EXHIBIT 13
CTS CORPORATION
1996 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
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
1
CTS CORPORATION
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.
2
CTS CORPORATION
FIVE-YEAR SUMMARY
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
% OF % OF % OF
1996 SALES 1995 SALES 1994 SALES 1993
--------- ----- --------- ----- --------- ----- ---------
Summary of Operations
Net Sales............................ $ 321,297 100.0 $ 300,157 100.0 $ 268,707 100.0 $ 236,979
Cost of goods sold................. 233,801 72.8 225,353 75.1 205,640 76.5 183,927
Selling general and administrative
expenses......................... 43,333 13.5 39,312 13.1 36,175 13.5 36,323
Research and development
expenses......................... 10,743 3.3 8,004 2.7 6,208 2.3 5,708
(Gain) on sale of property and
other related provisions.........
Operating earnings................. 33,420 10.4 27,488 9.1 20,684 7.7 11,021
Other Income (expenses)-net.......... 182 0.1 196 0.1 803 0.3 (761)
Earnings before income taxes and
cumulative effect of changes in
accounting principles............ 33,602 10.5 27,684 9.2 21,487 8.0 10,260
Income taxes......................... 12,432 3.9 10,520 3.5 7,520 2.8 3,690
Net earnings--before accounting
changes.......................... 21,170 6.6 17,164 5.7 13,967 5.2 6,570
Cumulative effect on prior years of
accounting changes (a)............. (4,614)
Net earnings..................... 21,170 6.6 17,164 5.7 13,967 5.2 1,956
Retained earnings-beginning of
year............................... 126,546 112,506 100,868 100,973
Dividends declared................... (3,604) (3,124) (2,329) (2,061)
Retained earnings-end of year........ $ 144,112 $ 126,546 $ 112,506 $ 100,868
Average common and common equivalent
of shares outstanding.............. 5,259,284 5,200,818 5,170,406 5,152,556
Net earnings per share:
Before accounting changes.......... $ 4.03 $ 3.30 $ 2.70 $ 1.27
Cumulative effect on prior years of
accounting changes(a)............ (0.89)
Net earnings....................... $ 4.03 $ 3.30 $ 2.70 $ 0.38
Cash dividends per share............. $ 0.69 $ 0.60 $ 0.45 $ 0.40
Capital expenditures................. 17,210 11,181 13,401 11,696
Depreciation and amortization........ 12,491 11,683 11,236 12,143
Financial Position at Year-End
Current assets....................... $ 138,201 $ 126,113 $ 110,667 $ 97,266
Current liabilities.................. 51,391 50,962 44,792 49,888
Current ratio........................ 2.7 to 1 2.5 to 1 2.5 to 1 1.9 to 1
Working capital...................... $ 86,810 $ 75,151 $ 65,875 $ 47,378
Inventories.......................... 38,761 38,885 41,456 36,059
Property, plant and equipment-net.... 56,103 50,696 50,777 47,842
Total assets......................... 249,372 227,127 206,826 185,064
Short-term notes payable............. 6,685 7,436 12,822
Long-term obligations................ 11,220 13,714 15,595 4,995
Shareholders' equity................. 166,232 146,253 131,855 119,203
Common shares outstanding............ 5,224,956 5,217,329 5,178,604 5,153,424
Equity (book value) per share........ $ 31.82 $ 28.03 $ 25.46 $ 23.13
Other data
Stock price range (dollars per share $ 47.00- $ 37.75- $ 31.00- $ 22.38-
to the nearest 1/8)................ $ 36.00 $ 27.38 $ 19.50 $ 17.00
Average number of employees.......... 3,815 4,007 4,056 3,975
Number of shareholders at year-end... 986 1,062 1,136 1,198
% OF % OF
SALES 1992 SALES
----- --------- -----
Summary of Operations
Net Sales............................ 100.0 $ 277,391 100.0
Cost of goods sold................. 77.6 180,198 79.2
Selling general and administrative
expenses......................... 15.3 37,855 16.6
Research and development
expenses......................... 2.4 6,092 2.7
(Gain) on sale of property and
other related provisions......... (852) (0.3)
Operating earnings................. 4.7 4,098 1.8
Other Income (expenses)-net.......... (0.4) (277) (0.1)
Earnings before income taxes and
cumulative effect of changes in
accounting principles............ 4.3 3,821 1.7
Income taxes......................... 1.6 1,920 0.9
Net earnings--before accounting
changes.......................... 2.7 1,901 0.8
Cumulative effect on prior years of
accounting changes (a)............. (1.9)
Net earnings..................... 0.8 1,901 0.8
Retained earnings-beginning of
year............................... 102,482
Dividends declared................... (3,410)
Retained earnings-end of year........ $ 100,973
Average common and common equivalent
of shares outstanding.............. 5,141,936
Net earnings per share:
Before accounting changes.......... $ 0.37
Cumulative effect on prior years of
accounting changes(a)............
Net earnings....................... $ 0.37
Cash dividends per share............. $ 0.6625
Capital expenditures................. 8,831
Depreciation and amortization........ 11,665
Financial Position at Year-End
Current assets....................... $ 87,376
Current liabilities.................. 37,262
Current ratio........................ 2.3 to 1
Working capital...................... $ 50,114
Inventories.......................... 37,222
Property, plant and equipment-net.... 48,529
Total assets......................... 170,773
Short-term notes payable............. 5,827
Long-term obligations................ 10,826
Shareholders' equity................. 119,372
Common shares outstanding............ 5,150,824
Equity (book value) per share........ $ 23.18
Other data
Stock price range (dollars per share $ 24.50-
to the nearest 1/8)................ $ 17.13
Average number of employees.......... 4,335
Number of shareholders at year-end... 1,278
- - ------------------------
(a) The Company adopted FASB 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and FASB 109, "Accounting for Income Taxes,"
as of January 1, 1993.
3
CTS CORPORATION
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.
4
CTS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
CUMULATIVE
COMMON RETAINED TRANSLATION DEFERRED TREASURY
STOCK EARNINGS ADJUSTMENT COMPENSATION 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........................... 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........................... 76 (632) 556
Issued 17,325 shares on exercise of stock
options.................................. (163) 522 359
Acquired compensation...................... 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............................... 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
5
CTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 31 DECEMBER 31
1996 1995
------------ ------------
ASSETS
Current Assets
Cash and equivalents................................................................ $ 44,957 $ 37,271
Accountants 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........ 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.
6
CTS CORPORATION
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
Adjustment 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)
Charges 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 financing 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.
7
CTS CORPORATION
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 adjustments made directly to the
"Cumulative translation adjustment" component of shareholders' equity.
Statements of earnings accounts are translated at the average rates during the
period.
FINANCIAL INSTRUMENTS 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.
8
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
9
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 per share would have been reduced
to the pro forma amounts indicated below:
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
--------------------
1996 1995
--------- ---------
As reported $ 21,170 $ 17,164
Net earnings................................................................ Pro forma $ 20,936 $ 17,141
As reported $ 4.03 $ 3.30
Net earnings per share...................................................... 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.
10
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 beginning 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
------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
NUMBER REMAINING --------------------------------------
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
PRICES 12/31/96 (YEARS) EXERCISE PRICE AT 12/31/96 EXERCISE 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.
11
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1995
---------- ---------- ----------
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)
---------- ---------- ----------
12
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
13
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
14
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
--------- ---------
--------- ---------
15
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
CTS' 15 largest customers represented about 62%, 61% and 62% of net sales in
1996, 1995 and 1994, respectively. Sales to General Motors Corportation ("GM")
represented more than 10% of CTS' net sales in each of the last three years
(ranging from 15% to 18% of net sales over such period). The loss of, or
reduction in, orders from GM could have a material adverse effect on CTS.
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.
16
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(IN THOUSANDS)
----------------------------------
GEOGRAPHIC AREA 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
---------- ---------- ----------
United Kingdom: 201,655 199,455 182,211
Sales to unaffiliated customers.......................................... 76,204 49,571 42,779
Transfers to other areas................................................. 730 732 514
---------- ---------- ----------
Other non-U.S.: 76,934 50,303 43,293
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
---------- ---------- ----------
---------- ---------- ----------
17
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
18
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
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
19
CTS CORPORATION
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, 1996 DECEMBER 31, 1995 DECEMBER 31, 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-Registered Trademark-)
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
20
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.
21
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
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$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.
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