charges, $14.0 million in the second quarter and $26.0 million in the fourth
quarter. Plan actions were designed to permit the Company to operate more
efficiently in the then-existing environment and, at the same time, position the
Company for success when the economy improves. Major actions under the
restructuring plan include closing its Chung-Li, Taiwan, facility in the fourth
quarter of 2001 and a decision to dispose of its Longtan, Taiwan, building. The
plan also covers ceasing production at its Sandwich, Illinois; and Carlisle,
Pennsylvania, facilities in the second quarter of 2002 and discontinuing the
manufacture of intermediate frequency surface acoustical wave ("IF SAW")
filters. IF SAW filter production was stopped at the end of the second quarter
of 2001. Amounts included in the Consolidated Statement of Earnings (Loss)
relating to the manufacture of IF SAW filters were insignificant in 2001. The
restructuring plan provides that production formerly completed at its Chung-Li,
Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities
be transferred to other existing CTS manufacturing
locations. CTS completed a substantial portion of these consolidations and
transfers in fiscal 2001 and the remainder are expected to be completed in the
first half of 2002.
The following table displays the 2001 restructuring activity and restructuring
reserve balances as of December 31, 2001:
Workforce Other
Reductions Exit Costs Total
($ in millions)
Second quarter charge $6.4 $2.0 $8.4
Fourth quarter charge 3.2 0.4 3.6
---- ---- ----
Total 2001 restructuring charge 9.6 2.4 12.0
Items paid in 2001 (6.8) (1.4) (8.2)
---- ---- ---- ----
Reserve balance at December 31 $2.8 $1.0 $3.8
==== ==== ====
The $12.0 million restructuring charge relates to facility consolidations,
including plant closures and product consolidations. Included in this amount is
approximately $9.6 million of severance benefits associated with the separation
of approximately 1,500 employees. Approximately 12% of the employees to be
terminated are managerial employees and 88% are nonmanagement employees. As of
December 31, 2001, approximately $6.8 million of severance benefits, relating to
approximately 1,200 employees, had been paid. Of the $2.4 million of other exit
costs, which consists primarily of costs associated with the closing of the
plants, $1.4 million has been paid as of December 31, 2001.
The restructuring plan also includes $31.0 million of asset impairment charges.
Approximately $26.9 million of the impairment charge is the adjustment needed to
reduce certain assets held for sale to their estimated fair value. See further
discussion in Note E, "Assets Held for Sale." An additional $1.2 million relates
to the write-off of leasehold improvements, primarily at its Chung-Li, Taiwan,
facility. The remaining $2.9 million relates to impairment of certain intangible
assets associated with obsolete products and technology acquired in the
acquisition of the Component Products Division of Motorola (see Note C,
"Acquisition").
CTS also recognized pension plan curtailment gains of approximately $3.0 million
in 2001 resulting from plant closures under the restructuring plan.
Also during 2001, CTS recorded in cost of sales, $10.7 million of one-time
charges, consisting primarily of inventory write downs, equipment relocation and
other employee related costs relating to restructuring activities.
NOTE C--Acquisition
- -------------------
On February 26, 1999, CTS completed the acquisition of certain assets and
liabilities of the Component Products Division of Motorola ("CTS Wireless"). At
the time of the acquisition, CTS Wireless designed and manufactured electronic
components and assemblies including ceramic filters, quartz crystals, crystal
oscillators, surface acoustic wave components and piezoceramic devices in five
facilities in the U.S. 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 in 2003 and 2004 depending upon
increased sales and profitability of CTS Wireless in 2002 and 2003. This
obligation resulted in a payment of $11.2 million for 1999, which was paid in
2000. The calculated obligation for 2000 resulted in an amount due to Motorola
of $14.9 million, which CTS offset against amounts due from Motorola in
September 2001. No amounts are due to Motorola under the calculation for 2001.
The maximum remaining potential payment under the acquisition agreement was
$34.8 million at December 31, 2001.
NOTE D--Discontinued Operations
- -------------------------------
During 1998, CTS finalized a plan to sell all of the businesses obtained in its
1997 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 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, and
1999, CTS received gross proceeds related to the sale of discontinued operations
of $4 million and $31 million, respectively.
Note E---Assets Held for Sale
- -----------------------------
Assets held for sale at December 31, 2001, are comprised of facilities,
primarily the Longtan, Taiwan, building, and equipment that have been removed
from service and are to be disposed of pursuant to the restructuring activities
commenced in fiscal year 2001. Refer to Note B, "Restructuring and Impairment
Charges." The Company completed an assessment in the fourth quarter of 2001 of
the carrying value of its assets in light of current and expected market
conditions. The review highlighted certain assets for which no production demand
or use currently exists or is forecasted to exist before economic obsolescence
of the asset. In accordance with FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," an impairment
loss was recorded to reduce these assets to their estimated fair value. These
assets are recorded at amounts not in excess of what management currently
expects to receive upon sale, less cost of disposal; however, the amounts the
Company will ultimately realize are dependent on numerous factors, some of which
are beyond management's
ability to control, and could differ materially from the amounts currently
recorded. Management cannot determine when the sale of these assets will be
completed. The assets to be disposed of are held by both the electronic
components and electronic assemblies segments.
Note F--Notes Payable
- ---------------------
CTS had unsecured line of credit arrangements of $21,817 and $18,317 at December
31, 2001, and 2000, 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 $9,947 and $3,438 during 2001 and 2000, respectively.
The weighted-average interest rate, computed by relating interest expense to
average daily short-term borrowings, was 6.1% in 2001 and 8.8% in 2000.
NOTE G--Long-term Debt and Other Long-term Obligations
- ------------------------------------------------------
Long-term debt was comprised of the following at December 31:
2001 2000
---- ----
Term loans at 5.53% (2001) and 6.84% (2000), due in quarterly
installments through December 2004 $ 56,513 $ 61,000
Revolving credit agreement, average interest rate of 4.77% (2001) and
7.15% (2000), due in 2003 54,000 85,000
Industrial revenue bonds at a weighted-average rate of 7.50%, due in 2013 42,000 42,000
------- -------
152,513 188,000
Less current maturities 27,500 10,000
------- -------
Total long-term debt $125,013 $178,000
======== ========
On December 20, 2001, CTS amended its credit agreement with its existing nine
banks. The agreement includes a revolving credit facility commitment totaling
$125 million, expiring in December 2003, and term loans, which expire in
December 2004, with outstanding balances of $56.5 million, after prepayments of
principal made during third and fourth quarters of 2001 totaling $44.5 million.
The $56.5 million of term loans mature as follows: 2002--$27.5 million;
2003--$25.5 million; and 2004--$3.5 million.
The new agreement categorized all existing debt as senior to any future debt.
The debt is collaterized by substantially all U.S. assets and a pledge of 65% of
the stock of certain non-U.S. subsidiaries. Interest rates on these borrowings
fluctuate based upon LIBOR, with adjustments based on the ratio of CTS'
consolidated senior indebtedness to consolidated earnings before interest,
taxes, depreciation and amortization. CTS pays a commitment fee that varies
based on performance under certain financial covenants applicable to the undrawn
portion of the revolving credit agreement. At December 31, 2001, that fee was
0.75 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 maximum leverage
ratio. These covenants could reduce the borrowing availability under the credit
agreement. Additionally, the credit agreement limits the amount allowed for
dividends, capital expenditures and acquisitions and requires the proceeds of
all asset sales be applied against outstanding borrowings. Furthermore, it
requires repayment in an amount of 90% of excess cash flow, as defined therein.
While CTS management currently expects to be in compliance with all financial
covenants through December 31, 2002, there can be no assurance of this since
certain factors, such as forecasted future operating results, are dependent upon
events, some of which are beyond CTS' ability to control. If CTS is unable to
comply with financial covenants, it will seek to obtain amendments or waivers
from the lenders and/or identify other sources of liquidity such as raising
additional capital and/or the sale of certain assets, including assets held for
sale.
Debt relating to the industrial revenue bonds was assumed from Motorola (Note C,
"Acquisition"), and is collateralized by the land, building and equipment
acquired with the bonds.
Other long-term obligations were comprised of the following at December 31:
2001 2000
---- ----
Untendered shares of DCA $1,851 $2,941
Contractual DCA employee termination
benefits, payable ratably through 2007 766 3,501
Other 219 247
------ -------
Total other long-term obligations $2,836 $ 6,689
====== =======
In connection with the acquisition of DCA in 1997, CTS is required to make
contractual payments for severance and medical benefits to certain former
employees of DCA until 2007. In addition, CTS continues to carry a liability for
CTS common stock to be issued to DCA shareholders who have not yet tendered
their stock certificates for exchange.
NOTE H--Stock Plans
- -------------------
At December 31, 2001, CTS had five 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 FAS No. 123,
CTS' net earnings (loss) and net earnings (loss) per share would have been
adjusted to the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
Net earnings (loss) As reported $(45,375) $83,802 $51,468
Pro forma $(48,029) $81,914 $50,825
Net earnings (loss) per share --diluted As reported $(1.61) $2.92 $1.80
Pro forma $(1.70) $2.86 $1.78
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 2001, 2000 and
1999: dividend yield of 0.52%, 0.23% and 0.37%, respectively; expected
volatility of 74.87%, 33.17% and 19.82%, respectively; risk-free interest rate
of 4.51%, 5.12% and 5.86%, respectively, and expected life of 4.6, 5.1 and 5.2
years, respectively.
CTS has two plans, the 1996 Stock Option Plan ("1996 Plan") and the 2001 Stock
Option Plan ("2001 Plan"), which provide for grants of incentive stock options
or nonqualified stock options to officers and key employees. Options are granted
at the fair market value on the grant date and are exercisable in cumulative
annual installments over a maximum ten-year period, commencing at least one year
from the date of grant. The following table summarizes the status of these plans
as of December 31, 2001:
2001 Plan 1996 Plan
--------- ---------
Options originally available 2,000,000 1,200,000
Options outstanding 531,425 513,950
Options exercisable --- 210,050
During 1997, 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. Of the 2,400,000 options granted
under the nonqualified plan, 242,564 were exercisable at December 31, 2001.
A summary of the status of stock options as of December 31, 2001, 2000 and 1999,
and changes during the years ended on those dates, is presented below.
2001 2000 1999
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year 1,736,197 $ 17.53 2,103,460 $ 12.61 2,138,208 $ 10.05
Granted 724,800 22.92 193,500 51.44 213,700 33.61
Exercised (1,017,633) 10.59 (533,813) 9.64 (179,848) 6.46
Expired or canceled (155,425) 36.48 (26,950) 33.79 (68,600) 15.51
--------- --------- ---------
Outstanding at end of year 1,287,939 $ 23.69 1,736,197 $17.53 2,103,460 $ 12.61
========= ========= =========
Options exercisable at
year end 452,614 1,341,497 1,745,360
Weighted-average fair value
of options granted during
the year $ 12.79 $19.14 $10.05
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/01 Life (Years) Price at 12/31/01 Price
$10.42-15.55 462,364 5.40 $12.17 334,364 $11.42
17.15-25.10 528,425 8.73 22.56 5,600 24.47
33.63-50.00 283,250 8.19 42.64 107,050 39.43
54.75-79.25 13,900 8.10 64.33 5,600 66.14
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 $632, $132 and ($3,644) in 2001,
2000 and 1999, 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 $102, $232 and $363 in 2001, 2000 and 1999,
respectively.
NOTE I--Employee Retirement Plans
- ---------------------------------
Defined benefit plans
- ---------------------
CTS has a number of noncontributory defined benefit pension plans ("Pension
Plans") covering approximately 33% 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.
CTS provides postretirement life insurance benefits for certain retired
employees. Domestic employees who were hired prior to 1982 and certain domestic
union employees are eligible for life insurance benefits upon retirement. CTS
funds life insurance benefits through term life insurance policies. CTS plans to
continue funding premiums on a pay-as-you-go basis.
The following provides a reconciliation of benefit obligations, plan assets, and
the funded status of the Pension Plans and other postretirement benefits.
Other
Postretirement
Pension Benefits Benefits
2001 2000 2001 2000
Change in benefit obligation:
Benefit obligation at January 1 $155,711 $143,747 $ 4,196 $ 4,130
Service cost 6,527 6,303 40 38
Interest cost 11,333 10,641 305 297
Curtailment gains (4,742) -- -- --
Actuarial loss 1,929 2,323 266 2
Benefits paid (8,173) (7,303) (278) (271)
-------- -------- -------- -------
Benefit obligation at December 31 $162,585 $155,711 $ 4,529 $ 4,196
======== ======== ======== =======
Change in plan assets:
Assets at fair value at January 1 $303,090 $357,973 $ -- $ --
Actual return on assets (30,893) (48,166) -- --
Company contributions 1,118 784 278 271
Benefits paid (8,173) (7,303) (278) (271)
Administrative and other (433) (198) -- --
------- ------- -------- -------
Assets at fair value at December 31 $264,709 $303,090 $ -- $ --
======== ======== ========= =======
Reconciliation of prepaid (accrued) cost:
Funded status of the plan $102,124 $147,379 $ (4,529) $(4,196)
Unrecognized net gain (5,939) ( 70,843) (165) (442)
Unrecognized prior service cost 7,064 9,041 7 8
Unrecognized transition asset (1,053) (1,276) -- --
------- ------- -------- -------
Prepaid (accrued) cost $102,196 $ 84,301 $ (4,687) $(4,630)
======== ======== ======== =======
Net pension (income)/postretirement expense in 2001, 2000 and 1999 includes the
following components:
Other
Postretirement
Pension Benefits Benefits
2001 2000 1999 2001 2000 1999
Service cost -- benefits
earned during the year $ 6,527 $ 6,303 $ 5,483 $ 40 $ 38 $ 42
Interest cost on projected
benefit obligation 11,333 10,641 9,574 305 297 293
Curtailment gains (2,958) -- -- -- -- --
Expected return on plan
assets (28,448) (26,873) (18,758) -- -- --
Net amortization and
deferral (3,368) (4,598) (2,667) -- (1) 1
-------- --------- -------- ---- ---- ----
Net (income) expense $(16,914) $ (14,527) $ (6,368) $345 $334 $336
======== ========= ======== ==== ==== ====
Actuarial assumptions:
Discount rate as of
December 31 7.25% 7.50% 7.50% 7.25% 7.50% 7.50%
Expected return on
plan assets 9.75% 9.75% 9.75% -- -- --
Rate of compensation
increase 5%-7% 5%-7% 5%-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 2001 pension curtailment gains resulted from plant closings that occurred as
part of the restructuring initiatives discussed in Note B, "Restructuring and
Impairment Charges."
The majority of U.S. defined benefit pension plan assets are invested in common
stock, including approximately $23 million and $53 million in CTS common stock
at December 31, 2001, and 2000, 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 $3,676 in 2001, $4,082 in 2000 and
$2,821 in 1999.
NOTE J--Income Taxes
- --------------------
Earnings (loss) from continuing operations before income taxes consist of the
following:
2001 2000 1999
Domestic $(54,700) $ 39,568 $20,770
Non-U.S. (5,791) 77,559 53,285
-------- -------- -------
Total $(60,491) $117,127 $74,055
======== ======== =======
Significant components of income tax provision (benefit) are as follows:
2001 2000 1999
Current:
Federal $ -- $ 1,158 $11,736
State 259 619 2,975
Non-U.S. 9,162 27,941 13,079
------ ------ ------
Total current 9,421 29,718 27,790
Deferred:
Federal (16,622) 4,604 (4,585)
State (3,077) 597 (965)
Non-U.S. (4,838) (2,123) 347
------- ------ ------
Total deferred (24,537) 3,078 (5,203)
------- ------ ------
Total provision (benefit)
for income taxes $(15,116) $32,796 $22,587
======== ======= =======
Significant components of CTS' deferred tax liabilities and assets at December
31, 2001, and 2000 are:
2001 2000
Pensions $38,439 $ 31,145
Depreciation 4,941 6,698
Basis difference-acquired assets 1,981 2,073
Other 475 1,648
------ ------
Gross deferred tax liabilities 45,836 41,564
------ ------
Postretirement benefits 1,810 1,759
Inventory items 7,377 3,173
Loss carryforwards 15,851 -
Credit carryforwards 6,639 992
Nondeductible accruals 14,307 14,287
Nonrecurring compensation charge 572 2,913
Restructuring and asset impairment 11,072 --
Other 12,249 9,911
------ ------
Gross deferred tax assets 69,877 33,035
------ ------
Net deferred tax assets (liabilities) 24,041 (8,529)
------ ------
Deferred tax asset valuation allowance (6,708) (117)
------ ------
Total $17,333 $(8,646)
======= =======
During 2001, the valuation allowance was increased as a result of an increase in
unutilized foreign tax credits and other temporary differences in certain taxing
jurisdictions. The net increase in the valuation allowance was $6.6 million.
The overall effective income tax rate (expressed as a percentage of income
before income taxes) varied from the U.S. statutory income tax rate as follows:
2001 2000 1999
Taxes at the U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.0% 0.7% 1.8%
Non-U.S. income taxed at rates different than the U.S.
statutory rate (14.1%) (2.0%) (4.1%)
Tax exempt earnings - (1.2%) (1.3%)
Utilization of net operating loss carryforwards and benefit
of scheduled tax credits 0.8% (1.3%) (0.8%)
Other 0.3% (3.2%) (0.1%)
---- ---- ----
Provision for income taxes 25.0% 28.0% 30.5%
==== ==== ====
Undistributed earnings of certain non-U.S. subsidiaries amount to approximately
$125 million at December 31, 2001. Prior year earnings are intended to be
invested indefinitely and, accordingly, no provision has been made for non-U.S.
withholding taxes. In the event all undistributed earnings were remitted,
approximately $7 million of withholding tax would be imposed.
CTS qualifies for income tax holidays in certain non-U.S. taxing jurisdictions.
As a result, certain earnings of CTS are either tax-exempt or are subject to tax
at reduced rates for a specified period of time. These tax holidays, unless
extended, are scheduled to expire in 2004 and 2005.
The Company has U.S. tax basis business tax credits and foreign tax credits of
$0.5 million and $6.1 million, respectively. The business tax credits expire in
2021 and the foreign tax credits expire in 2006. The Company also has a U.S. net
operating loss carryforward of $35.8 million that expires in 2021 and a non-U.S.
net operating loss carryforward of $10.2 million that expires in 2006.
NOTE K--Business Segments
- -------------------------
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. CTS has two reportable segments: electronic components and
electronic assemblies. Electronic components are products which perform the
basic level electronic function for a given product family for use in customer
assemblies. Electronic components consist principally of wireless components
used in cellular handsets; automotive sensors used in commercial or consumer
vehicles; quartz crystals, oscillators and ClearONE(TM) terminators used in the
communications and computer markets and resistor networks, switches and
potentiometers used to serve multiple markets. Electronic assemblies are
assemblies of electronic or electronic and mechanical products which, apart from
the assembly, may themselves be marketed as separate stand-alone products. Such
assemblies represent completed, higher-level functional products to be used in
customer end products or assemblies. These products consist principally of
integrated interconnect products containing backpanel and connector assemblies
used in the computer and communications infrastructure markets, RF integrated
modules used in cellular handsets, low temperature cofired ceramics ("LTCC") for
global positioning systems ("GPS") and Bluetooth communications products and
pointing sticks/cursor controls for notebook computers.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Management
evaluates performance based upon operating earnings before interest and income
taxes.
Summarized financial information concerning CTS' reportable segments is shown in
the following table:
Electronic Electronic
Components Assemblies Total
2001
- ----
Net sales to external customers $313,573 $264,081 $577,654
Segment operating earnings (loss) (1) (5,893) 8,119 2,226
Total assets 459,008 108,923 567,931
Depreciation and amortization 42,413 9,261 51,674
Capital expenditures $ 64,351 $ 13,303 $ 77,654
2000
- ----
Net sales to external customers $536,703 $329,820 $866,523
Segment operating earnings 98,157 30,473 128,630
Total assets 523,593 149,336 672,929
Depreciation and amortization 36,422 7,903 44,325
Capital expenditures $ 84,791 $ 34,425 $119,216
1999
- ----
Net sales to external customers $507,344 $169,732 $677,076
Segment operating earnings (2) 81,025 14,711 95,736
Total assets 407,822 105,769 513,591
Depreciation and amortization 29,266 4,641 33,907
Capital expenditures $ 22,028 $ 10,868 $ 32,896
(1) Excludes $40.0 million of pre-tax restructuring and asset impairment charges
and $10.7 million of related pre-tax one-time charges.
(2) Excludes the pre-tax effect of a one-time, noncash write-off for acquired
in-process research and development (IPR&D), related to the acquisition of
CTS Wireless of $12,940.
Reconciling information between reportable segments and CTS' consolidated totals
is shown in the following table:
2001 2000 1999
Pre-tax Earnings (Loss)
Total segment operating earnings $ 2,226 $128,630 $ 95,736
Restructuring, asset impairment and related one-time
charges - Electronic Components (44,159) -- --
Restructuring, asset impairment and related one-time
charges - Electronic Assemblies (6,556) -- --
Acquired in-process research and development (IPR&D) -- -- (12,940)
Interest expense (12,775) (13,050) (9,944)
Interest income 744 846 865
Other income 29 701 338
-------- -------- --------
Earnings (loss) before income taxes $(60,491) $117,127 $ 74,055
======== ======== ========
Assets
Total assets for reportable segments $567,931 $672,929 $513,591
Investment in discontinued operations -- -- 9,061
-------- -------- --------
Total assets $567,931 $672,929 $522,652
======== ======== ========
Financial information relating to CTS' operations by geographic area was as
follows:
2001 2000 1999
Net Sales
United States $246,653 $414,571 $318,627
China 87,038 145,609 153,222
United Kingdom 154,466 158,018 96,807
Taiwan 38,519 84,166 59,392
Singapore 35,487 38,611 22,666
Other non-U.S. 15,491 25,548 26,362
-------- -------- --------
Consolidated $577,654 $866,523 $677,076
======== ======== ========
Sales are attributed to countries based upon the origin of the sale.
2001 2000 1999
Long-Lived Assets
United States $118,455 $162,172 $104,398
China 68,633 29,771 18,581
Singapore 25,154 21,136 5,877
United Kingdom 20,993 18,573 15,583
Taiwan 20,086 42,724 36,369
Other non-U.S. 4,581 4,091 6,727
------- ------- -------
Consolidated $257,902 $278,467 $187,535
======== ======== ========
Electronic components business segment revenues from Motorola represent
approximately $44,639, or 14%, $118,838, or 22%, and $141,501, or 28%, of the
segment's revenue for the year ended December 31, 2001, 2000 and 1999,
respectively. Electronic assemblies business segment revenues from Compaq
represent approximately $160,626, or 61%, $177,882, or 54%, and $71,986, or 42%,
of the segment's revenue for the year ended December 31, 2001, 2000 and 1999,
respectively, and from Motorola represent approximately $50,466, or 19%, and
$65,781, or 20%, for the year ended December 31, 2001, and 2000, respectively.
NOTE L--Capital Stock
- ---------------------
CTS adopted a Rights Plan on August 28, 1998. The Rights Plan was implemented by
declaring a dividend, distributable to shareholders of record on September 10,
1998, of one common share purchase right ("Right") for each outstanding share of
common stock held at the close of business on that date. Each Right under the
Rights Plan will initially entitle registered holders of common stock to
purchase one one-hundredth of a share of CTS' Series A Junior Participating
Preferred Stock for a purchase price of $125, subject to adjustment. The Rights
will be exercisable only if a person or group (1) acquires or obtains the right
to acquire 15% or more of the common stock or (2) announces a tender offer that
would result in any person or group acquiring beneficial ownership of 15% or
more of the outstanding common stock. The Rights are redeemable for $0.01 per
Right (subject to adjustment) at the option of the Board of Directors. Until a
Right is exercised, the holder of the Right, as such, has no rights as a
shareholder of CTS. The Rights will expire on August 27, 2008, unless redeemed
or exchanged by CTS prior to that date.
NOTE M--Treasury Stock
- ----------------------
Common stock held in treasury at December 31, 2001, totaled 17,630,192 shares
with a cost of $270,513, compared to 20,655,721 shares with a cost of $291,367
at December 31, 2000.
During 2000, CTS repurchased 190,000 of its common stock under a common stock
repurchase plan previously authorized by the Board of Directors. The remaining
shares authorized for repurchase were approximately 240,000 shares at
December 31, 2001. There can be no assurance as to the number of shares CTS may
repurchase or the timing of such purchases.
NOTE N---Contingencies
- ----------------------
Certain processes in the manufacture of CTS' current and past products create
hazardous waste by-products as currently defined by federal and state laws and
regulations. CTS has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator groups, that it is or
may be a Potentially Responsible Party ("PRP") regarding hazardous waste
remediation at several non-CTS sites. In addition to these non-CTS sites, CTS
has an ongoing practice of providing reserves for probable remediation
activities at certain of its manufacturing locations and for claims and
proceedings against CTS with respect to other environmental matters. In the
opinion of management, based upon presently available information relating to
all such matters, either adequate provision for probable costs has been made, or
the ultimate costs resulting will not materially affect the consolidated
financial position 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.
NOTE O--Leases
- --------------
In 2001, CTS sold certain manufacturing equipment and the Company's aircraft for
$15.5 million, which approximated the net book value of the assets. These assets
were subsequentially leased back by the Company. The leases are considered
operating leases as defined by FAS No. 13, "Accounting for Leases."
CTS incurred approximately $6.1 million of rent expense in 2001, $4.8 million in
2000 and $3.4 million in 1999. The future minimum lease payments under the
Company's operating leases are $5.9 million in 2002, $6.0 million in 2003, $5.9
million in 2004, $5.6 million in 2005, $4.5 million in 2006 and $9.6 million
thereafter.
NOTE P--Earnings Per Share
- --------------------------
FAS No. 128, "Earnings per Share," requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted 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 2000 and 1999. For the years ended December 31, 2000 and 1999, included in
other dilutive securities below are approximately 256,000 and 308,000 shares,
respectively, of CTS common stock to be issued to DCA shareholders who have not
yet tendered their stock certificates for exchange in connection with the DCA
acquisition. The weighted average number of shares outstanding at December 31,
2001, was 28,231,000. For 2001, approximately 673,000 of common stock
equivalents, including 193,000 shares of CTS common stock to be issued to DCA
shareholders, were excluded from the computation of diluted loss per share due
to their anti-dilutive effect.
Net Shares
Earnings (In thousands) Per Share
(Numerator) (Denominator) Amount
2000:
Basic EPS $83,802 27,623 $3.03
Effect of Dilutive Securities:
Stock Options 651
Other 401
------- ------ ----
Diluted EPS $83,802 28,675 $2.92
======= ====== =====
1999:
Basic EPS $51,468 27,498 $1.87
Effect of Dilutive Securities:
Stock Options 783
Other 308
------- ------ -----
Diluted EPS $51,468 28,589 $1.80
======= ====== =====
NOTE Q--Subsequent Event
- ------------------------
In the first quarter of 2002 (through February 27, 2002), CTS received $14.8
million of net proceeds from the issuance of 1 million shares of common stock to
an institutional investor. Also during the first quarter of 2002 (through
February 27, 2002), CTS received a firm commitment to receive approximately
$13.3 million of net proceeds from the issuance of approximately 1 million
shares of common stock to another institutional investor. Net proceeds from the
issuance of these equity securities will be used for repayment of debt.
Shareholder Information
- -----------------------
(In thousands of dollars except per share data)
Quarterly Results of Operations
-------------------------------
(Unaudited)
Earnings
Operating (Loss) from Loss from Net
Net Gross Earnings Continuing Discontinued Earnings
Sales Profit (Loss) Operations Operations (Loss)
2001
1st quarter $176,988 $ 40,565 $ 5,765 $ 1,697 $ - $ 1,697
2nd quarter (a) 143,723 22,878 (19,685) (17,173) - (17,173)
3rd quarter (b) 131,153 28,602 (886) (2,890) - (2,890)
4th quarter (c) 125,790 19,246 (33,683) (27,009) - (27,009)
$577,654 $111,291 $(48,489) $(45,375) $ - $(45,375)
2000
1st quarter $204,466 $ 62,826 $ 30,682 $ 19,776 $ (529) $ 19,247
2nd quarter 206,611 64,515 31,255 20,461 - 20,461
3rd quarter 222,052 62,758 31,292 21,315 - 21,315
4th quarter 233,394 70,826 35,401 22,779 - 22,779
$866,523 $260,925 $128,630 $ 84,331 $ (529) $ 83,802
Per Share Data
--------------
(Unaudited)
Earnings (loss) from Loss From
Continuing Operations Discontinued Operations Net Earnings (Loss)
Dividends --------------------- ----------------------- -------------------
High (d) Low (d) Declared Basic Diluted Basic Diluted Basic Diluted
2001
1st quarter $47.88 $19.70 $0.03 $0.06 $ 0.06 $ - $ - $ 0.06 $ 0.06
2nd quarter (a) 28.96 18.00 0.03 (0.62) (0.62) - - (0.62) (0.62)
3rd quarter (b) 24.00 13.49 0.03 (0.10) (0.10) - - (0.10) (0.10)
4th quarter (c) 18.00 13.62 0.03 (0.93) (0.93) - - (0.93) (0.93)
$0.12 $(1.61) $(1.61) $ - $ - $(1.61) $(1.61)
2000
1st quarter $82.75 $40.00 $0.03 $0.71 $0.68 $ (0.02) $(0.02) $0.69 $ 0.66
2nd quarter 68.00 45.00 0.03 0.74 0.71 - - 0.74 0.71
3rd quarter 59.00 40.25 0.03 0.77 0.76 - - 0.77 0.76
4th quarter 52.19 31.50 0.03 0.83 0.79 - - 0.83 0.79
$0.12 $3.05 $2.94 $ (0.02) $(0.02) $3.03 $ 2.92
(a) The second quarter 2001 results include restructuring and related one-time
charges of $19.4 million pre-tax, $14.6 million after-tax, or $0.53 per
diluted share.
(b) The third quarter 2001 results include customer reimbursements for expenses
incurred in previous quarters of approximately $2.5 million pre-tax, $1.9
million after-tax, or $0.06 per diluted share, and restructuring related
one-time charges of $0.8 million pre-tax, $0.6 million after-tax, or $0.02
per diluted share.
(c) The fourth quarter 2001 results include restructuring and related one-time
charges of $28.4 million pre-tax, $21.3 million after-tax, or $0.73 per
diluted share.
(d) The market prices of CTS common stock presented reflect the highest and
lowest prices on the New York Stock Exchange for each quarter of the last
two years.
Five-Year Summary
-----------------
(In thousands of dollars except per share and other data)
% of % of % of % of % of
2001 Sales 2000 Sales 1999 Sales 1998 Sales 1997 Sales
Summary of Operations
Net sales $577,654 100.0 $866,523 100.0 $677,076 100.0 $370,441 100.0 $390,602 100.0
Cost of goods sold 466,363 80.7 605,598 69.9 471,543 69.6 255,844 69.1 280,085 71.7
Selling, general and administrative expenses 80,214 13.9 94,501 10.9 80,866 12.0 51,300 13.8 45,264 11.6
Transaction-related compensation charge - - - - - - - - 16,200 4.1
Research and development expenses 32,762 5.7 32,583 3.8 25,348 3.8 13,387 3.6 13,131 3.4
Acquired in-process research and
development(IPR&D) - - - - 12,940 1.9 - - - -
Amortization of intangible assets 6,765 1.2 5,211 0.6 3,583 0.5 302 0.1 2,949 0.8
Restructuring and impairment charges 40,039 6.9 - - - - - - - -
------- ----- ------- ---- ------- ---- ------- ---- ------- ----
Operating earnings (loss) (48,489) (8.4) 128,630 14.8 82,796 12.2 49,608 13.4 32,973 8.4
Other (expense) income --net (12,002) (2.1) (11,503) (1.3) (8,741) (1.3) (167) (0.1) 2,757 0.7
------- ----- ------- ---- ------- ---- ------- ---- ------- ---
Earnings (loss) before income taxes (60,491) (10.5) 117,127 13.5 74,055 10.9 49,441 13.3 35,730 9.1
Income tax expense (benefit) (15,116) (2.6) 32,796 3.8 22,587 3.3 15,368 4.1 12,537 3.2
------- ----- ------- ---- ------- ---- ------- ---- ------ ---
Earnings (loss) from continuing operations (45,375) (7.9) 84,331 9.7 51,468 7.6 34,073 9.2 23,193 5.9
Discontinued operations:
Net earnings (loss) from discontinued
operations - - (529) - - - 3,401 0.9 (380) (0.1)
------- ----- ------- ---- ------ ---- ------- ---- ------- ---
Net earnings (loss) (45,375) (7.9) 83,802 9.7 51,468 7.6 37,474 10.1 22,813 5.8
Retained earnings--beginning of year 325,850 245,414 197,285 163,169 144,112
Dividends declared (3,487) (3,366) (3,339) (3,358) (3,756)
------- ------- ------- ------- -------
Retained earnings--end of year $276,988 $325,850 $245,414 $197,285 $163,169
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic:
Continuing operations $(1.61) $3.05 $1.87 $1.22 $0.74
Discontinued operations - (0.02) - 0.12 (0.01)
----- ----- ---- ---- -----
Net earnings (loss) per share $(1.61) $3.03 $1.87 $1.34 $0.73
===== ==== ==== ==== ====
Diluted:
Continuing operations $(1.61) $2.94 $1.80 $1.17 $0.73
Discontinued operations - (0.02) - 0.11 (0.01)
----- ----- ---- ---- -----
Net earnings (loss) per share $(1.61) $2.92 $1.80 $1.28 $0.72
===== ==== ==== ==== ====
Average basic shares outstanding (000's) 28,231 27,623 27,498 28,028 31,248
Average diluted shares outstanding (000's) 28,231 28,675 28,589 29,228 31,952
Cash dividends per share $0.12 $0.12 $0.12 $0.12 $0.12
Capital expenditures 77,654 119,216 32,896 21,330 22,180
Depreciation and amortization 51,674 44,325 33,907 19,155 16,016
Financial Position at Year End
Current assets $200,674 $305,696 $254,297 $117,683 $146,747
Current liabilities 153,857 202,891 154,461 82,377 80,991
Current ratio 1.3 to 1 1.5 to 1 1.6 to 1 1.4 to 1 1.8 to 1
Working capital $ 46,817 $102,805 $99,836 $35,306 $65,756
Inventories 50,149 104,316 78,942 33,322 34,683
Property, plant and equipment--net 191,958 224,861 139,692 68,086 66,511
Total assets 567,931 672,929 522,652 293,189 318,196
Short-term notes payable - 7,397 7,428 - -
Long-term debt 125,013 178,000 162,000 42,000 56,000
Long-term obligations, including long-term debt 132,287 189,069 176,164 59,828 67,759
Shareholders' equity 242,873 246,357 164,764 123,839 147,496
Common shares outstanding (000's) 30,902 27,781 27,462 27,243 30,356
Equity (book value) per share $7.86 $8.87 $6.00 $4.55 $4.86
Other Data
Stock price range $47.88-$13.49 $82.75-$31.50 $86.25-$20.44 $21.94-$11.82 $18.63-$6.79
Number of employees at year end 5,837 9,008 7,662 4,105 3,954
Number of shareholders at year end 1,549 1,492 1,498 1,379 1,404