FINANCIAL HIGHLIGHTS
(In thousands except per share data)
For the Year 1996 1995 1994
Net sales $321,297 $300,157 $268,707
Net earnings 21,170 17,164 13,967
Average common and common
equivalent shares outstanding 5,259 5,201 5,170
Per share data:
Net earnings $4.03 $3.30 $2.70
Dividends declared .69 .60 .45
Capital expenditures 17,210 11,181 13,401
At Year-End
Working capital $ 86,810 $ 75,151 $ 65,875
Notes payable 6,685 7,436
Long-term obligations (including
current maturities) 13,647 15,925 15,899
Shareholders' equity 166,232 146,253 131,855
Equity per outstanding share 31.82 28.03 25.46
SHAREHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
(Unaudited)
Net Gross Operating Net
Sales Earnings Earnings Earnings
1996
1st quarter $ 80,186 $19,799 $ 6,587 $ 4,414
2nd quarter 83,820 21,874 8,218 5,340
3rd quarter 76,457 20,726 7,847 5,060
4th quarter 80,834 25,097 10,768 6,356
$321,297 $87,496 $33,420 $21,170
1995
1st quarter $ 75,978 $17,273 $ 4,877 $ 3,256
2nd quarter 76,413 19,148 7,023 4,642
3rd quarter 73,890 18,345 6,416 4,218
4th quarter 73,876 20,038 9,172 5,048
$300,157 $74,804 $27,488 $17,164
Per Share Data
(Unaudited)
Dividends Net
High(a) Low(a) Declared Earnings
1996
1st quarter $38.63 $36.00 $.15 $.83
2nd quarter 47.00 37.38 .18 1.03
3rd quarter 47.00 40.50 .18 .96
4th quarter 43.00 38.13 .18 1.21
$.69 $4.03
1995
1st quarter $32.00 $27.38 $.15 $ .63
2nd quarter 33.50 29.25 .15 .89
3rd quarter 34.50 29.94 .15 .81
4th quarter 37.75 29.63 .15 .97
$.60 $3.30
(a) The market price range of CTS Corporation common stock on the New York
Stock Exchange for each of the quarters during the last two years.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except per share amounts)
Year Ended
December 31 December 31 December 31
1996 1995 1994
Net sales $321,297 $300,157 $268,707
Costs and expenses:
Cost of goods sold 233,801 225,353 205,640
Selling, general and administrative
expenses 43,333 39,312 36,175
Research and development expenses 10,743 8,004 6,208
Operating earnings 33,420 27,488 20,684
Other (expenses) income:
Interest expense (1,449) (1,790) (714)
Interest income 1,881 1,421 657
Other (250) 565 860
Total other income (expenses) 182 196 803
Earnings before income taxes 33,602 27,684 21,487
Income taxes--Note F 12,432 10,520 7,520
Net earnings $ 21,170 $ 17,164 $ 13,967
Net earnings per share $4.03 $3.30 $2.70
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)
Cumulative Deferred
Common RetainedTranslation Compen- Treasury
Stock Earnings Adjustment sation Stock Total
Balances at December 31, 1993 $34,222 $100,868 $(1,049) $(92) $(14,746)$119,203
Net earnings 13,967 13,967
Cash dividends of $.45 per share (2,329) (2,329)
Nonemployee Directors' stock retirement plan (4) 3 12 11
Cumulative translation adjustment 695 695
Issued 15,500 shares on restricted stock and
cash bonus plan 51 (358) 307
Issued 8,650 shares on exercise of stock options (72) 248 176
Stock compensation 1 12 13
Deferred compensation recognized 119 119
Balances at December 31, 1994 34,198 112,506 (354) (328) (14,167) 131,855
Net earnings 17,164 17,164
Cash dividends of $.60 per share (3,124) (3,124)
Nonemployee Directors' stock retirement plan 15 15
Cumulative translation adjustment (291) (291)
Issued 18,500 shares on restricted stock and
cash bonus plan 76 (632) 556
Issued 17,325 shares on exercise of stock options (163) 522 359
Acquired 200 shares traded on options--net 7 (7)
Stock compensation 3 93 96
Deferred compensation recognized 17 162 179
Balances at December 31, 1995 34,138 126,546 (645) (783) (13,003) 146,253
Net earnings 21,170 21,170
Cash dividends of $.69 per share (3,604) (3,604)
Nonemployee Directors' stock retirement plan 17 17
Cumulative translation adjustment 2,018 2,018
Issued 1,500 shares on restricted stock and
cash bonus plan 23 (70) 47
Issued 6,300 shares on exercise of stock options (51) 197 146
Acquired 73 shares traded on options--net 3 (3)
Stock compensation 27 100 127
Deferred compensation recognized 236 236
Acquired 3,200 shares for treasury stock (131) (131)
Balances at December 31, 1996 $34,140 $144,112 $1,373 $(600) $(12,793)$166,232
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31 December 31
(In thousands of dollars) 1996 1995
ASSETS
Current Assets
Cash and equivalents $ 44,957 $ 37,271
Accounts receivable, less allowances
(1996--$622; 1995--$774) 43,984 41,737
Inventories
Finished goods 8,504 7,445
Work-in-process 17,138 14,789
Raw materials 13,119 16,651
Total inventories 38,761 38,885
Other current assets 3,787 2,544
Deferred income taxes--Note F 6,712 5,676
Total current assets 138,201 126,113
Property, Plant and Equipment
Buildings and land 42,800 42,547
Machinery and equipment 146,589 139,594
Total property, plant and equipment 189,389 182,141
Less accumulated depreciation 133,286 131,445
Net property, plant and equipment 56,103 50,696
Other Assets
Goodwill, less accumulated amortization
(1996--$8,361; 1995--$7,687) 4,039 4,603
Prepaid pension expense--Note E 50,152 44,739
Other 877 976
Total other assets 55,068 50,318
Total Assets $249,372 $227,127
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable--Note B $ 6,685
Current maturities of long-term obligations--Note C $ 2,427 2,211
Accounts payable 17,146 15,605
Accrued salaries, wages and vacation 6,836 6,695
Accrued taxes other than income 2,070 1,740
Income taxes payable 5,946 3,991
Other accrued liabilities--Note H 16,966 14,035
Total current liabilities 51,391 50,962
Long-term Obligations--Note C 11,220 13,714
Deferred Income Taxes--Note F 16,146 11,909
Postretirement Benefits--Note E 4,383 4,289
Contingencies--Note H
Shareholders' Equity
Common stock-authorized 8,000,000 shares without
par value; issued 5,807,031 shares 33,540 33,355
Retained earnings 144,112 126,546
Cumulative translation adjustment 1,373 (645)
179,025 159,256
Less cost of common stock held in treasury
(1996-- 582,075 shares; 1995--589,702 shares) 12,793 13,003
Total shareholders' equity 166,232 146,253
Total Liabilities and Shareholders' Equity $249,372 $227,127
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
December 31 December 31 December 31
1996 1995 1994
Cash flows from operating activities:
Net earnings $21,170 $17,164 $13,967
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 12,491 11,683 11,236
Deferred income taxes 3,201 3,239 2,519
Other (160) (52) (421)
Changes in assets and liabilities:
Accounts receivable (2,247) (6,708) (4,402)
Inventories 124 2,571 (3,297)
Prepaid pension asset (5,413) (5,331) (6,563)
Accounts payable and accrued
liabilities 4,943 4,280 (38)
Income taxes payable 1,955 1,703 882
Other (961) (1,688) (1,328)
Total adjustments 13,933 9,697 (1,412)
Net cash provided by operating
activities 35,103 26,861 12,555
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 822 236 411
Capital expenditures (17,210) (11,181) (10,000)
Payment for purchase of business acquisitions (5,501)
Net cash used in investing
activities (16,388) (10,945) (15,090)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 15,000
Payments of long-term obligations (2,208) (286) (4,479)
Decrease in notes payable (6,685) (751) (6,050)
Proceeds from stock options exercised 146 359 176
Dividends paid (3,446) (3,118) (2,067)
Purchases of treasury stock (131)
Net cash (used in) provided by
financing activities (12,324) (3,796) 2,580
Effect of exchange rate changes on cash 1,295 229 1,343
Net increase in cash 7,686 12,349 1,388
Cash and equivalents at beginning of year 37,271 24,922 23,534
Cash and equivalents at end of year $44,957 $37,271 $24,922
Supplemental cash flow information
Cash paid during the year for:
Interest $1,467 $ 1,791 $ 658
Income taxes - net 7,276 5,590 4,009
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions
have been eliminated.
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 machinery and equipment from 3 to 8 years.
Goodwill: The excess of cost over the fair value of net assets of
businesses acquired is amortized on the straight-line method over
the periods expected to be benefited.
Retirement Plans: The Company has various defined benefit and
defined contribution retirement plans covering a majority of its
employees. The Company's policy is to annually fund the defined
benefit pension plans at or above the minimum required under the
Employee Retirement Income Security Act of 1974 (ERISA).
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. The Company expenses
all research and development costs as incurred.
Income Taxes: The Company provides deferred income taxes for
transactions reported in different periods for financial reporting
and income tax return purposes pursuant to the requirements of
Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes." The underlying differences relate
primarily to depreciation differences, pension income,
postemployment benefits, certain nondeductible accruals and
inventory reserves.
Translation of Foreign Currencies: The financial statements of
all of the Company's non-U.S. subsidiaries, except the United
Kingdom subsidiary, are remeasured into U.S. dollars using the
U.S. dollar as the functional currency with all remeasurement
adjustments included in the determination of net earnings. The
assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars principally at the current
exchange rate at period end, with resulting translation adjust-
ments made directly to the "Cumulative translation adjustment"
component of shareholders' equity. Statements of earnings
accounts are translated at the average rates during the period.
Financial Instruments: The Company's financial instruments
consist primarily of cash, cash equivalents, trade receivables and
payables, and obligations under notes payable and long-term debt.
In accordance with the requirements of FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments," the
Company is providing the following fair value estimates and
information regarding valuation methodologies. The carrying value
for cash and cash equivalents, and trade receivables and payables
approximates fair value based on the short-term maturities of
these instruments. The carrying value for all long-term debt
outstanding at December 31, 1996, and 1995 approximates fair value
where fair value is based on market prices for the same or similar
debt and maturities.
The Company occasionally uses forward exchange currency contracts
to minimize the impact of foreign currency fluctuations on the
Company's costs and expenses. At December 31, 1996, the Company's
forward foreign exchange currency contracts were not material.
These contracts are accounted for as hedges and have minimal
credit risk because the counterparties are well-established
financial institutions.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less from the
purchase date to be cash equivalents.
Concentration of Credit Risk: The Company sells its products to
customers primarily in the automotive, computer equipment,
communications equipment and instruments and controls industries,
primarily in North America, Europe and the Pacific Rim. The
Company performs ongoing credit evaluations of its customers to
minimize credit risk. The Company generally does not require
collateral.
Stock-Based Compensation: FASB Statement No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require,
companies to record compensation cost for stock-based compensation
at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related
Interpretation. See Note D for the required pro forma net income
and earnings per share disclosures required by FASB Statement No.
123.
Earnings Per Share: Earnings per common share are based on the
weighted average number of common and common equivalent shares
outstanding.
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 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 - Short-term Borrowings
The Company has no outstanding short-term borrowings at December
31, 1996. At December 31, 1995, short-term borrowings consisted
of demand notes payable to various banks, with an average
interest rate of 6.6%. The Company has unsecured lines of credit
arrangements which totaled $15,855,000 at December 31, 1996.
These arrangements are generally subject to annual renewal and
renegotiation, and may be withdrawn at the banks' option.
Average daily short-term borrowings over the year, including
borrowings denominated in non-U.S. currencies, during 1996, 1995
and 1994 were $2,308,000, $6,781,000 and $11,776,000,
respectively. The weighted average interest rates, computed by
relating interest expense to average daily short-term borrowings,
were 6.1% in 1996, 6.5% in 1995 and 5.5% in 1994.
The maximum amount of short-term borrowings at the end of any
month during 1996, 1995 and 1994 was $8,055,000, $8,440,000 and
$12,977,000, respectively. The short-term borrowings outstanding
at December 31, 1994, were $7,436,000.
NOTE C - Long-term Obligations
Long-term obligations were comprised of the following:
(In thousands)
1996 1995
Long-term debt:
Term loan at 8.4%, due in annual
installments through 1999. $13,000 $15,000
Other 647 608
13,647 15,608
Less current maturities 2,427 2,211
Total long-term debt 11,220 13,397
Other 317
Total long-term obligations $11,220 $13,714
The Company has a $13,000,000 term loan with four banks, of which
$2,000,000 expires in 1997, $2,000,000 expires in 1998 and
$9,000,000 expires in 1999.
The Company has unsecured revolving credit agreements totaling
$45,000,000 with four banks, which expire in 2001. Interest rates
on these borrowings fluctuate based upon market rates. The
Company pays a commitment fee that varies based on performance
under certain financial covenants applicable to the revolving
credit agreements. Currently, that fee is .15 percent per annum.
The credit agreements and term loan require, among other things,
that the Company maintain certain tangible net worth, interest
coverage requirements and a specified total liabilities to
tangible net worth ratio.
Annual maturities of long-term obligations during the three years
subsequent to 1997 are as follows: 1998--$2,220,000; 1999--$9,000,000;
2000--$0.
NOTE D - Stock Plans
At December 31, 1996, the Company has four stock-based
compensation plans, which are described below. The Company
applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option
plans while compensation expense has been recognized for its
compensatory plans. Had compensation cost for the Company's two
fixed stock-based compensation plans been determined based on the
fair value based method, as defined in FASB Statement No. 123, the
Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts)
1996 1995
Net earnings As reported $21,170 $17,164
Pro forma $20,936 $17,141
Net earnings per share As reported $4.03 $3.30
Pro forma $3.99 $3.30
The effects of applying FASB Statement No. 123 in the above pro
forma disclosures are not indicative of future amounts as they do
not include the effects of awards granted prior to 1995, some of
which would have had income statement effects in 1995 and 1996 due
to the five-year vesting period associated with the fixed stock
option awards.
The Company's two fixed stock option plans, approved by the
shareholders, provide for grants of incentive stock options or
nonqualified stock options to officers and key employees. Under
the 1986 Stock Option Plan which expired in 1995, the Company
could grant options to its officers and key employees for up to
300,000 shares of common stock. Of the 300,000 shares,
approximately 100,000 shares were granted. Under the 1996 Stock
Option Plan, the Company may grant options to its officers and key
employees for up to 200,000 shares of common stock.
Under the 1996 Stock Option Plan, options are granted at the fair
market value on the grant date and are exercisable generally in
cumulative annual installments over a maximum ten-year period,
commencing at least one year from the date of grant. Upon the
exercise of stock options, payment may be made using cash, shares
of the Company's common stock or any combination thereof.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1995:
dividend yield of 1.63%; expected volatility of 19.93%, risk-free
interest rate of 5.62%; and expected life of 4.3 years. There
were no grants in 1996.
A summary of the status of the Company's two fixed stock option
plans as of December 31, 1996, 1995 and 1994, and changes during
the years ending on those dates, is presented below:
1996 1995 1994
Weighted Weighted Weighted
-Average -Average -Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
Outstanding at begin-
ning of year 152,925 $31.82 86,000 $23.15 44,650 $20.13
Granted 94,050 36.89 57,000 24.75
Exercised (6,300) 23.56 (17,325) 21.05 (8,650) 20.44
Expired or canceled (9,100) 33.47 (9,800) 23.39 (7,000) 20.30
Outstanding at end
of year 137,525 $32.09 152,925 $31.82 86,000 $23.15
Options exercisable
at year-end 51,425 19,225 22,150
Weighted-average fair
value of options
granted during the
year $ 8.26
The following table summarizes information about fixed stock
options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life (Years) Price at 12/31/96 Price
$19.125--
24.750 53,475 2.37 $24.07 29,925 $23.81
$31.250--
37.375 84,050 3.94 $37.19 21,500 $37.18
Under the 1986 Stock Option Plan, options to purchase a total of
55,975 shares were outstanding as of December 31, 1996. At
December 31, 1996, 30,625 of these shares were exercisable.
During 1996, the shareholders of the Company approved the 1996
Stock Option Plan, under which a maximum of 200,000 shares of
common stock were reserved for issuance to certain officers and
key employees. Under the 1996 Stock Option Plan, options to
purchase a total of 81,550 shares were outstanding as of December
31, 1996. At December 31, 1996, 20,800 of these shares were
exercisable.
The Company has a discretionary Restricted Stock and Cash Bonus
Plan (Plan) which reserves 400,000 shares of the Company's common
stock for sale, at market price or below, or award to key
employees. Shares sold or awarded are subject to restrictions
against transfer and repurchase rights of the Company. In
general, restrictions lapse at the rate of 20% per year beginning
one year from the award or sale. In addition, the Plan provides
for a cash bonus to the participant equal to the fair market value
of the shares on the dates restrictions lapse, in the case of an
award, or the excess of the fair market value over the original
purchase price if the shares were purchased. The total bonus paid
to any participant during the restricted period is limited to
twice the fair market value of the shares on the date of award or
sale.
Under the Plan, during 1996, 1,500 shares were awarded leaving
343,900 shares available for award or sale at December 31, 1996.
Under the Plan, in 1995 and 1994, 18,500 and 15,500 shares were
awarded, respectively. In addition to the shares issued and the
amortization of deferred compensation included in the Consolidated
Statements of Shareholders' Equity, the Company accrued $408,000,
$306,000, and $212,000 for additional compensation payable under
the provisions of the Plan in 1996, 1995 and 1994, respectively.
The Company 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 Company stock. Under this plan, the amount of the actual
dollar compensation was $17,100, $15,100 and $11,100 in 1996, 1995
and 1994, respectively.
NOTE E - Employee Retirement Plans
Defined benefit plans
The Company has a number of noncontributory defined benefit
pension plans (Plans) covering approximately 46% 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.
Net pension income for the Plans in 1996, 1995 and 1994 includes
the following components:
(In thousands)
1996 1995 1994
Service cost--benefits earned
during the year $ 2,787 $ 2,216 $ 2,374
Interest cost on projected
benefit obligation 5,430 5,330 4,769
Actual (return) loss on plan
assets (20,982) (23,252) 2,565
Net amortization and deferral 7,352 10,375 (16,271)
Net pension income $(5,413) $(5,331) $(6,563)
The following table details the funded status of the Plans at
December 31, 1996, and December 31, 1995:
(In thousands)
1996 1995
Actuarial present value of benefit obligations:
Vested benefits $ 68,570 $ 66,736
Nonvested benefits 2,598 2,960
Accumulated benefit obligation $ 71,168 $ 69,696
Plan assets at fair value $151,841 $134,595
Projected benefit obligation 78,046 77,138
Plan assets in excess of the projected
benefit obligation 73,795 57,457
Unrecognized prior year service cost 397 154
Unrecognized net (gain) loss (15,146) (1,935)
Unrecognized net asset (8,894) (10,937)
Prepaid pension expense $50,152 $ 44,739
Assumptions used in determining net pension income and the funded
status of U.S. defined benefit pension plans were as follows:
1996 1995 1994
Discount rates (funded status) 7.75% 7.25% 8.25%
Rates of increase in compensation levels
(salaried plan only) 5%-7% 5%-7% 5%-7%
Expected long-term rate of return on assets 9.75% 9.00% 9.00%
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. Effective with the
December 31, 1996, measurement date, the discount rate was
increased to 7.75% to reflect current market conditions. This
change had no impact on 1996 pension income, but will increase
1997 pension income by $562,000. Effective with the December 31,
1995, measurement date, the discount rate was reduced to 7.25% to
reflect market conditions. This change had no impact on 1995
pension income, but reduced 1996 pension income by $310,000.
Effective with the December 31, 1994, measurement date, the
discount rate, expected long-term rate of return on assets and
mortality assumptions were revised to reflect current market and
demographic conditions. As a result of these changes, the
December 31, 1994, projected benefit obligation decreased by $2.4
million. These changes had no effect on 1994 pension income, but
reduced 1995 pension income by $1.2 million.
The majority of U.S. defined benefit pension plan assets are
invested in common stock, including approximately $8.5 million in
CTS common stock. 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.
Because the domestic plans are fully funded, the Company made no
contributions during 1996, 1995 or 1994. Benefits paid by all
Plans during 1996, 1995 and 1994 were $4,240,000, $4,085,000 and
$4,175,000, respectively.
Pension coverage for employees of certain non-U.S. subsidiaries
is provided through separate plans. Contributions of $167,000,
$237,000 and $172,000 were made to the non-U.S. Plans in 1996,
1995 and 1994, respectively.
Defined contribution plans
The Company sponsors a 401(k) Plan and several other defined
contribution plans which cover some of its non-U.S. employees and
its domestic hourly employees not covered by a defined benefit
pension plan. Contributions and costs are generally determined
as a percentage of the covered employee's annual salary. Amounts
expensed for the 401(k) Plan and the other plans totaled
$2,382,000 in 1996, $2,294,000 in 1995 and $2,506,000 in 1994.
Postretirement life insurance plans
In addition to providing pension benefits, the Company provides
certain life insurance programs for retired employees.
Substantially all of the Company's domestic employees are
eligible for life insurance benefits.
Summary information on the Company's plans as of December 31,
1996, and December 31, 1995, is as follows:
(In thousands)
1996 1995
Accumulated postretirement benefit obligation:
Active employees $(1,298) $(1,282)
Retirees and dependents (2,698) (2,912)
(3,996) (4,194)
Unrecognized net gain (574) (345)
Postretirement benefit obligation $(4,570) $(4,539)
The components of net periodic postretirement benefit expense for
1996, 1995 and 1994 are as follows:
(In thousands)
1996 1995 1994
Service cost--benefits earned
during the year $ 34 $ 28 $ 43
Interest cost on accumulated
benefit obligation 295 330 511
Net amortization and deferral (1,008)
Net expense (income) $329 $ (650) $554
The accumulated postretirement benefit obligation was determined
using relevant actuarial assumptions and the terms of the
Company's life insurance plans. For measurement purposes, a
7.75%, 7.25% and 8.25% annual discount rate was used to determine
the remaining life obligation for 1996, 1995 and 1994,
respectively.
The Company funds life insurance benefits through term life
insurance policies. The Company plans to continue funding
premiums on a pay-as-you-go basis.
NOTE F - Income Taxes
The components of earnings before income taxes are as follows:
(In thousands)
1996 1995 1994
Domestic $16,381 $17,563 $15,391
Non-U.S. 17,221 10,121 6,096
Total $33,602 $27,684 $21,487
The provision for income taxes consists of the following:
(In thousands)
1996 1995 1994
Current:
Federal $3,105 $1,935 $1,998
State 1,012 963 604
Non-U.S. 5,114 4,383 2,367
Total current 9,231 7,281 4,969
Deferred:
Federal 2,761 2,534 1,268
State 313 578 400
Non-U.S. 127 127 883
Total deferred 3,201 3,239 2,551
Total provision for income taxes $12,432 $10,520 $7,520
Significant components of the Company's deferred tax liabilities
and assets at December 31, 1996, and 1995, are:
(In thousands)
1996 1995
Depreciation $ 1,460 $ 1,063
Pensions 17,683 15,767
Other 3,185 2,282
Gross deferred tax liabilities 22,328 19,112
Postemployment benefits 1,622 1,611
Inventory reserves 2,721 2,613
Loss carryforwards 5,778 5,847
Credit carryforwards 4,355 5,537
Nondeductible accruals 4,365 3,200
Other 818 710
Gross deferred tax assets 19,659 19,518
Net deferred tax (liabilities) assets (2,669) 406
Deferred tax asset valuation allowance (6,765) (6,639)
Total $(9,434) $(6,233)
During 1996, the valuation allowance was increased as a result of
an increase in unutilized net operating loss carryforwards in
some taxing jurisdictions, and decreased by the utilization of
net operating losses and scheduled tax credits in other
jurisdictions. The net increase in the valuation allowance was
$126,000.
A reconciliation from the statutory federal income tax to the
Company's effective income tax follows:
(In thousands)
1996 1995 1994
Taxes at the U.S. statutory rate $11,761 $ 9,689 $7,306
State income taxes, net of federal
income tax benefit 861 1,002 663
Non-U.S. income taxed at rates
different than the U.S. statutory rate (728) 1,159 1,639
Utilization of net operating loss
carryforwards and benefit of scheduled
tax credits (279) (2,024) (2,544)
Foreign distributions, net of foreign
tax credits 297 372
Other 520 322 456
Provision for income taxes $12,432 $10,520 $7,520
Undistributed earnings of certain non-U.S. subsidiaries amount to
$52,892,000 at December 31, 1996. These earnings are intended to
be permanently invested and, accordingly, no provision has been
made for non-U.S. withholding taxes. In the event all
undistributed earnings were remitted, approximately $4,795,000 of
withholding tax would be imposed, which would be substantially
offset by foreign tax credits.
The Company has U.S. tax basis business tax credits and foreign
tax credits of approximately $1,624,000 at December 31, 1996.
The U.S. business credit carryforwards expire between the years
2001 and 2010. In addition, the Company has various non-U.S. tax
basis net operating losses and business credit carryforwards of
$20,937,000 and $70,000, respectively. The non-U.S. net
operating losses have an unlimited carryforward period. The non-U.S.
credit carryforwards expire in 1997. In addition, the
Company has alternative minimum tax credit carryforwards of
approximately $2,661,000, which have no expiration dates.
NOTE G - Business Segment and Non-U.S. Operations
The Company's operations comprise one business segment, the
manufacturing of electronic components. Electronic components
include production and sale of automotive control devices, fiber-optic
transceivers, flex cable assemblies, frequency control
devices, hybrid microcircuits, industrial electronics, insulated
metal circuits, interconnect products, loudspeakers, resistor
networks, switches and variable resistors.
Sales to a major automotive manufacturer were $49,100,000 in
1996, $54,900,000 in 1995 and $49,400,000 in 1994.
The non-U.S. operations or facilities are located in Canada, Hong
Kong, Japan, Mexico, Singapore, Taiwan, Thailand and the United
Kingdom. Net sales to unaffiliated customers from the United
Kingdom equaled 24%, 17% and 16% of the consolidated total for
1996, 1995 and 1994, respectively. Net sales to unaffiliated
customers from Other non-U.S. operations in the aggregate equaled
16%, 19% and 18% of the consolidated total for each of the years
1996, 1995 and 1994, respectively.
Net sales by geographic area include both sales to unaffiliated
customers and transfers between geographic areas. Such transfers
are accounted for primarily on the basis of a uniform
intercompany pricing policy. Operating earnings are total net
sales less operating expenses. In computing operating earnings,
none of the following items have been added or deducted: general
corporate expenses, interest income, interest expense, other
income and expenses and income taxes. Identifiable assets by
geographic area are those assets that are used in the Company's
operations in each such area. The Corporate Office assets are
principally cash and equivalents and the prepaid pension asset.
Summarized financial information concerning the geographic areas
of operation for 1996, 1995 and 1994 is shown in the following
table. The caption "Eliminations" includes intercompany sales
and other transactions which are eliminated or adjusted in
arriving at consolidated data.
Geographic Area (In thousands)
1996 1995 1994
Net Sales
United States:
Sales to unaffiliated customers $193,474 $194,016 $178,032
Transfers to non-U.S. area 8,181 5,439 4,179
201,655 199,455 182,211
United Kingdom:
Sales to unaffiliated customers 76,204 49,571 42,779
Transfers to other areas 730 732 514
76,934 50,303 43,293
Other non-U.S.:
Sales to unaffiliated customers 51,619 56,570 47,896
Transfers to other areas 7,400 6,092 7,692
59,019 62,662 55,588
Eliminations (16,311) (12,263) (12,385)
Total net sales $321,297 $300,157 $268,707
Operating Earnings
United States $23,226 $ 22,204 $ 18,109
United Kingdom 10,192 6,483 4,569
Other non-U.S. 9,141 6,345 3,708
42,559 35,032 26,386
Eliminations (72) 140 1
42,487 35,172 26,387
General corporate expenses 9,067 7,684 5,703
Operating earnings 33,420 27,488 20,684
Other income--net 182 196 803
Earnings before income taxes $33,602 $ 27,684 $ 21,487
Assets Apportioned by Area
United States $88,189 $ 87,862 $ 86,605
United Kingdom 36,037 24,718 23,419
Other non-U.S. 47,689 49,848 43,272
171,915 162,428 153,296
Eliminations (4,672) (3,783) (3,305)
167,243 158,645 149,991
Corporate assets 82,129 68,482 56,835
Total assets $249,372 $227,127 $206,826
NOTE H - Contingencies
Certain processes in the manufacture of the Company's current and
past products create hazardous waste by-products as currently
defined by federal and state laws and regulations. The Company
has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator
groups, that it is or may be a Potentially Responsible Party
(PRP) regarding hazardous waste remediation at several non-CTS
sites. The factual circumstances of each site are different; the
Company has determined that its role as a PRP with respect to
these sites, even in the aggregate, will not have a material
adverse effect on the Company's business or financial condition,
based on the following: 1) the Company's status as a de minimis
party; 2) the large number of other PRPs identified; 3) the
identification and participation of many larger PRPs who are
financially viable; 4) defenses concerning the nature and limited
quantities of materials sent by the Company to certain of the
sites; and/or 5) the Company's experience to-date in relation to
the determination of its allocable share. In addition to these
non-CTS sites, the Company has an ongoing practice of providing
reserves for probable remediation activities at certain of its
manufacturing locations and for claims and proceedings against
the Company with respect to other environmental matters. Accrued
environmental costs as of December 31, 1996, totaled $4.8
million, compared with $4.5 million at December 31, 1995. In the
opinion of management, based upon presently available
information, either adequate provision for probable costs has
been made, or the ultimate costs resulting will not materially
affect the consolidated financial position or results of
operations of the Company.
Certain claims are pending against the Company with respect to
matters arising out of the ordinary conduct of its business. 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 the
Company's consolidated financial position or results of
operations.
NOTE I - Related Party Transactions
Dynamics Corporation of America (DCA) owned 2,303,100 shares
(44.1%) of the Company's outstanding common stock at December 31,
1996. Of these shares, 1,020,000 were not granted voting
authority by CTS shareholders in 1987. In addition to stock
ownership, as of December 31, 1996, two representatives of DCA
serve on the Company's Board of Directors. The normal business
transactions between the Company and DCA are insignificant.
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, shareholders'
equity and of cash flows present fairly, in all material
respects, the financial position of CTS Corporation and its
subsidiaries at December 31, 1996, and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/S/PRICE WATERHOUSE LLP
South Bend, Indiana
January 27, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1994 - 1996)
Liquidity and Capital Resources
The table below highlights significant comparisons and ratios
related to liquidity and capital resources of CTS Corporation (CTS
or Company) for each of the last three years.
(In thousands)
December 31 December 31 December 31
1996 1995 1994
Net cash provided by (used in):
Operating activities $ 35,103 $ 26,861 $ 12,555
Investing activities (16,388) (10,945) (15,090)
Financing activities (12,324) (3,796) 2,580
Cash and equivalents $ 44,957 $ 37,271 $ 24,922
Accounts receivable, net 43,984 41,737 35,029
Inventories, net 38,761 38,885 41,456
Current assets 138,201 126,113 110,667
Notes payable 6,685 7,436
Accounts payable 17,146 15,605 12,768
Accrued liabilities 31,818 26,461 24,284
Current liabilities 51,391 50,962 44,792
Working capital 86,810 75,151 65,875
Current ratio 2.69 2.47 2.47
Interest-bearing debt $ 13,428 $ 22,267 $ 23,318
Net tangible worth 162,193 141,650 126,634
Ratio of interest-bearing debt
to net tangible worth .08 .16 .18
During 1996, $35.1 million of positive cash flow was generated from
operating activities. This amount, which exceeded 1995 by 31%, or
$8.2 million, was primarily a result of the higher level of
earnings and improved management of working capital, particularly
accounts receivable.
The 1995 cash flow from operating activities of $26.9 million
improved by $14.3 million from 1994, primarily as a result of
higher net earnings and reduction in inventories, partially offset
by an increase in accounts receivable.
During 1994, cash flow of $12.6 million was positive from operating
activities, primarily as a result of the significant improvement in
operating earnings when compared to 1993. However, offsetting the
favorable impact of the higher earnings was the higher working
capital requirements to support the increased sales levels, which
reduced operating cash flow by $5.0 million from 1993.
Cash expenditures for investing activities totaled $16.4 million in
1996, exceeding the prior year's amount by $5.4 million, or 50%.
The major change in financing activities was cash payments of $8.9
million for short and long-term debt. As of year-end, the Company
had no short-term debt.
Spending of cash for investing activities in 1995 was $10.9 million
and comparable to 1994 after the impact of the 1994 expenditures
for the light emitting diode (LED)-based fiber-optic data link
(ODL ) product line of $3.4 million. In terms of financing
activities, the impact of the notes payable reduction during 1995
was $5.3 million from the increased cash flow.
Investing requirements increased during 1994, primarily due to the
$13.4 million of capital expenditures, including $3.4 million for
the acquisition of ODL fixed assets. Additionally, financing
activities increased during 1994 and were generated by the higher
sales levels and the acquisition of the ODL product line for which
$2.1 million of additional expenditures were made for inventory.
A significant noncash component and a decreasing component of
operating earnings during the 1994 to 1996 period was pension
income of $5.4 million, $5.3 million and $6.6 million in 1996, 1995
and 1994, respectively. The 1996 pension income amount was
approximately the same as 1995, but decreased from 1994 as a result
of actuarial changes. As a result of the Company's overfunded
pension position, no overall cash contributions are anticipated to
be required in the immediate future to meet the Company's pension
obligations.
The major investment activity during the last three years has been
capital expenditures, which totaled $17.2 million in 1996, $11.2
million in 1995 and $13.4 million in 1994. The major capital
expenditures in 1996 were for new products and product line
enhancements. Also during 1996, as in 1995, capacity increases
were required in our automotive and European interconnect product
lines. The Company expects to increase its capital expenditures in
1997 over 1996 levels. These capital expenditures will be
primarily for new products and cost reduction programs, as well as
selected manufacturing equipment capacity expansion.
The most recent major long-term financing activity outside the CTS
revolving credit agreements occurred during 1994, when the Company
negotiated a five-year, $15.0 million long-term loan which expires
in 1999. As of December 31, 1996, $13.0 million remains
outstanding on this loan.
Dividends paid were $3.4 million in 1996, $3.1 million in 1995 and
$2.1 million in 1994. During 1996, as a result of continuing
improved earnings performance and positive cash flow, the Company
increased its quarterly dividend to $.18 per share, effective with
the August payment. In December 1994, the Board of Directors,
principally as a result of the Company's improving performance and
cash position, increased the quarterly dividend to $.15 per share,
effective with the February 1995 payment.
At the end of each of the last three years, cash of various non-U.S.
subsidiaries was invested in U.S.-denominated cash
equivalents. Such cash is generally available to the parent
Company and the Company's intention is not to repatriate non-U.S.
earnings. If all non-U.S. earnings were repatriated, approximately
$4.8 million of withholding taxes would accrue, but would be
substantially offset by foreign tax credits.
In 1996, CTS renegotiated its long-term revolving credit agreement
and at the end of 1996, CTS had $45.0 million of borrowing capacity
available under long-term revolving credit agreements with four
banks. These revolving agreements, which expire in 2001, are the
Company's primary credit vehicles and, together with cash from
operations, should adequately fund the Company's anticipated cash
needs.
Results of Operations
The following table highlights significant information with regard
to the Company's twelve months results of operations during the
past three fiscal years.
(In thousands)
December 31 December 31 December 31
1996 1995 1994
Net sales $321,297 $300,157 $268,707
Gross earnings 87,496 74,804 63,067
Gross earnings as a percent
of sales 27.2% 24.9% 23.5%
Selling, general and
administrative expenses $ 43,333 $ 39,312 $ 36,175
Selling, general and
administrative expenses
as a percent of sales 13.5% 13.1% 13.5%
Research and development
expenses $ 10,743 $ 8,004 $ 6,208
Research and development
expenses as a percent of
sales 3.3% 2.7% 2.3%
Operating earnings $ 33,420 $ 27,488 $ 20,684
Operating earnings as a
percent of sales 10.4% 9.1% 7.7%
Interest (income) expense, net $ (432) $ 369 $ 57
Earnings before income taxes 33,602 27,684 21,487
Income taxes 12,432 10,520 7,520
Income tax rate 37.0% 38.0% 35.0%
Net sales for 1996 increased by $21.1 million, or 7.0% over 1995,
principally due to the increased demand in the domestic and
European automotive, computer equipment and communications
equipment markets.
The 1995 net sales increased $31.5 million, or 11.7% over 1994,
primarily due to broad increases in demand for electronic component
products into our automotive, computer equipment and communications
equipment markets.
From 1993 to 1994, total sales increased by 13.4%, primarily as a
result of substantial increases in our automotive and European
interconnect product lines.
During the three-year period 1994-1996, the percentage of overall
sales to the automotive market decreased from 38% to 34%. During
this same period, our sales into the computer equipment market
increased from 19% to 24%, as a percent of total sales. Sales into
other markets have generally remained constant.
The Company's 15 largest customers represented 62% of net sales in
1996, 61% in 1995 and 62% in 1994. One customer, a major
manufacturer of automobiles, comprised 15% of net sales in 1996 as
compared to 18% in 1995 and 1994.
Because most of CTS' revenues are derived from the sale of custom
products, the relative contribution to revenues of changes in unit
volume cannot be meaningfully determined. The Company's products
are usually priced with reference to expected or required profit
margins, customer expectations and market competition. Pricing for
most of the Company's electronic component products frequently
decreases over time and also fluctuates in accordance with total
industry utilization of manufacturing capacity.
In 1996, 1995 and 1994, improvements in gross earnings were
realized over each of the preceding years in absolute terms and as
a percent of sales, principally due to higher sales volume,
production efficiencies and higher absorption of fixed
manufacturing overhead expenses.
Selling, general and administrative expenses as a percent of sales
have remained constant over the last three years, ranging from
13.1% to 13.5%. In 1996, as in previous years, the Company
continued to control these expenses while increasing sales. Also
during 1994, the Company successfully resolved approximately $1
million of outstanding legal and customer claims, the provision for
most of which had been established in 1993.
During 1996, research and development expenses increased by $2.7
million, or 34% over 1995, as the Company continued investment
efforts in new product development and product improvements,
particularly in automotive, frequency control and hybrid
microcircuit products. Research and development expenses increased
by $1.8 million, or 29%, in 1995 over 1994, with much of the
additional effort devoted to the "hall effect" non-contacting
sensor development for our automotive products, as well as other
new product development programs in the automotive and the resistor
network product areas.
The net of interest expense and interest income is reflective of
the levels of debt during the 1994-1996 period. The lower amount
of expense in 1994 relates to the timing of the $15.0 million loan
secured in late 1994, while the 1996 income amount is a result of
lower levels of short-term debt compared to 1995.
During 1996 and 1995, the primary reasons for the substantial
operating earnings improvement include the higher overall sales and
related productivity in our automotive, resistor network and
interconnect products, and the reduction of losses from our
frequency control products. These improvements substantially
offset losses from our defense and aerospace products, caused
primarily by the declining market conditions. In 1994, the level
of operating earnings was a result of the higher automotive and
interconnect product sales, and improved performance within our
resistor network and electromechanical products, which more than
offset losses from our frequency control and hybrid microcircuit
products during that year.
The 1996 effective tax rate of 37% approximated the 1995 tax rate
of 38%. The Company has net operating loss carryforwards of
approximately $21 million in certain non-U.S. subsidiaries, and has
established a 100% valuation reserve on these amounts based upon
historical pretax losses.
With respect to the recently issued FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and FASB Statement No. 123,
"Accounting for Stock-Based Compensation," the Company has realized
no impact on financial position or results of operations upon
adoption in 1996.
In terms of environmental issues, the Company has been notified by
the U.S. Environmental Protection Agency, as well as state agencies
and generator groups, that it is or may be a Potentially
Responsible Party regarding hazardous waste remediation at non-CTS
sites. Additionally, the Company provides reserves for probable
remediation activities at certain of its manufacturing locations.
These issues are discussed in Note H - Contingencies.