UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
Quarterly Period Ended July
2, 2006
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
Transition Period from _______________ to _______________
Commission
File Number: 1-4639
CTS
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Indiana
|
|
35-0225010
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification Number)
|
|
|
905
West Boulevard North, Elkhart, IN
|
|
46514
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code: 574-293-7511
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of July 24, 2006: 35,900,777.
TABLE
OF CONTENTS
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Page
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FINANCIAL
INFORMATION
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3
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|
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|
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Item
1.
|
|
3
|
|
|
|
|
|
|
3
|
|
- For the Three and Six Months ended July 2, 2006 and July 3,
2005
|
|
|
|
|
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|
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4
|
|
- As of July 2, 2006, and December 31,
2005
|
|
|
|
|
|
|
|
5
|
|
- For the Six Months Ended July 2, 2006 and July
3, 2005
|
|
|
|
|
|
|
|
6
|
|
- For the Three and Six Months Ended July 2, 2006 and July 3,
2005
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Item
2.
|
|
18
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|
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|
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|
Item
3.
|
|
29
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|
|
|
|
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Item
4.
|
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29
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|
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|
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|
OTHER
INFORMATION
|
29
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|
|
|
|
|
Item
1.
|
|
29
|
|
|
|
|
|
Item
1A.
|
|
29
|
|
|
|
|
|
Item
2.
|
|
30
|
|
|
|
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|
Item
4.
|
|
31
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Item
6.
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31
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32
|
(In
thousands of dollars, except per share amounts)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165,925
|
|
$
|
158,346
|
|
$
|
316,418
|
|
$
|
313,676
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
131,945
|
|
|
126,054
|
|
|
250,364
|
|
|
253,169
|
|
Selling,
general and administrative expenses
|
|
|
19,924
|
|
|
17,404
|
|
|
36,661
|
|
|
35,161
|
|
Research
and development expenses
|
|
|
4,070
|
|
|
4,567
|
|
|
8,162
|
|
|
9,354
|
|
Restructuring
charge - Note C
|
|
|
920
|
|
|
—
|
|
|
2,882
|
|
|
—
|
|
Operating
earnings
|
|
|
9,066
|
|
|
10,321
|
|
|
18,349
|
|
|
15,992
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,034
|
)
|
|
(1,582
|
)
|
|
(2,145
|
)
|
|
(3,299
|
)
|
Interest
income
|
|
|
198
|
|
|
396
|
|
|
323
|
|
|
815
|
|
Other
|
|
|
59
|
|
|
(326
|
)
|
|
62
|
|
|
(300
|
)
|
Total
other expense
|
|
|
(777
|
)
|
|
(1,512
|
)
|
|
(1,760
|
)
|
|
(2,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes
|
|
|
8,289
|
|
|
8,809
|
|
|
16,589
|
|
|
13,208
|
|
Income
tax expense — Note M
|
|
|
1,973
|
|
|
4,867
|
|
|
4,048
|
|
|
5,879
|
|
Net
earnings
|
|
$
|
6,316
|
|
$
|
3,942
|
|
$
|
12,541
|
|
$
|
7,329
|
|
Net
earnings per share — Note K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.11
|
|
$
|
0.35
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
$
|
0.10
|
|
$
|
0.32
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
0.06
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,843
|
|
|
36,621
|
|
|
35,832
|
|
|
36,508
|
|
Diluted
|
|
|
40,145
|
|
|
41,226
|
|
|
40,189
|
|
|
41,101
|
|
See
notes
to condensed consolidated financial statements.
(dollars
in thousands)
|
|
July
2, 2006
|
|
December
31, 2005*
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
17,651
|
|
$
|
12,029
|
|
Accounts
receivable, less allowances (2006 - $2,741; 2005 - $2,373)
|
|
|
104,600
|
|
|
91,265
|
|
Inventories
— Note F
|
|
|
65,012
|
|
|
60,564
|
|
Other
current assets
|
|
|
17,989
|
|
|
16,816
|
|
Total
current assets
|
|
|
205,252
|
|
|
180,674
|
|
Property,
plant and equipment, less accumulated depreciation (2006 - $254,788;
2005
- $252,545)
|
|
|
104,450
|
|
|
109,676
|
|
Other
Assets
|
|
|
|
|
|
|
|
Prepaid
pension asset — Note H
|
|
|
155,289
|
|
|
152,483
|
|
Goodwill
|
|
|
24,657
|
|
|
24,657
|
|
Other
intangible assets, net
|
|
|
40,745
|
|
|
42,347
|
|
Deferred
income taxes
|
|
|
22,045
|
|
|
22,011
|
|
Other
|
|
|
1,713
|
|
|
2,088
|
|
Total
other assets
|
|
|
244,449
|
|
|
243,586
|
|
Total
Assets
|
|
$
|
554,151
|
|
$
|
533,936
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
12,095
|
|
$
|
13,299
|
|
Current
portion of long-term debt - Note G
|
|
|
173
|
|
|
164
|
|
Accounts
payable
|
|
|
74,060
|
|
|
67,196
|
|
Accrued
liabilities
|
|
|
43,974
|
|
|
39,274
|
|
Total
current liabilities
|
|
|
130,302
|
|
|
119,933
|
|
Long-term
debt - Note G
|
|
|
64,266
|
|
|
68,293
|
|
Other
long-term obligations
|
|
|
16,350
|
|
|
16,139
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Preferred
stock - authorized 25,000,000 shares without par value; none
issued
|
|
|
—
|
|
|
—
|
|
Common
stock — authorized 75,000,000 shares without par value; 53,674,917 shares
issued at July 2, 2006 and 53,576,243 shares issued at December 31,
2005
|
|
|
276,183
|
|
|
275,211
|
|
Additional
contributed capital
|
|
|
25,842
|
|
|
24,743
|
|
Retained
earnings
|
|
|
307,344
|
|
|
296,956
|
|
Accumulated
other comprehensive earnings (loss)
|
|
|
1,739
|
|
|
(244
|
)
|
|
|
|
611,108
|
|
|
596,666
|
|
Cost
of common stock held in treasury (17,776,027 shares at 2006 and
17,717,657
shares at 2005)
|
|
|
(267,875
|
)
|
|
(267,095
|
)
|
Total
shareholders’ equity
|
|
|
343,233
|
|
|
329,571
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
554,151
|
|
$
|
533,936
|
|
*The
balance sheet at December 31, 2005, has been derived from the audited
financial statements at that date.
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In
thousands of dollars)
|
|
Six
Months Ended
|
|
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
12,541
|
|
$
|
7,329
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,200
|
|
|
13,649
|
|
Prepaid
pension asset
|
|
|
(3,131
|
)
|
|
(4,132
|
)
|
Equity-based
compensation
|
|
|
2,065
|
|
|
1,159
|
|
Restructuring
charge
|
|
|
2,882
|
|
|
—
|
|
Deferred
income taxes
|
|
|
—
|
|
|
3,048
|
|
Changes
in assets and liabilities, net of effects from purchase
of
SMTEK
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(13,335
|
)
|
|
10,011
|
|
Inventories
|
|
|
(4,447
|
)
|
|
(1,564
|
)
|
Other
current assets
|
|
|
(1,300
|
)
|
|
(3,336
|
)
|
Accounts
payable and accrued liabilities
|
|
|
8,651
|
|
|
(1,977
|
)
|
Other
|
|
|
301
|
|
|
389
|
|
Total
adjustments
|
|
|
4,886
|
|
|
17,247
|
|
Net
cash provided by operating activities
|
|
|
17,427
|
|
|
24,576
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payment
for purchase of SMTEK, net of cash acquired
|
|
|
—
|
|
|
(35,561
|
)
|
Capital
expenditures
|
|
|
(5,848
|
)
|
|
(5,911
|
)
|
Proceeds
from sales of assets
|
|
|
1,227
|
|
|
800
|
|
Net
cash used in investing activities
|
|
|
(4,621
|
)
|
|
(40,672
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
Repayment
of debt assumed in connection with purchase of SMTEK
|
|
|
—
|
|
|
(13,013
|
)
|
Payments
of long-term debt
|
|
|
(61,268
|
)
|
|
(108,201
|
)
|
Proceeds
from borrowings of long-term debt
|
|
|
57,190
|
|
|
98,522
|
|
Decrease
in short-term notes payable
|
|
|
(1,204
|
)
|
|
(311
|
)
|
Dividends
paid
|
|
|
(2,152
|
)
|
|
(2,159
|
)
|
Purchase
of treasury stock
|
|
|
(768
|
)
|
|
(3,388
|
)
|
Other
|
|
|
(130
|
)
|
|
(46
|
)
|
Net
cash used in financing activities
|
|
|
(8,332
|
)
|
|
(28,596
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
1,148
|
|
|
(2,119
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
5,622
|
|
|
(46,811
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
12,029
|
|
|
61,005
|
|
Cash
and cash equivalents at end of period
|
|
$
|
17,651
|
|
$
|
14,194
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,847
|
|
$
|
2,935
|
|
Income
taxes—net
|
|
$
|
2,729
|
|
$
|
2,801
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
Refer
to Note E, “Supplemental Schedule of Noncash Investing and Financing
Activities”
|
|
|
See
notes
to condensed consolidated financial statements.
(In
thousands of dollars)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Net
earnings
|
|
$
|
6,316
|
|
$
|
3,942
|
|
$
|
12,541
|
|
$
|
7,329
|
|
Other
comprehensive earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
1,448
|
|
|
(1,564
|
)
|
|
1,983
|
|
|
(1,959
|
)
|
Comprehensive
earnings
|
|
$
|
7,764
|
|
$
|
2,378
|
|
$
|
14,524
|
|
$
|
5,370
|
|
See
notes
to condensed consolidated financial statements.
July
2, 2006
NOTE
A—Basis of Presentation
The
accompanying condensed consolidated interim financial statements have been
prepared by CTS Corporation (CTS or the Company), without audit, pursuant
to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been
omitted pursuant to such rules and regulations. The unaudited condensed
consolidated interim financial statements should be read in conjunction with
the
financial statements, notes thereto, and other information included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
The
accompanying unaudited condensed consolidated interim financial statements
reflect, in the opinion of management, all adjustments (consisting of normal
recurring items) necessary for a fair statement, in all material respects,
of
the financial position and results of operations for the periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ materially from those estimates.
The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
Certain
reclassifications have been made for the periods presented in the consolidated
financial statements to conform to the classifications adopted in
2006.
NOTE
B—Share-Based Compensation
Effective
January 1, 2006, CTS adopted the provisions of the Financial Accounting
Standards Board’s (FASB) Financial Accounting Standard (FAS) No. 123(R),
“Share-Based Payment.” FAS No. 123(R) requires that CTS recognize expense
related to the fair value of stock-based compensation awards in the Unaudited
Condensed Consolidated Statement of Earnings.
Prior
to
January 1, 2006, CTS accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No.
25,
“Accounting for Stock Issued to Employees,” and its related Interpretations.
Accordingly, stock-based compensation expense was not recognized in the
Unaudited Condensed Consolidated Statement of Earnings for stock options
granted
with an exercise price equal to the market value of the common stock on the
grant date. However, prior years’ financial statements did include pro forma
disclosures for equity-based awards as if the fair-value approach had been
followed. The following table presents the pro forma net earnings and net
earnings per share for the three and six-month periods ending July 3, 2005,
as
if CTS had applied the provisions of FAS No. 123(R) during those
periods:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands, except per share amounts)
|
|
July
3, 2005
|
|
July
3, 2005
|
|
Net
earnings, as reported
|
|
$
|
3,942
|
|
$
|
7,329
|
|
Deduct:
Stock-based employee compensation cost, net of tax, as if fair
value based
method
were used
|
|
|
(149
|
)
|
|
(280
|
)
|
Pro
forma net earnings
|
|
$
|
3,793
|
|
$
|
7,049
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - basic, as reported
|
|
$
|
0.11
|
|
$
|
0.20
|
|
Pro
forma net earnings per share - basic
|
|
|
0.10
|
|
|
0.19
|
|
Net
earnings per share - diluted, as reported
|
|
|
0.10
|
|
|
0.19
|
|
Pro
forma net earnings per share - diluted
|
|
$
|
0.10
|
|
$
|
0.18
|
|
CTS
has
elected to follow the modified prospective transition method allowed by FAS
No.
123(R), and therefore, will apply the provisions of FAS No. 123(R) to awards
modified or granted after January 1, 2006. In addition, for awards which
were
unvested as of January 1, 2006, CTS will recognize compensation expense in
the
Unaudited Condensed Consolidated Statement of Earnings over the remaining
vesting period. The compensation expense for these awards will be based on
the
grant-date fair value as calculated for the prior years’ pro forma disclosures.
As allowed under the modified prospective transition method, the financial
results for prior periods have not been restated. The cumulative effect of
the
change in accounting principle from APB No. 25 was not
material.
As
a
result of adopting FAS No. 123(R), CTS has included additional compensation
expense relating to stock option awards to employees in its operating earnings,
earnings before income taxes, net income, and earnings per share. The impact
of
this incremental expense, for the three and six-month periods ending July
2,
2006 is shown in the following table:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands, except per share amounts)
|
|
|
July
2, 2006
|
|
|
July
2, 2006
|
|
Impact
of adopting FAS No. 123(R) on:
|
|
|
|
|
|
|
|
Operating
earnings
|
|
$
|
537
|
|
$
|
746
|
|
Earnings
before income taxes
|
|
|
537
|
|
|
746
|
|
Net
earnings
|
|
|
322
|
|
|
448
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Prior
to
the adoption of FAS No. 123(R), CTS presented tax benefits in excess of
recognized cumulative compensation costs as operating cash flows in the
Unaudited Condensed Consolidated Statement of Cash Flows. FAS No. 123(R)
requires these cash flows be classified as financing cash flows. CTS has
classified $130,000 and $23,000 of these excess tax benefits as financing
cash
flows for the six-month periods ending July 2, 2006 and July 3, 2005,
respectively.
At
July
2, 2006, CTS had five equity-based compensation plans: the 1988 Restricted
Stock
and Cash Bonus Plan (1988 Plan), the 1996 Stock Option Plan (1996 Plan),
the
2001 Stock Option Plan (2001 Plan), the Nonemployee Directors’ Stock Retirement
Plan (Directors’ Plan), and the 2004 Omnibus Long-Term Incentive Plan (2004
Plan). As of December 2004, additional grants can only be made under the
2004
Plan. CTS believes that equity-based awards align the interest of employees
with
those of its shareholders.
The
2004
Plan, and previously the 1996 Plan and 2001 Plan, provides for grants of
incentive stock options or nonqualified stock options to officers, key
employees, and nonemployee members of CTS’ board of directors. In addition, the
2004 Plan allows for grants of stock appreciation rights, restricted stock,
restricted stock units, performance shares, performance units, and other
stock
awards.
The
following table summarizes the compensation expense included in the Unaudited
Condensed Consolidated Statement of Earnings for the three and six-month
periods
ending July 2, 2006 and July 3, 2005 relating to equity-based compensation
plans:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
|
July
2, 2006
|
|
|
July
3, 2005
|
|
|
July
2, 2006
|
|
|
July
3, 2005
|
|
Stock
options (1)
|
|
$
|
548
|
|
$
|
23
|
|
$
|
771
|
|
$
|
46
|
|
Restricted
stock units
|
|
|
595
|
|
|
446
|
|
|
1,176
|
|
|
962
|
|
Restricted
stock
|
|
|
57
|
|
|
73
|
|
|
118
|
|
|
151
|
|
Total
|
|
$
|
1,200
|
|
$
|
542
|
|
$
|
2,065
|
|
$
|
1,159
|
|
(1) |
Stock
option expense includes $11 and $23 in the quarters ending July 2,
2006
and July 3, 2005, respectively, and $25 and $46 for the six-month
periods
ending July 2, 2006 and July 3, 2005, respectively, related to
non-employee director stock options.
|
_______________________
The
following table summarizes plan status as of July 2, 2006:
|
|
2004
Plan
|
|
2001
Plan
|
|
1996
Plan
|
|
Awards
originally available
|
|
|
6,500,000
|
|
|
2,000,000
|
|
|
1,200,000
|
|
Stock
options outstanding
|
|
|
332,000
|
|
|
929,324
|
|
|
320,050
|
|
Restricted
stock units outstanding
|
|
|
611,808
|
|
|
—
|
|
|
—
|
|
Awards
exercisable
|
|
|
85,350
|
|
|
792,929
|
|
|
297,251
|
|
Awards
available for grant
|
|
|
5,425,239
|
|
|
—
|
|
|
—
|
|
Stock
Options
Stock
options are exercisable in cumulative annual installments over a maximum
10-year
period, commencing at least one year from the date of grant. Stock options
are
generally granted with an exercise price equal to the market price of the
Company’s stock on the date of grant. The stock options generally vest over four
years and have a 10-year contractual life. The awards generally contain
provisions to either accelerate vesting or allow vesting to continue on schedule
upon retirement if certain service and age requirements are met. The awards
also
provide for accelerated vesting if there is a change in control
event.
The
Company estimates the fair value of the stock option on the grant date using
the
Black-Scholes option-pricing model and assumptions for expected price
volatility, option term, risk-free interest rate, and dividend yield. Expected
price volatilities are based on historical volatilities of the Company’s stock.
The expected option term is derived from historical data on exercise behavior.
The range of option terms shown below results from certain groups of employees
exhibiting different behavior. The dividend yield is based on historical
dividend payments. The risk-free rate for periods within the contractual
life of
the option is based on the U.S. Treasury yield curve in effect at the time
of
grant.
|
|
Six
Months Ended
|
|
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Expected
volatility
|
|
|
53.3%
- 58.2%
|
|
|
52.4%
|
|
Weighted-average
volatility
|
|
|
54.1%
|
|
|
52.4%
|
|
Expected
dividends
|
|
|
0.9%
|
|
|
1.1%
|
|
Expected
term
|
|
|
4.0
- 10.0 years
|
|
|
10.0
years
|
|
Weighted-average
risk-free rate
|
|
|
5.1%
|
|
|
4.1%
|
|
A
summary
of the status of stock options as of July 2, 2006 and July 3, 2005, and changes
during the six-month periods then ended, is presented below:
|
|
July
2, 2006
|
|
July
3, 2005
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding
at beginning of year
|
|
|
1,567,499
|
|
$
|
15.93
|
|
|
1,636,900
|
|
$
|
16.82
|
|
Granted
|
|
|
93,000
|
|
|
13.68
|
|
|
136,600
|
|
|
11.11
|
|
Exercised
|
|
|
(25,350
|
)
|
|
8.55
|
|
|
(14,425
|
)
|
|
8.44
|
|
Expired
|
|
|
(45,375
|
)
|
|
23.41
|
|
|
(58,901
|
)
|
|
28.81
|
|
Forfeited
|
|
|
(8,400
|
)
|
|
9.45
|
|
|
(24,599
|
)
|
|
9.99
|
|
Outstanding
at end of period
|
|
|
1,581,374
|
|
$
|
15.73
|
|
|
1,675,575
|
|
$
|
16.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,175,530
|
|
$
|
17.24
|
|
|
1,008,982
|
|
$
|
19.92
|
|
The
total
intrinsic value of stock options exercised during the six-month periods ended
July 2, 2006 and July 3, 2005 was $114,000 and $56,000 respectively. The
exercise price of options granted during the six-month periods ending July
2,
2006 and July 3, 2005 equaled the trading price of the company’s stock on the
grant date.
A
summary
of the weighted-average remaining contractual term and aggregate intrinsic
value
of options outstanding and exercisable at July 2, 2006 is presented
below:
|
Weighted-average
Remaining
Contractual Life
|
Aggregate
Intrinsic Value
|
Options
outstanding
|
6.3 years
|
—
|
Options
exercisable |
5.7
years
|
—
|
A
summary
of the nonvested stock options as of July 2, 2006 and July 3, 2005, and changes
during the six-month periods then ended, is presented below:
|
|
July
2, 2006
|
|
July
3, 2005
|
|
|
|
Options
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Options
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Nonvested
at beginning of year
|
|
|
488,943
|
|
$
|
6.94
|
|
|
792,716
|
|
$
|
5.53
|
|
Granted
|
|
|
93,000
|
|
|
6.53
|
|
|
136,600
|
|
|
6.51
|
|
Vested
|
|
|
(167,699
|
)
|
|
5.35
|
|
|
(238,124
|
)
|
|
7.48
|
|
Forfeited
|
|
|
(8,400
|
)
|
|
4.57
|
|
|
(24,599
|
)
|
|
4.86
|
|
Nonvested
at end of period
|
|
|
405,844
|
(1)
|
$
|
5.59
|
|
|
666,593
|
|
$
|
5.23
|
|
(1)
Based on historical experience, CTS currently expects approximately 404,000
of
these options to vest.
_____________________
The
total
fair value of shares vested during the quarters ended July 2, 2006 and July
3,
2005 was approximately $897,000 and $1,781,000 respectively. As of July 2,
2006,
there was $979,000 of unrecognized compensation cost related to nonvested
stock
options. That cost is expected to be recognized over a weighted-average period
of 1.4 years. CTS recognizes expense on a straight-line basis over the requisite
service period for each separately vesting portion of the award as if the
award
was, in substance, multiple awards.
The
following table summarizes information about stock options outstanding at
July
2, 2006:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Range
of
|
|
Number
|
|
Remaining
|
|
Weighted-Average
|
|
Number
|
|
Weighted-Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
Prices
|
|
at
7/2/06
|
|
Life
(Years)
|
|
Price
|
|
at
7/2/06
|
|
Price
|
$
|
7.70
- 11.11
|
|
|
910,899
|
|
|
|
7.33
|
|
|
$
|
9.35
|
|
|
|
610,055
|
|
|
$
|
9.06
|
|
|
13.68
- 16.24
|
|
|
237,800
|
|
|
|
7.35
|
|
|
|
14.10
|
|
|
|
132,800
|
|
|
|
14.34
|
|
|
23.00
- 33.63
|
|
|
327,675
|
|
|
|
4.53
|
|
|
|
24.57
|
|
|
|
327,675
|
|
|
|
24.57
|
|
|
35.97
- 50.00
|
|
|
103,500
|
|
|
|
4.20
|
|
|
|
47.02
|
|
|
|
103,500
|
|
|
|
47.02
|
|
|
56.94
- 79.25
|
|
|
1,500
|
|
|
|
3.28
|
|
|
|
64.38
|
|
|
|
1,500
|
|
|
|
64.38
|
|
Restricted
Stock Units
Stock
settled restricted stock units (RSUs) entitle the holder to receive one share
of
common stock for each unit when the unit vests. RSUs are issued to officers
and
key employees as compensation. Generally, the RSUs vest over a five-year
period.
A summary of the status of RSUs as of July 2, 2006 and July 3, 2005, and
changes
during the six-month periods then ended is presented below:
|
|
July
2, 2006
|
|
July
3, 2005
|
|
|
|
RSUs
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
RSUs
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Outstanding
at beginning of year
|
|
|
525,898
|
|
$
|
11.49
|
|
|
252,000
|
|
$
|
11.07
|
|
Granted
|
|
|
207,600
|
|
|
13.68
|
|
|
310,250
|
|
|
11.62
|
|
Settled
|
|
|
(99,760
|
)
|
|
11.22
|
|
|
(45,510
|
)
|
|
11.04
|
|
Cancelled
|
|
|
(21,930
|
)
|
|
11.29
|
|
|
(15,750
|
)
|
|
11.22
|
|
Outstanding
at end of period
|
|
|
611,808
|
|
$
|
11.82
|
|
|
500,990
|
|
$
|
11.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining contractual life
|
|
|
4.7
years
|
|
|
|
|
|
5.0
years
|
|
|
|
|
As
of
July 2, 2006, there was $4.9 million of unrecognized compensation cost related
to nonvested RSUs. That cost is expected to be recognized over a
weighted-average period of 1.8 years. CTS recognizes expense on a straight-line
basis over the requisite service period for each separately vesting portion
of
the award as if the award was, in substance, multiple awards.
Restricted
Stock and Cash Bonus Plan
CTS’
1988
Plan originally reserved 2,400,000 shares of CTS’ common stock for sale at
market price, or award, to key employees. Under the 1988 Plan, 41,382 shares
of
Restricted Stock were outstanding as of July 2, 2006. Shares sold or awarded
are
subject to restrictions against transfer and repurchase rights of CTS. In
general, restrictions lapse at the rate of 20% per year beginning one year
from
the grant date. In addition, the 1988 Plan provides for a cash bonus to the
participant equal to the fair market value of shares on the dates restrictions
lapse, in the case of an award. 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. As of July 2, 2006, there was $289,000 of total unrecognized
compensation cost related to nonvested Restricted Stock. That cost is expected
to be recognized over a weighted-average period of 1.3 years. CTS recognizes
expense on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance,
multiple awards.
Stock
Retirement Plan
The
Directors’ Plan provides for a portion of the total compensation payable to
nonemployee directors to be deferred and paid in CTS stock. The Directors
Plan
was frozen effective December 1, 2004. All future grants will be from the
2004
Plan.
NOTE
C - Restructuring Charge
In
January 2006, CTS announced its intention to consolidate its Berne, Indiana
manufacturing operations into three of its other existing facilities. Automotive
product operations at Berne will be transferred to CTS’ automotive facilities in
Matamoros, Mexico and Elkhart, Indiana. Electronic components operations
in
Berne will be moved to CTS’ Singapore facility. While the Berne facility is
currently being marketed for sale, CTS continues to use the facility for
certain
electronic component-related service functions. The consolidation process
is
expected to largely be completed in the second half of 2006.
The
following table displays the planned costs associated with the Berne
consolidation, as well as a summary of the actual costs incurred through
July 2,
2006:
($
in millions)
|
|
Planned
Costs
|
|
Actual
incurred through
July
2, 2006
|
|
|
|
|
|
|
|
Workforce
reduction
|
|
$
|
3.1
|
|
$
|
2.6
|
|
Postemployment
obligation curtailment, net - Note H
|
|
|
0.2
|
|
|
0.2
|
|
Other
|
|
|
0.1
|
|
|
0.1
|
|
Restructuring
charge
|
|
|
3.4
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Equipment
relocation
|
|
|
0.3
|
|
|
0.4
|
|
Other
employee related costs
|
|
|
0.3
|
|
|
0.3
|
|
Restructuring-related
costs
|
|
|
0.6
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Total
restructuring and restructuring-related costs
|
|
$
|
4.0
|
|
$
|
3.6
|
|
All
of
the Berne consolidation costs relate to the Components and Sensors business
segment. Restructuring charges are reported on a separate line on the Unaudited
Condensed Consolidated Statement of Earnings and the restructuring-related
costs
are included in cost of goods sold.
The
following table displays the restructuring reserve activity for the six-month
period ending July 2, 2006:
($
in millions)
|
|
|
|
Restructuring
liability at January 1, 2006
|
|
$
|
—
|
|
First
six months of 2006 charge
|
|
|
3.6
|
|
Costs
paid
|
|
|
(1.4
|
)
|
Restructuring
liability at July 2, 2006
|
|
$
|
2.2
|
|
NOTE
D—Acquisition
Effective
January 31, 2005, CTS acquired 100% of SMTEK International Inc., (SMTEK).
The
results of SMTEK’s operations have been included in the consolidated financial
statements since that date. SMTEK is an EMS provider serving original equipment
manufacturers in the medical, industrial, instrumentation, telecommunications,
security, financial services, automation, aerospace, and defense industries.
SMTEK had four facilities located in Moorpark and Santa Clara, California;
Marlborough, Massachusetts; and Bangkok, Thailand.
The
following table presents CTS’ unaudited pro forma consolidated results of
operations for the six-month period ending July 3, 2005 as if the acquisition
had been completed at the beginning of the period. The pro forma information
is
presented for comparative purposes only and does not purport to be indicative
of
what would have occurred had the acquisition actually been made at such date,
nor is it necessarily indicative of future operating results.
($
in thousands, except per share amounts)
|
|
Pro
forma
Six
Months Ended
July
3, 2005
|
|
|
|
|
|
Revenues
|
|
$
|
323,723
|
|
Net
income
|
|
$
|
7,503
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.19
|
|
NOTE
E—Supplemental Schedule of Noncash Investing and Financing
Activities
In
2005,
the Company purchased all of the capital stock of SMTEK for $61.1 million.
In
conjunction with the acquisition, CTS issued common stock and assumed
liabilities as follows (refer also to Note D, “Acquisition”):
($
in millions)
|
|
|
|
Cash
paid
|
|
$
|
37.2
|
|
Fair
value of stock issued
|
|
|
10.9
|
|
Liabilities
assumed
|
|
|
32.8
|
|
Fair
value of assets acquired
|
|
$
|
80.9
|
|
NOTE
F—Inventories
Inventories
consist of the following:
($
in thousands)
|
|
July
2, 2006
|
|
December
31, 2005
|
|
Finished
goods
|
|
$
|
12,509
|
|
$
|
11,771
|
|
Work-in-process
|
|
|
15,568
|
|
|
16,039
|
|
Raw
materials
|
|
|
36,935
|
|
|
32,754
|
|
Total
inventories
|
|
$
|
65,012
|
|
$
|
60,564
|
|
NOTE
G - Debt
Long-term
debt was comprised of the following:
($
in thousands)
|
|
July
2, 2006
|
|
December
31, 2005
|
|
Revolving
credit agreement, weighted-average interest rate of 6.5%, due in
2011
|
|
$
|
3,590
|
|
$
|
—
|
|
Revolving
credit agreement, weighted-average interest rate of 6.1%
|
|
|
—
|
|
|
2,080
|
|
Convertible,
senior subordinated debentures at a weighted-average interest rate
of
2.125%,
due in 2024
|
|
|
60,000
|
|
|
60,000
|
|
Convertible,
subordinated debentures at a weighted-averaged interest rate of
6.5%
|
|
|
—
|
|
|
5,500
|
|
Term
loan, weighted-average interest rate of 6.7% (2006) and 5.8% (2005),
due
in 2011
|
|
|
849
|
|
|
875
|
|
Other
debt, weighted-average interest rate of 6.3%
|
|
|
—
|
|
|
2
|
|
|
|
|
64,439
|
|
|
68,457
|
|
Less
current maturities
|
|
|
173
|
|
|
164
|
|
Total
long-term debt
|
|
$
|
64,266
|
|
$
|
68,293
|
|
On
June
27, 2006, CTS entered into a new $100 million, unsecured revolving credit
agreement. Under the terms of the new revolving credit agreement, CTS can
expand
the credit facility to $150 million. The new revolving credit agreement had
an
outstanding balance of $3.6 million at July 2, 2006. Interest rates on the
new
revolving credit agreement fluctuate based upon LIBOR and the Company’s
quarterly total leverage ratio. CTS pays a commitment fee on the undrawn
portion
of the new revolving credit agreement. The commitment fee varies based on
the
quarterly leverage ratio and was 0.15 percent per annum at July 2, 2006.
The new
revolving credit agreement requires, among other things, that CTS comply
with a
maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure
of CTS to comply with these covenants could reduce the borrowing availability
under the new revolving credit agreement. CTS was in compliance with all
debt
covenants at July 2, 2006. Additionally, the new revolving credit agreement
contains restrictions relating to the amount of secured debt the Company
can
have outstanding, the amounts allowed for acquisitions or asset sales, and
the
amounts allowed for stock repurchases and dividend payments. The new revolving
credit agreement expires in June 2011. The former $75 million revolving credit
agreement was cancelled in connection with the execution of the new revolving
credit agreement.
CTS
has
$60 million convertible senior subordinated debentures (2.125% Debentures).
These unsecured debentures bear interest at an annual rate of 2.125%, payable
semiannually on May 1 and November 1 of each year through the maturity date
of
May 1, 2024. The 2.125% Debentures are convertible, under certain circumstances,
into CTS common stock at a conversion price of $15.00 per share (which is
equivalent to an initial conversion rate of approximately 66.6667 shares
per
$1,000 principal amount of the notes). Upon conversion of the 2.125% Debentures,
in lieu of delivering common stock, the Company may, at its discretion, deliver
cash or a combination of cash and common stock.
The
conversion price of the 2.125% Debentures will be adjusted if CTS completes
certain transactions, including: distribution of shares as a dividend to
substantially all shareholders; subdivision, combination or reclassification
of
its common stock; distribution of stock purchase warrants to substantially
all
shareholders; distribution of cash, stock or property to shareholders in
excess
of $0.03 per share; or purchase of its common stock pursuant to a tender
offer
or exchange offer under certain circumstances.
Holders
may convert the 2.125% Debentures at any time during a conversion period
if the
closing price of CTS common stock is more than 120% of the conversion price
($18.00 per share) for at least 20 of the 30 consecutive trading days
immediately preceding the first trading day of the conversion period. The
conversion periods begin on February 15, May 15, August 15, and November
15 of
each year. Holders may also convert the notes if certain corporate transactions
occur. As of July 2, 2006, none of the conditions for conversion of the 2.125%
million Debentures were satisfied.
CTS
may,
at its option, redeem all or a portion of the 2.125% Debentures for cash
at any
time on or after May 1, 2009, at a redemption price equal to the principal
amount of the notes plus any accrued and unpaid interest at the redemption
date.
Holders may require CTS to purchase for cash all or part of their notes on
May
1, 2009, 2014, and 2019, or upon the occurrence of certain events, at 100%
of
the principal amount of the notes plus accrued and unpaid interest up to,
but
not including, the date of purchase.
CTS
has a
registration rights agreement relating to the 2.125% Debentures which became
effective in 2004. CTS had an obligation to keep the registration statement
continuously effective for a period of two years, which expired in May 2006.
The
registration rights agreement provided that in the event of a default in
this
obligation, CTS was subject to an additional interest penalty of 0.25% per
annum
of the principal for the first 90 days of default and 0.5% per annum of
principal thereafter. Accordingly, as of July 2, 2006, there was no interest
penalty which CTS could incur as a result of the failure to maintain an
effective registration statement.
As
of
December 31, 2005, the Company also had $5.5 million outstanding debt under
its
6.5% convertible, subordinated debentures (6.5% Debentures). However, in
accordance with the provisions of the 6.5% Debentures, the remaining debenture
holder exercised its put option and accelerated the maturity of this debt,
which
was repaid by CTS during June 2006.
In
connection with the acquisition of SMTEK, CTS assumed a term loan, which
has a
balance of $0.8 million at July 2, 2006. The term loan is secured by machinery
and equipment of the Thailand manufacturing facility and requires monthly
payments through May 2011.
NOTE
H—Retirement Plans
Net
pension (income) / postretirement expense for the three and six-month periods
ended July 2, 2006 and July 3, 2005 includes the following components:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
PENSION
PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,280
|
|
$
|
1,312
|
|
$
|
2,556
|
|
$
|
2,630
|
|
Interest
cost
|
|
|
3,017
|
|
|
2,839
|
|
|
6,029
|
|
|
5,685
|
|
Expected
return on plan assets (1)
|
|
|
(6,184
|
)
|
|
(6,311
|
)
|
|
(12,359
|
)
|
|
(12,629
|
)
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition
obligation
|
|
|
—
|
|
|
(76
|
)
|
|
—
|
|
|
(152
|
)
|
Prior
service cost
|
|
|
135
|
|
|
205
|
|
|
269
|
|
|
411
|
|
Recognized
(gain) loss
|
|
|
644
|
|
|
184
|
|
|
1,288
|
|
|
368
|
|
Curtailment
loss
|
|
|
—
|
|
|
—
|
|
|
325
|
|
|
475
|
|
Net
pension income
|
|
$
|
(1,108
|
)
|
$
|
(1,847
|
)
|
$
|
(1,892
|
)
|
$
|
(3,212
|
)
|
(1) Expected
return on plan assets is net of expected investment expenses and certain
administrative expenses.
________________________
In
2006
and 2005, CTS recognized a pension plan curtailment loss of approximately
$0.3
million and $0.5 million, respectively, due to reduced employment levels.
Also,
effective April 1, 2006, CTS closed one of its U.S. defined benefit plans
to new
participants.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
OTHER
POSTRETIREMENT BENEFIT PLAN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
5
|
|
$
|
7
|
|
$
|
9
|
|
$
|
14
|
|
Interest
cost
|
|
|
74
|
|
|
79
|
|
|
149
|
|
|
158
|
|
Curtailment
gain
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
Net
postretirement expense
|
|
$
|
79
|
|
$
|
86
|
|
$
|
77
|
|
$
|
172
|
|
In
the
first six months of 2006, CTS recognized postretirement benefit plan curtailment
gain of approximately $0.1 million due to reduced employment levels.
NOTE
I—Business Segments
FAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” requires companies to provide certain information about their
operating segments. CTS has two reportable business segments: 1)
Electronics Manufacturing Services (EMS) and 2) Components and
Sensors.
EMS
includes the higher level assembly of electronic and mechanical components
into
a finished subassembly or assembly performed under a contract manufacturing
agreement with an OEM or other contract manufacturer. Additionally, for some
customers, CTS provides full turnkey manufacturing and completion including
design, bill-of-material management, logistics, and repair.
Components
and sensors are products which perform specific electronic functions for
a given
product family and are intended for use in customer assemblies. Components
and sensors consist principally of automotive sensors and actuators used
in
commercial or consumer vehicles; electronic components used in communications
infrastructure and computer markets; terminators, including ClearONE™
terminators, used in computer and other high speed applications, switches,
resistor networks, and potentiometers used to serve multiple markets.
The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies in the Company’s annual report
on Form 10-K. Management evaluates performance based upon segment
operating earnings before restructuring and related charges, interest expense,
other non-operating income, and income tax expense.
Summarized
financial information concerning CTS’ reportable segments is shown in the
following table:
($
in thousands)
|
|
EMS
|
|
Components
and Sensors
|
|
Total
|
|
Second
Quarter of 2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
94,230
|
|
$
|
71,695
|
|
$
|
165,925
|
|
Segment
operating earnings
|
|
|
2,543
|
|
|
7,986
|
|
|
10,529
|
|
Total
assets
|
|
|
164,778
|
|
|
389,373
|
|
|
554,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter of 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
91,871
|
|
$
|
66,475
|
|
$
|
158,346
|
|
Segment
operating earnings
|
|
|
2,850
|
|
|
7,471
|
|
|
10,321
|
|
Total
assets
|
|
|
158,454
|
|
|
382,445
|
|
|
540,899
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
177,095
|
|
$
|
139,323
|
|
$
|
316,418
|
|
Segment
operating earnings
|
|
|
3,590
|
|
|
18,343
|
|
|
21,933
|
|
Total
assets
|
|
|
164,778
|
|
|
389,373
|
|
|
554,151
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
183,037
|
|
$
|
130,639
|
|
$
|
313,676
|
|
Segment
operating earnings
|
|
|
4,981
|
|
|
11,011
|
|
|
15,992
|
|
Total
assets
|
|
|
158,454
|
|
|
382,445
|
|
|
540,899
|
|
Reconciling
information between reportable segments’ operating earnings and CTS’
consolidated pre-tax income is shown in the following table:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Total
segment operating earnings
|
|
$
|
10,529
|
|
$
|
10,321
|
|
$
|
21,933
|
|
$
|
15,992
|
|
Restructuring
and related charges - Components and Sensors
|
|
|
(1,463
|
)
|
|
—
|
|
|
(3,584
|
)
|
|
—
|
|
Interest
expense
|
|
|
(1,034
|
)
|
|
(1,582
|
)
|
|
(2,145
|
)
|
|
(3,299
|
)
|
Other
income
|
|
|
257
|
|
|
70
|
|
|
385
|
|
|
515
|
|
Earnings
before income taxes
|
|
$
|
8,289
|
|
$
|
8,809
|
|
$
|
16,589
|
|
$
|
13,208
|
|
NOTE
J—Contingencies
Certain
processes in the manufacture of CTS’ current and past products create hazardous
waste by-products as currently defined by federal and state laws and
regulations. CTS has been notified by the U.S. Environmental Protection
Agency, state environmental agencies and, in some cases, generator groups,
that
it is or may be a Potentially Responsible Party (PRP) regarding hazardous
waste remediation at several non-CTS sites. In addition to these non-CTS
sites, CTS has an ongoing practice of providing reserves for probable
remediation activities at certain of its manufacturing locations and for
claims
and proceedings against CTS with respect to other environmental matters.
In the opinion of management, based upon presently available information
relating to all such matters, either adequate provision for probable costs
has
been made, or the ultimate costs resulting will not materially affect the
consolidated financial position, results of operations, or cash flows of
CTS.
Certain
claims are pending against CTS with respect to matters arising out of the
ordinary conduct of its business. For all claims, in the opinion of
management, based upon presently available information, either adequate
provision for anticipated costs has been made or the ultimate anticipated
costs
resulting will not materially affect CTS’ consolidated financial position,
results of operations or cash flows.
NOTE
K—Earnings Per Share
FAS
No. 128, “Earnings per Share,” requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share (EPS) computations. The calculations below provide net
earnings, average common shares outstanding, and the resultant earnings per
share for both basic and diluted EPS for the three and six-month periods
ending
July 2, 2006 and July 3, 2005.
($
in thousands, except per share amounts)
|
|
Net
Earnings
(Numerator)
|
|
Shares
(in
thousands) (Denominator)
|
|
Per
Share Amount
|
|
Second
Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
6,316
|
|
|
35,843
|
|
$
|
0.18
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
242
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
302
|
|
|
|
|
Diluted
EPS
|
|
$
|
6,558
|
|
|
40,145
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2005
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
3,942
|
|
|
36,621
|
|
$
|
0.11
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
244
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
605
|
|
|
|
|
Diluted
EPS
|
|
$
|
4,186
|
|
|
41,226
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2006
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
12,541
|
|
|
35,832
|
|
$
|
0.35
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
483
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
357
|
|
|
|
|
Diluted
EPS
|
|
$
|
13,024
|
|
|
40,189
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2005
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
7,329
|
|
|
36,508
|
|
$
|
0.20
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
495
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
593
|
|
|
|
|
Diluted
EPS
|
|
$
|
7,824
|
|
|
41,101
|
|
$
|
0.19
|
|
The
following table shows the potentially dilutive securities which have been
excluded from the first three and six-month periods ending July 2, 2006 and
July
3, 2005 dilutive earnings per share calculation because they are either
anti-dilutive, or the exercise price exceeds the average market
price.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(Number
of Shares in Thousands)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Stock
options where the assumed proceeds exceeds the average
market price
|
|
|
714
|
|
|
689
|
|
|
774
|
|
|
701
|
|
Securities
related to the 6.5% Debentures
|
|
|
201
|
|
|
1,080
|
|
|
238
|
|
|
1,163
|
|
NOTE
L - Leases
CTS
incurred approximately $2.9 million and $4.4 million of rent expense in the
six-month periods ending July 2, 2006 and July 3, 2005, respectively. The
future
minimum lease payments under the Company’s operating leases are $2.6 million for
the remainder of 2006, $4.8 million in 2007, $3.9 million in 2008, $3.7 million
in 2009, $2.3 million in 2010, and $3.6 million thereafter.
Note
M - Income Taxes
During
the second quarter of 2006, CTS changed the estimate of its 2006 effective
tax
rate from 25.0% to 24.4%. The lower effective tax rate reflects tax savings
resulting from the implementation of the Tax Increase Prevention and
Reconciliation Act (enacted May 17, 2006), partially offset by increased
earnings in certain higher-tax jurisdictions.
NOTE
N - Treasury Stock
In
November 2005, CTS’ Board of Directors authorized a program to repurchase up to
one million shares of its common stock in the open market. The authorization
expires June 30, 2007. Reacquired shares will be used to support equity-based
compensation programs and for other corporate purposes. During the first
half of
2006, CTS repurchased 57,400 shares at a total cost of $0.8 million. CTS
is
authorized to repurchase an additional 803,200 shares.
NOTE
O - New Accounting Pronouncements
In
June
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FAS
No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
No. 48 also provides guidance on derecognition, classification, interest
and
penalties, accounting in interim periods, disclosure, and transition. FIN
No. 48
is effective for fiscal years beginning after December 15, 2006. CTS is
currently reviewing the provisions of FIN No. 48, but does not expect it
will
have a material impact on its financial statements.
Overview
CTS
is a
global manufacturer of components and sensors used primarily in the automotive,
communications, and computer markets. The Company also provides electronic
manufacturing solutions, including design and supply chain management functions,
primarily serving the communications, computer, industrial, and medical markets
under contract arrangements with the original equipment manufacturers (OEMs).
Sales and marketing are accomplished through CTS sales engineers, independent
manufacturer’s representatives, and distributors.
Sales
are
reported through two business segments, Electronics Manufacturing Services
(EMS)
and Components and Sensors. In the second quarter of 2006, sales of EMS and
Components and Sensors business segments represented 56.8% and 43.2% of CTS’
total sales respectively, compared to 58.0% and 42.0% respectively in the
second
quarter of 2005.
As
discussed in more detail throughout the Management's Discussion and
Analysis:
· |
Sales
increased by $7.6 million, or 4.8%, in the second quarter of 2006
from the
second quarter of 2005. Sales in the EMS business segment increased
by
2.6% compared to the second quarter of 2005, while sales in the Components
and Sensors business segment increased by 7.9% versus the second
quarter
of 2005.
|
· |
Gross
margins, as a percent of sales, were 20.5% and 20.4% in the second
quarter
of 2006 and 2005, respectively.
|
· |
Selling,
general and administrative, and research and development expenses
as a
percent of sales increased to 14.5% in the second quarter of 2006
compared
to 13.9% in the second quarter of 2005.
The
primary drivers for the increase were the recognition of stock option
expenses, higher salaries, and lower pension
income.
|
· |
In
the second quarter of 2006, a $1.4 million pre-tax expense was incurred
for restructuring and related charges associated with the consolidation
of
CTS’ Berne, Indiana manufacturing operations into three of its other
existing facilities.
|
· |
During
the second quarter of 2006, CTS changed the estimate of its full
year 2006
effective tax rate from 25.0% to 24.4%.
|
· |
Net
earnings were $6.3 million, or $0.16 per diluted share, in the second
quarter of 2006 compared to $3.9 million, or $0.10 per diluted share,
in
the second quarter of 2005.
|
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company’s unaudited condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Management
believes that judgment and estimates related to the following critical
accounting policies could materially affect its consolidated financial
statements.
§
|
Estimating
inventory valuation, the allowance for the doubtful accounts, and
other
accrued liabilities
|
§
|
Valuation
of long-lived and intangible assets, and depreciation/amortization
periods
|
In
the
second quarter of 2006, there have been no changes in the above critical
accounting policies, except that the following policy has been added in
consideration of CTS’ adoption of FAS No. 123(R), “Share-Based Payment,”
effective January 1, 2006.
Share-Based
Compensation
Effective
January 1, 2006, CTS adopted the provisions of FAS No. 123(R) which required
CTS
to recognize the expense related to the fair value of stock-based compensation
awards in the Unaudited Condensed Consolidated Statement of Earnings. CTS
elected to follow the modified prospective transition method allowed by FAS
No.
123(R), and therefore, only applied the provisions of FAS No. 123(R) to awards
modified or granted after January 1, 2006. In addition, for awards which
were
unvested as of January 1, 2006, CTS will recognize compensation expense in
the
Unaudited Condensed Consolidated Statement of Earnings over the remaining
vesting period. Prior to January 1, 2006, CTS accounted for stock-based
compensation using the intrinsic value method prescribed in APB No. 25,
“Accounting for Stock Issued to Employees.”
FAS
No.
123(R) requires companies to estimate the fair value of stock-based awards
on
the date of grant using an option-pricing model. CTS uses the Black-Scholes
option pricing model. A number of assumptions are used by the Black-Scholes
option-pricing model to compute the grant date fair value, including expected
price volatility, option term, risk-free interest rate, and dividend yield.
These assumptions are established at each grant date based upon current
information at that time. Expected volatilities are based on historical
volatilities of the Company’s stock. The expected option term is derived from
historical data on exercise behavior. Different expected option terms result
from different groups of employees exhibiting different behavior. The dividend
yield is based on historical dividend payments. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. The fair value of awards that are
ultimately expected to vest is recognized as expense over the requisite service
periods in the Unaudited Condensed Consolidated Statement of Earnings. CTS’
stock options primarily have a graded-vesting schedule. CTS recognizes expense
on a straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in substance, multiple
awards.
Results
of Operations
Comparison
of Second Quarter 2006 and Second Quarter 2005
Business
Segment Discussion
Refer
to
Note I, “Business Segments,” for a description of the Company’s business
segments.
The
following table highlights the business segment results for the three-month
periods ending July 2, 2006 and July 3, 2005:
($
in thousands)
|
|
Components
& Sensors
|
|
EMS
|
|
Consolidated
Total
|
|
Second
Quarter 2006
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
71,695
|
|
$
|
94,230
|
|
$
|
165,925
|
|
Segment
operating earnings
|
|
|
7,986
|
|
|
2,543
|
|
|
10,529
|
|
%
of sales
|
|
|
11.1
|
%
|
|
2.7
|
%
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
66,475
|
|
$
|
91,871
|
|
$
|
158,346
|
|
Segment
operating earnings
|
|
|
7,470
|
|
|
2,851
|
|
|
10,321
|
|
%
of sales
|
|
|
11.2
|
%
|
|
3.1
|
%
|
|
6.5
|
%
|
Sales
in
the Components and Sensors business segment were up $5.2 million, or
approximately 7.9% from the second quarter of 2005. The increase was
attributable primarily to growth in automotive product sales and growth in
the
sale of electronic components into infrastructure applications, partially
offset
by decreased sales into mobile handset applications as CTS continues to
de-emphasize these products.
The
Components and Sensors business segment operating earnings were $8.0 million
in
the second quarter of 2006 compared to $7.5 million in the second quarter
of
2005. Operating earning improvements resulted from margin contribution from
the
higher sales volume and from savings related to personnel reductions taken
in
2005, partially offset by stock option expense, higher salaries and lower
pension income. In the second quarter of 2006, CTS had pension income of
$1.1
million in the second quarter of 2006 compared to $1.8 million of pension
income
in the second quarter of 2005. The primary factor contributing to the decrease
in pension income was the recognition of prior years’ investment losses and
other actuarial losses.
The
EMS
business segment experienced a sales increase of $2.4 million, or 2.6%, in
the
second quarter of 2006 versus the second quarter of 2005. The increase in
sales
was attributable primarily to higher sales into the communication, medical,
and
defense markets partially offset by a decrease in computer-related sales
and a
decrease of sales into the industrial market.
The
EMS
business segment operating earnings decreased $0.3 million primarily due
to
increased compensation-related expenses versus 2005, partially offset by
higher
gross margin from the higher sales volume and improved product mix.
Total
Company Discussion
The
following table highlights changes in significant components of the unaudited
condensed consolidated statements of earnings for the three-month periods
ended
July 2, 2006 and July 3, 2005:
|
|
Three
Months Ended
|
|
|
|
($
in thousands, except net earnings per share)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Increase
(Decrease)
|
|
Net
sales
|
|
$
|
165,925
|
|
$
|
158,346
|
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related
costs
|
|
|
542
|
|
|
—
|
|
|
542
|
|
%
of net sales
|
|
|
0.3
|
%
|
|
—
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
33,980
|
|
|
32,292
|
|
|
1,688
|
|
%
of net sales
|
|
|
20.5
|
%
|
|
20.4
|
%
|
|
0.1
|
%
|
|
Selling,
general and administrative expenses
|
|
|
19,924
|
|
|
17,404
|
|
|
2,520
|
|
%
of net sales
|
|
|
12.0
|
%
|
|
11.0
|
%
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
4,070
|
|
|
4,567
|
|
|
(497
|
)
|
%
of net sales
|
|
|
2.5
|
%
|
|
2.9
|
%
|
|
(0.4
|
)%
|
|
Restructuring
charge
|
|
|
920
|
|
|
—
|
|
|
920
|
|
%
of net sales
|
|
|
0.6
|
%
|
|
—
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
9,066
|
|
|
10,321
|
|
|
(1,255
|
)
|
%
of net sales
|
|
|
5.5
|
%
|
|
6.5
|
%
|
|
(1.0
|
)%
|
|
Income
tax expense
|
|
|
1,973
|
|
|
4,867
|
|
|
(2,894
|
)
|
|
Net
earnings
|
|
$
|
6,316
|
|
$
|
3,942
|
|
$
|
2,374
|
|
%
of net sales
|
|
|
3.8
|
%
|
|
2.5
|
%
|
|
1.3
|
%
|
|
Net
earnings per share - diluted
|
|
$
|
0.16
|
|
$
|
0.10
|
|
$
|
0.06
|
|
Second
quarter sales of $165.9 million increased $7.6 million, or 4.8%, from the
second
quarter of 2005. The EMS business segment increase was mainly attributable
to
higher sales into the communication and medical markets partially offset
by a
decline of sales into the industrial market. The Components and Sensors business
segment growth was attributable to automotive product sales and growth in
the
sale of electronic components into infrastructure applications which was
partially offset by decreased sales into mobile handset applications as CTS
continues to de-emphasize these products.
Gross
margin increased $1.7 million in the second quarter of 2006 from the second
quarter of 2005 due to increased volume, favorable business segment sales
mix,
and gross margin improvement within the EMS business segment. The sales from
the
Components and Sensors business segment, which inherently generates a higher
gross margin, increased to 43.2% of total sales in the second quarter of
2006
compared to 42.0% of total sales in the same period of 2005 due mainly to
sales
growth in automotive sensor products.
Selling,
general and administrative expenses were $19.9 million, or 12.0% of sales,
in
the second quarter of 2006 versus
$17.4
million, or 11.0% of sales in the second quarter of 2005. The increase was
driven by stock option expenses, higher salaries, and lower pension income.
Research
and development expenses were $4.1 million, or 2.5% of sales in the second
quarter of 2006 versus $4.6 million, or 2.9% of sales in the second quarter
of
2005. The decrease was primarily due to personnel reductions taken in 2005,
primarily in the Components and Sensors business segment. Research and
development expenditures in the EMS business segment are typically much lower
than in the Components and Sensors business segment. Significant ongoing
research and development activities continue in Components and Sensors to
support expanded application and new product development.
Operating
earnings were $9.1 million in the second quarter of 2006 compared to $10.3
million in the second quarter of 2005. The decrease in operating earnings
included $1.4 million of expenses from restructuring and related charges
associated with the consolidation of CTS’ Berne, Indiana manufacturing
operations. Additionally, in the second quarter of 2006, CTS has recorded
pension income of $1.1 million compared to $1.8 million of pension income
recorded in the second quarter of 2005. The pension income results primarily
from U.S. pension plans which have assets in excess of projected benefit
obligations. The primary factor contributing to the decrease in pension income
was the recognition of prior years’ investment losses and other actuarial
losses.
During
the second quarter of 2006, CTS changed the estimate of its 2006 full year
effective tax rate from 25.0% to 24.4%. The lower effective tax rate reflects
tax savings resulting from the implementation of the Tax Increase Prevention
and
Reconciliation Act (enacted May 17, 2006), partially offset by increased
earnings in certain higher-tax jurisdictions.
In
the
second quarter of 2005, CTS changed its estimate of its 2005 tax rate before
the
benefit of reversal of reserves and expense of HIA dividend from 23% to 25%.
The
higher effective tax rate reflects the lower than planned revenue and
profitability in certain jurisdictions with lower statutory tax rates partially
offset by increased profitability in certain jurisdictions with higher statutory
tax rates.
In
the
second quarter of 2005, income tax expense included a net impact of $2.8
million, or $0.07 per share, related to the $4.5 million of expense for the
repatriation of foreign cash to the United States under the American Jobs
Creation Act of 2004 and a $1.7 million benefit relating to the reversal
of
income tax reserves due to the successful resolution of tax issues in certain
foreign jurisdictions.
Net
earnings of $6.3 million, or 3.8% of sales, increased $2.4 million versus
the
second quarter of 2005. Net earnings per share of $0.16 were $0.06 higher
than
second quarter 2005.
The
following table provides a reconciliation of actual earnings per share, diluted
to adjusted earnings per share, diluted for the Company:
|
|
Three
Months Ended
|
|
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Earnings
per share, diluted |
|
$ |
0.16 |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
Tax-affected
charges to reported diluted earnings per share: |
|
|
|
|
|
|
|
Impact
of tax repatriation & reversal of tax reserves
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Restructuring
and related charges
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
earnings per share, diluted |
|
$ |
0.19 |
|
$ |
0.17 |
|
Adjusted
earnings per share, diluted is a non-GAAP financial measure. The most directly
comparable GAAP financial measure is earnings per share, diluted. CTS calculated
adjusted earnings per share, diluted for the second quarter of 2006 to exclude
the per share impact of restructuring and related charges. CTS
calculated adjusted earnings per share, diluted for the second quarter of
2005,
by excluding the 2005 tax expense related to the cash repatriation and the
reversal of certain tax reserves. We exclude the impact of these
items because each item was a discrete event which had a significant impact
on
comparable GAAP financial measures and could distort an evaluation of our
normal
operating performance. CTS uses adjusted earnings per share, diluted measures,
to evaluate overall performance, establish plans and perform strategic analysis.
Using adjusted earnings per share, diluted measures avoids distortion in
the
evaluation of operating results by eliminating the impact of events which
are
not related to normal operating performance. Because adjusted earnings per
share, diluted measures are based on the exclusion of specific items, they
may
not be comparable to measures used by other companies which have similar
titles.
CTS' management compensates for this limitation when performing peer comparisons
by evaluating both GAAP and non-GAAP financial measures reported by peer
companies. CTS believes that adjusted earnings per share, diluted measures
are
useful to its management, investors and stakeholders in that
they:
-
provide
a truer measure of CTS' operating performance,
-
reflect
the results used by management in making decisions about the business, and
-
help
review and project CTS' performance over time.
We
recommend that investors consider both actual and projected earnings per
share,
diluted and actual and projected
adjusted earnings per share, diluted measures in evaluating the performance
of
CTS with peer companies.
Comparison
of First Half 2006 and First Half 2005
Business
Segment Discussion
The
following table highlights the business segment results for the six-month
periods ending July 2, 2006 and July 3, 2005:
($
in thousands)
|
|
Components
&
Sensors
|
|
EMS
|
|
Consolidated
Total
|
|
First
Six Months 2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
139,323
|
|
$
|
177,095
|
|
$
|
316,418
|
|
Segment
operating earnings
|
|
|
18,343
|
|
|
3,590
|
|
|
21,933
|
|
%
of sales
|
|
|
13.2
|
%
|
|
2.0
|
%
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$ |
130,639
|
|
$
|
183,037
|
|
$
|
313,676
|
|
Segment
operating earnings
|
|
|
11,011
|
|
|
4,981
|
|
|
15,992
|
|
%
of sales
|
|
|
8.4
|
%
|
|
2.7
|
%
|
|
5.1
|
%
|
During
the first six months of 2006, sales of Components and Sensors and EMS products,
as a percentage of total sales, were 44.0% and 56.0% respectively. The first
six
months of 2005 sales of Components and Sensors and EMS products, as a percentage
of total sales, were 41.6% and 58.4% respectively.
The
Components and Sensors business segment sales increased $8.7 million or 6.6%
from the first half of 2005. The increase was primarily due to higher sales
of
automotive products, higher sales of electronic components into infrastructure
applications, and higher revenue from royalties, partially offset by decreased
sales into mobile handset applications as CTS continues to de-emphasize these
products.
The
Component and Sensors business segment operating earnings increased $7.3
million
due to margin contribution from the higher sales volume, savings related
to
personnel reductions taken in 2005, and favorable product mix as the sales
shifted from the less profitable handset market into the more profitable
infrastructure applications and automotive products. These favorable items
were
partially offset by expenses related to recognizing the fair value of
stock-based compensation, higher salaries, and lower pension income. In the
first half of 2006, CTS had pension income of $1.9 million
compared to $3.2 million in the first half of 2005. The primary factor
contributing to the decrease in pension income was the recognition of prior
years’ investment losses and other actuarial losses.
The
EMS
business segment experienced a sales decrease of $5.9 million in the first
six
months of 2006, or 3.2% from the first six months of 2005. The EMS revenue
decrease is due to lower sales into the computer market, partially offset
by the
higher communication and medical market sales. The EMS business segment
operating earnings decreased $1.4 million due primarily to lower sales volumes
versus 2005.
Total
Company Discussion
The
following table highlights changes in significant components of the condensed
consolidated statements of earnings for the six-month periods ended July
2, 2006
and July 3, 2005:
|
|
Six
Months Ended
|
|
|
|
($
in thousands, except net earnings per share)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Increase
(Decrease)
|
|
Net
sales
|
|
$
|
316,418
|
|
$
|
313,676
|
|
$
|
2,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related
costs
|
|
|
702
|
|
|
—
|
|
|
702
|
|
%
of net sales
|
|
|
0.2
|
%
|
|
—
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
66,054
|
|
|
60,507
|
|
|
5,547
|
|
%
of net sales
|
|
|
20.9
|
%
|
|
19.3
|
%
|
|
1.6
|
%
|
|
Selling,
general and administrative expenses
|
|
|
36,661
|
|
|
35,161
|
|
|
1,500
|
|
%
of net sales
|
|
|
11.6
|
%
|
|
11.2
|
%
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
8,162
|
|
|
9,354
|
|
|
(1,192
|
)
|
%
of net sales
|
|
|
2.6
|
%
|
|
3.0
|
%
|
|
(0.4
|
)%
|
|
Restructuring
charge
|
|
|
2,882
|
|
|
—
|
|
|
2,882
|
|
%
of net sales
|
|
|
0.9
|
%
|
|
—
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
18,349
|
|
|
15,992
|
|
|
2,357
|
|
%
of net sales
|
|
|
5.8
|
%
|
|
5.1
|
%
|
|
0.7
|
%
|
|
Income
tax expense
|
|
|
4,048
|
|
|
5,879
|
|
|
(1,831
|
)
|
|
Net
earnings
|
|
$
|
12,541
|
|
$
|
7,329
|
|
$
|
5,212
|
|
%
of net sales
|
|
|
4.0
|
%
|
|
2.3
|
%
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - diluted
|
|
$
|
0.32
|
|
$
|
0.19
|
|
$
|
0.13
|
|
|
First
six
month sales in 2006 of $316.4 million increased $2.7 million, or 0.9%, from
the
first six months of 2005. The Components and Sensors business segment sales
increase was attributable to automotive product sales, growth in the sale
of
electronic components into infrastructure applications, and increased royalty
revenue, partially offset by decrease of sales into mobile handset applications
as CTS continues to de-emphasize these products. The EMS business segment
experienced a sales decrease of $5.9 million in the first six months of 2006,
or
3.2%, from the first six months of 2005. The EMS revenue decrease was due
to
lower sales into the computer market, partially offset by the higher
communication and medical market sales. Gross margin increased $5.5 million,
or
9.2%, for the first half of 2006, primarily due to margin improvements within
each business segment, favorable business segment sales mix, and margin
contribution from the higher sales volume. As a percentage of sales, gross
margin increased to 20.9% in the first half of 2006 compared to 19.3% in
the
first half of 2005.
Selling,
general and administrative expenses increased $1.5 million, primarily driven
by
stock option expenses, higher salaries, and lower pension income. Partially
offsetting the increase was an insurance claim settlement received in 2006
and
savings related to personnel reductions.
Research
and development expenses were $8.2 million, or 2.6% of sales, versus $9.4
million, or 3.0% of sales, in the first half of 2005. The
percentage decrease was primarily due to savings from personnel reductions
primarily in the Components and Sensors business segment. Research and
development expenditures in the EMS business segment are typically much lower
than in the Components and Sensors business segment. Significant ongoing
research and development activities continue in Components and Sensors business
segment to support expanded application and new product development.
Operating
earnings were $18.3 million in the first half of 2006 compared to $16.0 million
in the first half of 2005. In addition to the items addressed above, the
increase in operating earnings was adversely impacted by $3.6 million of
expenses from restructuring and related charges associated with the
consolidation of CTS’ Berne, Indiana manufacturing operations and also included
the favorable impact from an insurance claim settlement of approximately
$1.5
million. CTS’ operating earnings includes $1.9 million and $3.2 million of
pension income in the first half of 2006 and 2005, respectively. The pension
income results primarily from U.S. pension plans which have assets in excess
of
projected benefit obligations. The primary factor contributing to the decrease
in pension income was the recognition of prior years’ investment losses and
other actuarial losses.
During
the second quarter of 2006, CTS changed the estimate of its 2006 full year
effective tax rate from 25.0% to 24.4%. The lower effective tax rate reflects
tax savings resulting from the implementation of the Tax Increase Prevention
and
Reconciliation Act (enacted May 17, 2006), partially offset by increased
earnings in certain higher-tax jurisdictions.
In
the
second quarter of 2005, CTS changed its estimate of its 2005 tax rate before
the
benefit of reversal of reserves and expense of HIA dividend from 23%
to 25%. The
higher effective tax rate reflects the lower than planned revenue and
profitability in certain jurisdictions with lower statutory tax rates partially
offset by increased profitability in certain jurisdictions with higher statutory
tax rates.
In
the
first half of 2005, income tax expense included a net impact of $2.8 million,
or
$0.07 per share, related to the $4.5 million of expense for the repatriation
of
foreign cash to the United States under the American Jobs Creation Act of
2004,
and a $1.7 million benefit relating to the reversal of income tax reserves
due
to the successful resolution of tax issues in certain foreign
jurisdictions.
In
the
first half of 2006, net earnings of $12.5 million, or 4.0% of sales, increased
$5.2 million versus the first half of 2005. Net earnings per share of $0.32
were
$0.13 higher than first half of 2005.
Outlook-
2006 Sales Growth and Full Year Earnings:
Based
on
the first half results and the outlook for the remainder of the year, CTS
expects full-year 2006 sales to grow by 6% - 8% over 2005. Full-year adjusted
diluted earnings per share are now expected to be in a range of $0.75 to
$0.80,
which excludes the full-year Berne restructuring and related charges of
approximately $0.08 per share.
The
following table provides a reconciliation of projected earnings per share,
diluted to adjusted projected earnings per share, diluted for the
Company:
|
|
|
Projected
|
|
|
|
Twelve
Months Ended
|
|
|
|
December
31, 2006
|
Earnings
per share, diluted
|
|
|
$0.67-
$0.72
|
|
|
|
|
|
Restructuring
and related charges
|
|
|
0.08
|
|
|
|
|
|
Adjusted
earnings per share, diluted
|
|
|
$0.75-
$0.80
|
Projected
adjusted earnings per share, diluted is a non-GAAP financial measure. The
most
directly comparable GAAP financial measure is projected earnings per share,
diluted. CTS calculated full year projected adjusted earnings per share,
diluted
to exclude the per share impact of restructuring and related charges. We
exclude
the impact of this item because it is a discrete event which has a significant
impact on comparable GAAP financial measures and could distort an evaluation
of
our normal operating performance. CTS uses adjusted earnings per share, diluted
measures, to evaluate overall performance, establish plans and perform strategic
analysis. Using adjusted earnings per share, diluted measures avoids distortion
in the evaluation of operating results by eliminating the impact of events
which
are not related to normal operating performance. Because adjusted earnings
per
share, diluted measures are based on the exclusion of specific items, they
may
not be comparable to measures used by other companies which have similar
titles.
CTS' management compensates for this limitation when performing peer comparisons
by evaluating both GAAP and non-GAAP financial measures reported by peer
companies. CTS believes that adjusted earnings per share, diluted measures
are
useful to its management, investors and stakeholders in that they:
-
provide
a truer measure of CTS' operating performance,
-
reflect
the results used by management in making decisions about the business, and
-
help
review and project CTS' performance over time.
We
recommend that investors consider both actual and projected diluted earnings
per
share, and actual and projected
adjusted diluted earnings per share, in evaluating the performance of CTS
with
peer companies.
Liquidity
and Capital Resources
Overview
Cash
and
cash equivalents were $17.7 million at the end of July 2, 2006 compared to
$12.0
million at December 31, 2005. Total debt on July 2, 2006 was $76.5 million
versus $81.8 million at December 31, 2005. Total debt as a percentage of
total
capitalization was 18.2% at the end of the second quarter of 2006, compared
with
19.9% at December 31, 2005.
Working
capital increased $14.2 million in the first half of 2006 primarily driven
by
the change in the cash and cash equivalents balance as noted above and the
following:
· |
Accounts
receivables increased by $13.3 million primarily due to an $11.3
million
increase in sales during the second quarter of 2006 compared to the
fourth
quarter of 2005.
|
· |
Inventory
increased by $4.4 million due to increased buffer stock for the Berne
product transition, inventory related to the start up of the new
facility
in the Czech Republic, and builds related to anticipated new customer
demand in the EMS business segment.
|
Working
capital increases were partially offset by
· |
Accounts
payable increased by $6.9 million primarily driven by a $4.4 million
increase in inventory compared to December
2005.
|
· |
Accrued
liabilities increased by $4.7 million primarily driven by increased
accrued expenses related to restructuring and increased accrued salaries
and wages.
|
Cash
Flow
Operating
Activities
Net
cash
provided by operating activities was $17.4
million
for the first half of 2006. Components of net cash provided by operating
activities included net earnings of $12.5
million,
depreciation and amortization expense of $13.2
million,
equity-based compensation of $2.1 million and restructuring charges of $2.9
million partially offset by an increase to the prepaid pension asset of $3.1
million, and an increase
in
assets and liabilities of $10.1 million. The increase in assets and liabilities
were primarily due to increased accounts receivables of $13.3 million, an
increase in other current assets of $1.3 million, an increase in inventory
of
$4.4
million,
and a increase in accounts payable and accrued liabilities of $8.7
million.
Net
cash
provided by operating activities was $24.6
million in the first half of 2005. Components of net cash provided by
operating activities included net earnings of $7.3 million, depreciation
and
amortization expense of $13.6 million,
equity-based compensation of $1.2
million,
deferred income taxes of $3.0 million and a $3.5
million
favorable change in assets and liabilities. The favorable changes in assets
and
liabilities were primarily due to decreased accounts receivables of
$10.0
million
partially offset by an
increase in other current assets of $3.3 million, an increase in inventory
of
$1.6
million
and an increase of $2.0
million
in accounts payable and accrued liabilities. Net cash provided by operating
activities was partially offset by the unfavorable change in the prepaid
pension
asset of $4.1 million.
Total
free cash flow in the first half of 2006 was
$11.6
million.
Total free cash flow in the first half of 2005 was $18.7
million.
Free
cash
flow is a non-GAAP financial measure which CTS defines as net cash provided
by
operations less capital expenditures. The most comparable GAAP measure is
net
cash provided by operations. CTS' management uses free cash flow to evaluate
financial performance and in strategic planning, specifically, for investing
and
financing decisions. CTS' management believes free cash flow is a useful
measure
because it indicates the ability of a business operation to fund its own
required capital investments. CTS' management believes that the non-GAAP
measure
free cash flow is useful to investors because it reflects the performance
of its
overall operations more accurately than net cash provided by operations and
because it provides investors with the same results that management uses
as the
basis for making decisions about the business. Free cash flow is not an
indicator of residual cash available for discretionary spending, because
it does
not take into account mandatory debt service or other non-discretionary spending
requirements which are not deducted in the calculation of free cash flow.
CTS'
management takes these limitations into account when using free cash flow
to
make investing and financing decisions.
The
following table summarizes free cash flow for CTS:
|
|
Six
Months Ended
|
|
($
in millions)
|
|
July
2, 2006
|
|
July
3, 2005
|
|
Net
cash provided by operations
|
|
$
|
17.4
|
|
$
|
24.6
|
|
Capital
expenditures
|
|
|
(5.8
|
)
|
|
(5.9
|
)
|
Free
cash flow
|
|
$
|
11.6
|
|
$
|
18.7
|
|
Net
cash
used in investing activities were $4.6
million
for the first half of 2006, including
$5.8
million
used for capital expenditures partially offset by $1.2
million
in proceeds from asset sales.
Net
cash
used in investing activities totaled $40.7 million in the first half of 2005.
The cash used for the SMTEK acquisition was $35.6 million, and capital
expenditures were $5.9 million.
Net
cash
used in financing activities were $8.3 million in first half of 2006, consisting
primarily of a net $4.1 million reduction in long-term debt primarily related
to
the early repayment of the $5.5 million 6.5% Debentures. Additional financing
activities included $2.2 million in dividend payments, a decrease in short-term
notes payable of $1.2 million, and a $0.8 million purchase of treasury stock.
Net
cash
used in financing activities were $28.6 million in first half of 2005,
consisting primarily of $13.0 million from the repayment of debt related
to the
SMTEK acquisition and a net $9.7 million reduction in the credit facility,
a
$3.4 million purchase of treasury stock and $2.2 million in dividends payments.
Capital
Resources
On
June
27, 2006, CTS entered into a new $100 million, unsecured revolving credit
agreement. Under the terms of the new revolving credit agreement, CTS can
expand
the credit facility to $150 million. The new revolving credit agreement had
an
outstanding balance of $3.6 million at July 2, 2006. Interest rates on the
new
revolving credit agreement fluctuate based upon LIBOR and the Company’s
quarterly total leverage ratio. CTS pays a commitment fee on the undrawn
portion
of the new revolving credit agreement. The commitment fee varies based on
the
quarterly leverage ratio and was 0.15 percent per annum at July 2, 2006.
The new
revolving credit agreement requires, among other things, that CTS comply
with a
maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure
of CTS to comply with these covenants could reduce the borrowing availability
under the new revolving credit agreement. CTS was in compliance with all
debt
covenants at July 2, 2006. Additionally, the new revolving credit agreement
contains restrictions relating to the amount of secured debt the Company
can
have outstanding, the amounts allowed for acquisitions or asset sales, and
the
amounts allowed for stock repurchases and dividend payments. The new revolving
credit agreement expires in June 2011. The former $75 million revolving credit
agreement was cancelled in connection with the execution of the new revolving
credit agreement.
CTS
believes cash flows from operating activities and available borrowings under
its
credit facility will be adequate to fund its working capital and capital
expenditure requirements. CTS may choose to pursue additional equity and/or
debt
financing to fund acquisitions and/or to reduce its overall interest expense
or
improve its capital structure.
In
November 2005, CTS’ Board of Directors authorized a program to repurchase up to
one million shares of stock. The authorization expires June 30, 2007. Reacquired
shares will be used to support equity-based compensation programs and
for
other corporate purposes. During the first six months of 2006, CTS
repurchased 57,400 shares
at
a total cost of $767,811. At
July
2, 2006, CTS was authorized to repurchase approximately 803,200 additional
shares.
On
December 14, 1999, CTS’ shelf registration statement on Form S-3 was declared
effective by the Securities and Exchange
Commission. CTS could initially offer up to $500.0 million in any
combination of debt securities, common stock, preferred stock or warrants
under
the registration statement. During the first six months of 2006, CTS did
not issue any securities under this registration statement. As of July 2,
2006, CTS could offer up to $435.1 million of additional debt and/or equity
securities under this registration statement.
Capital
Requirements
The
following table sets forth the impact that contractual obligations, as of
July
2, 2006, are expected to have on the Company's liquidity and cash flow in
future
periods:
|
|
Payments
Due by Period
|
|
($
in millions)
|
|
Total
|
|
2006
|
|
2007
- 2008
|
|
2009
- 2010
|
|
2011
- beyond
|
|
Long-term
debt (1)
|
|
$
|
87.4
|
|
$
|
0.7
|
|
$
|
2.9
|
|
$
|
2.9
|
|
$
|
80.9
|
|
Operating
leases
|
|
|
23.8
|
|
|
5.5
|
|
|
8.7
|
|
|
6.0
|
|
|
3.6
|
|
Purchase
obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Retirement
obligations
|
|
|
15.2
|
|
|
0.8
|
|
|
3.1
|
|
|
3.2
|
|
|
8.1
|
|
|
|
$
|
126.4
|
|
$
|
7.0
|
|
$
|
14.7
|
|
$
|
12.1
|
|
$
|
92.6
|
|
(1)
|
|
2.125%
Debentures issued in May 2004. Investors may convert the debentures,
under
certain circumstances, to CTS common stock. The conversion price
is $15.00
per common share.
|
_______________________
Purchase
obligations are defined as agreements that are enforceable and legally binding
on CTS and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions;
and the
approximate timing of the transaction. CTS purchases direct materials, generally
related to customer orders, for production occurring at its manufacturing
facilities around the world. These goods are secured using purchase orders,
either blanket or discrete. Purchase orders commit CTS to take delivery of
the
quantities ordered generally over a specified delivery schedule. CTS’ standard
purchase order terms and conditions state that, if CTS should cancel an order,
CTS will reimburse its supplier only for the costs incurred at the time of
cancellation. CTS’ purchase order cancellations generally occur due to order
cancellation by a customer. If a customer cancels its order, CTS’ standard terms
of sale provide for reimbursement of costs, including those related to CTS’
purchase orders. Therefore, these commitments are not included in purchase
obligations.
New
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FAS
No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
No. 48 also provides guidance on derecognition, classification, interest
and
penalties, accounting in interim periods, disclosure, and transition. FIN
No. 48
is effective for fiscal years beginning after December 15, 2006. CTS is
currently reviewing the provisions of FIN No. 48, but does not expect it
will
have a material impact on its financial statements.
Off-Balance
Sheet Arrangements
CTS
incurred approximately $2.9
million and $4.4 million
of rent expense in the six-month period ending July 2, 2006 and July 3, 2005,
respectively. The future minimum lease payments under the Company's operating
leases are $2.6 million for the remainder of 2006, $4.8 million in 2007,
$3.9
million in 2008, $3.7 million in 2009, $2.3 million in 2010, and $3.6 million
thereafter.
__________________________________________________
*****
Forward-Looking
Statements
Statements
about the Company’s earnings outlook and its plans, estimates and beliefs
concerning the future are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based
on
management’s expectations, certain assumptions and currently available
information. Actual results may differ materially from those reflected in
the
forward-looking statements due to a variety of geopolitical, economic, health,
industry and other factors which could affect the Company’s operating results,
liquidity and financial condition. We undertake no obligations to publicly
update or revise any forward-looking statement. Examples of factors which
may
affect future results include, but are not limited to: rapid technological
change, general market conditions in the automotive, communications and computer
industries; reliance on key customers; the ability to protect our intellectual
property; pricing pressures and demand for our products; and risks associated
with our international operations, including trade and tariff barriers, exchange
rates and political and geopolitical risks. Investors are encouraged to examine
the Company’s 2005 Form 10-K, which more fully describes the risks and
uncertainties associated with the Company’s business.
There
have been no material changes in CTS’ market risk since December 31,
2005.
CTS
maintains a set of disclosure controls and procedures designed to ensure
information required to be disclosed by CTS in reports that it files or submits
under the Securities Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Management recognizes that a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of
a
control system must reflect the fact that there are resource constraints,
and
the benefits of controls must be considered relative to their costs. As of
July
2, 2006, the end of the quarter covered by this report, an evaluation was
carried out under the supervision and with the participation of CTS’ management,
including the chief executive officer and chief financial officer, of the
effectiveness of CTS’ disclosure controls and procedures. Based upon that
evaluation, the chief executive officer and chief financial officer have
concluded that CTS’ disclosure controls and procedures are effective at the
reasonable assurance level referred to above, provided that the evaluation
of
CTS’ disclosure controls and procedures did not include an evaluation of the
effectiveness of the internal control over financial reporting for the SMTEK
business, as described further below.
The
SMTEK
business had facilities located in Moorpark and Santa Clara, California;
Marlborough, Massachusetts; and Bangkok, Thailand. Each of these facilities
reports financial results that are included in this report for the quarter
ended
July 2, 2006. CTS’ management has not made an assessment of the SMTEK business’
internal control over financial reporting since the date of the acquisition.
Other than changes resulting from CTS’ acquisition of SMTEK, there were no
changes in CTS’ internal control over financial reporting during the quarter
ended July 2, 2006 that materially affected, or are reasonably likely to
materially affect, CTS’ internal control over financial reporting.
Certain
processes in the manufacturer of CTS’ current and past products create hazardous
waste by-products as currently defined by federal and state laws and
regulations. CTS has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator groups that it
is or
may be a Potentially Responsible Party (PRP) regarding hazardous waste
remediation at several non-CTS sites. In addition to these non-CTS sites,
CTS
has an ongoing practice of providing reserves for probably remediation
activities at certain of its manufacturing locations and for claims and
proceedings against CTS with respect to other environmental matters. In the
opinion of management, based upon presently available information relating
to
all such matters, either adequate provision for probably costs has been made,
or
the ultimate costs resulting will not materially affect the consolidated
financial position, results of operations or cash flows of CTS.
Certain
claims are pending against CTS with respect to matters arising out of the
ordinary conduct of its business. For all claims, in the opinion of management,
based upon presently available information, either adequate provision for
anticipated costs has been made by insurance, accruals or otherwise, or the
ultimate anticipated costs resulting will not materially affect CTS’
consolidated financial position, results of operations or cash
flows.
The
following statements reflect material changes in certain risk factors previously
disclosed in CTS’ Annual Report on Form 10-K for the year ended December 31,
2005. The changes relate to CTS' new $100 million revolving credit agreement
and
the repayment of its 6.5% convertible, subordinated debentures.
The
risk
factors below, together with the other risk factors disclosed in the December
31, 2005 Annual Report on Form 10-K, could affect our business, financial
condition and operating results. All risk factors should be considered in
connection with evaluating the forward-looking statements contained in this
Quarterly Report on Form 10-Q because these factors could cause CTS’ actual
results and condition to differ materially from those projected in
forward-looking statements. Investing in CTS involves some risks, including
the
risks described below and in the December 31, 2005 Annual Report on Form
10-K.
These risks are not the only ones that CTS faces. If any of these risks actually
occur, CTS’ business, financial condition or operating results could be
negatively affected.
CTS’
indebtedness may adversely affect its financial health.
As
of
July 2, 2006, CTS’ long-term debt balance was $64.4 million, consisting of $60.0
million of 2.125% convertible senior subordinated notes, $3.6 million of
borrowings under CTS’ revolving credit facility and $0.8 million of borrowings
under foreign credit facilities. The level of CTS’ indebtedness could, among
other things: increase CTS’ vulnerability to general economic and industry
conditions, including recessions; require CTS to use cash flows from operations
to service its indebtedness, thereby reducing its ability to fund working
capital, capital expenditures, research and development efforts and other
expenses; limit CTS’ flexibility in planning for, or reacting to, changes in its
business and the industries in which it operates; place CTS at a competitive
disadvantage compared to competitors that have less indebtedness; limit CTS’
ability to borrow additional funds that may be needed to operate and expand
its
business.
CTS’
credit facility and the indenture governing CTS’ convertible subordinated notes
contain provisions that could materially restrict CTS’ business.
CTS’
credit facility contains a number of significant covenants that, among other
things, limit CTS’ ability to: dispose of assets; incur certain additional debt;
repay other debt or amend subordinated debt instruments; create liens on
assets;
make investments, loans or advances; make acquisitions or engage in mergers
or
consolidations; make capital expenditures; and engage in certain transactions
with CTS’ subsidiaries and affiliates. Under CTS’ credit facility, CTS is
required to meet certain financial ratios. In addition, the indenture governing
CTS’ 2.125% convertible senior subordinated notes provides for an adjustment of
the conversion rate if CTS pays dividends over a certain amount or makes
other
distributions on capital stock and limits CTS' ability to engage in mergers
or
consolidations.
The
restrictions contained in CTS’ credit facility and in the indenture governing
CTS’ convertible subordinated notes could limit CTS’ ability to plan for or
react to market conditions or meet capital needs or could otherwise restrict
CTS’ activities or business plans. These restrictions could adversely affect
CTS’ ability to finance its operations, strategic acquisitions, investments or
other capital needs or to engage in other business activities that could
be in
CTS’ interests.
CTS’
ability to comply with these covenants may be affected by events beyond its
control. If CTS breaches any of these covenants or restrictions, it could
result
in an event of default under CTS’ credit facility, the indenture governing CTS’
convertible subordinated notes, or documents governing any other existing
or
future indebtedness. A default, if not cured or waived, may permit acceleration
of CTS’ indebtedness. In addition, CTS’ lenders could terminate their
commitments to make further extensions of credit under CTS’ credit facility. If
CTS’ indebtedness is accelerated, CTS cannot be certain that it will have
sufficient funds to pay the accelerated indebtedness or that it will have
the
ability to refinance accelerated indebtedness on terms favorable to CTS or
at
all.
The
following table summarizes the repurchases of CTS common stock made by the
Company during the three-month period ending July 2, 2006:
|
|
|
(a)
Total
Number of
Shares
Purchased
|
|
|
|
(b)
Average
Price
Paid
per Share
|
|
|
|
(c)
Total
Number of Shares
Purchased
as Part of
Plans
or Programs
(1)
|
|
|
|
(d)
Maximum
Number
of
Shares
That
May Yet Be
Purchased
Under the
Plans
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
859,100
|
May
29, 2006 - July 2, 2006
|
|
|
55,900
|
|
|
$ |
13.40
|
|
|
|
55,900
|
|
|
|
803,200
|
Total
|
|
|
55,900
|
|
|
$
|
13.40
|
|
|
|
55,900
|
|
|
|
|
(1)
|
In
November 2005, CTS’ Board of Directors authorized a program to repurchase
up to one million shares of its common stock in the open market.
The
authorization expires June 30,
2007.
|
____________________________
The
Annual Meeting of Shareholders of CTS Corporation was held on May 3, 2006.
At the meeting, the following matter was submitted to a vote of the
stockholders of CTS:
The
election of nine directors to serve for one year beginning at the 2006 annual
shareholders' meeting and expiring at the 2007 annual shareholders' meeting.
A summary of votes by directors is shown below:
Director
|
|
For
|
|
Withheld
|
Walter
S. Catlow
|
|
30,822,329
|
|
2,153,663
|
Lawrence
J. Ciancia
|
|
30,096,253
|
|
2,879,739
|
Thomas
G. Cody
|
|
30,821,820
|
|
2,154,172
|
Gerald
H. Frieling
|
|
30,632,583
|
|
2,343,409
|
Roger
R. Hemminghaus
|
|
30,819,051
|
|
2,156,941
|
Michael
A. Henning
|
|
30,067,014
|
|
2,908,978
|
Robert
A. Profusek
|
|
22,390,378
|
|
10,585,614
|
Donald
K. Schwanz
|
|
30,693,476
|
|
2,282,516
|
Patricia
K. Vincent
|
|
30,818,013
|
|
2,157,979
|
|
|
Prototype
Restricted Stock Unit Agreement
|
|
|
|
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Director
and Named Executive Officer Compensation
|
|
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CTS
Corporation
|
|
CTS
Corporation
|
|
|
|
|
|
/s/
Richard G. Cutter III
|
|
/s/
Vinod M. Khilnani
|
|
Richard
G. Cutter III
Vice
President, Secretary
and
General Counsel
|
|
Vinod
M. Khilnani
Senior
Vice President and
Chief
Financial Officer
|
|
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Dated:
July 27, 2006
|
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Date:
July 27, 2006
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