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 October
1, 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 October 30, 2006: 35,804,763
TABLE
OF CONTENTS
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Page
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PART
I.
|
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3
|
|
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|
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Item
1.
|
|
3
|
|
|
|
|
|
|
3
|
|
-
For the Three
and Nine Months ended October 1, 2006 and October 2, 2005
|
|
|
|
|
|
|
|
4
|
|
- As of October 1, 2006, and December 31, 2005
|
|
|
|
|
|
|
|
5
|
|
- For the Nine Months ended October 1, 2006 and October 2, 2005
|
|
|
|
|
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6
|
|
- For the Three and Nine Months ended October 1, 2006 and October
2,
2005
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Item
2.
|
|
18
|
|
|
|
|
|
Item
3.
|
|
30
|
|
|
|
|
|
Item
4.
|
|
30
|
|
|
|
|
PART
II.
|
|
30
|
|
|
|
|
|
Item
1.
|
|
30
|
|
|
|
|
|
Item
1A.
|
|
30
|
|
|
|
|
|
Item
2.
|
|
31
|
|
|
|
|
|
Item
6.
|
|
31
|
|
|
|
|
|
|
32
|
(In
thousands of dollars, except per share amounts)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165,676
|
|
$
|
149,210
|
|
$
|
482,094
|
|
$
|
462,886
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
136,830
|
|
|
120,224
|
|
|
387,194
|
|
|
373,393
|
|
Selling,
general and administrative expenses
|
|
|
17,725
|
|
|
16,159
|
|
|
55,168
|
|
|
51,773
|
|
Research
and development expenses
|
|
|
3,775
|
|
|
3,976
|
|
|
11,937
|
|
|
13,330
|
|
Gain
on sales of assets - Note L
|
|
|
(1,332
|
)
|
|
(353
|
)
|
|
(2,114
|
)
|
|
(806
|
)
|
Restructuring
charges - Note C
|
|
|
486
|
|
|
—
|
|
|
3,368
|
|
|
—
|
|
Operating
earnings
|
|
|
8,192
|
|
|
9,204
|
|
|
26,541
|
|
|
25,196
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(803
|
)
|
|
(1,254
|
)
|
|
(2,948
|
)
|
|
(4,553
|
)
|
Interest
income
|
|
|
199
|
|
|
239
|
|
|
522
|
|
|
1,054
|
|
Other
|
|
|
231
|
|
|
33
|
|
|
293
|
|
|
(267
|
)
|
Total
other expense
|
|
|
(373
|
)
|
|
(982
|
)
|
|
(2,133
|
)
|
|
(3,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes
|
|
|
7,819
|
|
|
8,222
|
|
|
24,408
|
|
|
21,430
|
|
Income
tax expense
|
|
|
1,907
|
|
|
1,892
|
|
|
5,955
|
|
|
7,771
|
|
Net
earnings
|
|
$
|
5,912
|
|
$
|
6,330
|
|
$
|
18,453
|
|
$
|
13,659
|
|
Net
earnings per share — Note K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
0.17
|
|
$
|
0.51
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
0.48
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.09
|
|
$
|
0.09
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,861
|
|
|
36,284
|
|
|
35,841
|
|
|
36,434
|
|
Diluted
|
|
|
40,266
|
|
|
41,013
|
|
|
40,215
|
|
|
41,072
|
|
See
notes
to condensed consolidated financial statements.
(dollars
in thousands)
|
|
October
1, 2006
|
|
December
31, 2005*
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
29,723
|
|
$
|
12,029
|
|
Accounts
receivable, less allowances (2006 - $1,787; 2005 - $2,373)
|
|
|
101,747
|
|
|
91,265
|
|
Inventories
— Note F
|
|
|
67,229
|
|
|
60,564
|
|
Other
current assets
|
|
|
21,212
|
|
|
16,816
|
|
Total
current assets
|
|
|
219,911
|
|
|
180,674
|
|
Property,
plant and equipment, less accumulated depreciation (2006 - $249,076;
2005
- $252,545)
|
|
|
96,292
|
|
|
109,676
|
|
Other
Assets
|
|
|
|
|
|
|
|
Prepaid
pension asset — Note H
|
|
|
156,855
|
|
|
152,483
|
|
Goodwill
|
|
|
24,657
|
|
|
24,657
|
|
Other
intangible assets, net
|
|
|
39,950
|
|
|
42,347
|
|
Deferred
income taxes
|
|
|
22,017
|
|
|
22,011
|
|
Other
|
|
|
1,803
|
|
|
2,088
|
|
Total
other assets
|
|
|
245,282
|
|
|
243,586
|
|
Total
Assets
|
|
$
|
561,485
|
|
$
|
533,936
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
9,458
|
|
$
|
13,299
|
|
Current
portion of long-term debt - Note G
|
|
|
176
|
|
|
164
|
|
Accounts
payable
|
|
|
75,641
|
|
|
67,196
|
|
Accrued
liabilities
|
|
|
46,319
|
|
|
39,274
|
|
Total
current liabilities
|
|
|
131,594
|
|
|
119,933
|
|
Long-term
debt - Note G
|
|
|
60,645
|
|
|
68,293
|
|
Other
long-term obligations
|
|
|
19,398
|
|
|
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; 53,687,419
shares issued at October 1, 2006 and 53,576,243 shares issued at
December 31, 2005
|
|
|
276,290
|
|
|
275,211
|
|
Additional
contributed capital
|
|
|
26,762
|
|
|
24,743
|
|
Retained
earnings
|
|
|
312,178
|
|
|
296,956
|
|
Accumulated
other comprehensive earnings (loss)
|
|
|
2,671
|
|
|
(244
|
)
|
|
|
|
617,901
|
|
|
596,666
|
|
Cost
of common stock held in treasury (17,789,331 shares at 2006 and
17,717,657
shares at 2005) - Note M
|
|
|
(268,053
|
)
|
|
(267,095
|
)
|
Total
shareholders’ equity
|
|
|
349,848
|
|
|
329,571
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
561,485
|
|
$
|
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.
|
|
|
|
|
|
|
|
(In
thousands of dollars)
|
|
Nine
Months Ended
|
|
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,453
|
|
$
|
13,659
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,978
|
|
|
19,826
|
|
Prepaid
pension asset
|
|
|
(4,697
|
)
|
|
(6,579
|
)
|
Equity-based
compensation
|
|
|
2,960
|
|
|
1,842
|
|
Restructuring
charges
|
|
|
3,368
|
|
|
—
|
|
Gain
on sales of assets
|
|
|
(2,114
|
)
|
|
(806
|
)
|
Deferred
income taxes
|
|
|
—
|
|
|
3,048
|
|
Changes
in assets and liabilities, net of effects from purchase
of
SMTEK
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,482
|
)
|
|
6,348
|
|
Inventories
|
|
|
(6,664
|
)
|
|
(1,366
|
)
|
Other
current assets
|
|
|
(4,443
|
)
|
|
(2,927
|
)
|
Accounts
payable and accrued liabilities
|
|
|
11,725
|
|
|
(4,681
|
)
|
Other
|
|
|
1,406
|
|
|
1,358
|
|
Total
adjustments
|
|
|
10,037
|
|
|
16,063
|
|
Net
cash provided by operating activities
|
|
|
28,490
|
|
|
29,722
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payment
for purchase of SMTEK, net of cash acquired
|
|
|
—
|
|
|
(35,561
|
)
|
Capital
expenditures
|
|
|
(11,108
|
)
|
|
(12,549
|
)
|
Proceeds
from sales of assets
|
|
|
14,453
|
|
|
1,636
|
|
Net
cash provided by (used in) investing activities
|
|
|
3,345
|
|
|
(46,474
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
Repayment
of debt assumed in connection with purchase of SMTEK
|
|
|
—
|
|
|
(13,013
|
)
|
Payments
of long-term debt
|
|
|
(81,562
|
)
|
|
(135,819
|
)
|
Proceeds
from borrowings of long-term debt
|
|
|
73,850
|
|
|
135,144
|
|
Decrease
in short-term notes payable
|
|
|
(3,841
|
)
|
|
(311
|
)
|
Dividends
paid
|
|
|
(3,227
|
)
|
|
(3,259
|
)
|
Purchase
of treasury stock
|
|
|
(946
|
)
|
|
(7,525
|
)
|
Other
|
|
|
(149
|
)
|
|
(4
|
)
|
Net
cash used in financing activities
|
|
|
(15,875
|
)
|
|
(24,787
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
1,734
|
|
|
(2,381
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
17,694
|
|
|
(43,920
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
12,029
|
|
|
61,005
|
|
Cash
and cash equivalents at end of period
|
|
$
|
29,723
|
|
$
|
17,085
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,249
|
|
$
|
3,347
|
|
Income
taxes—net
|
|
$
|
3,123
|
|
$
|
4,851
|
|
|
|
|
|
|
|
|
|
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
|
|
Nine
Months Ended
|
|
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Net
earnings
|
|
$
|
5,912
|
|
$
|
6,330
|
|
$
|
18,453
|
|
$
|
13,659
|
|
Other
comprehensive earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
932
|
|
|
(411
|
)
|
|
2,915
|
|
|
(2,370
|
)
|
Comprehensive
earnings
|
|
$
|
6,844
|
|
$
|
5,919
|
|
$
|
21,368
|
|
$
|
11,289
|
|
See
notes
to condensed consolidated financial statements.
October
1, 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 nine-month periods ending October 2,
2005,
as if CTS had applied the provisions of FAS No. 123(R) during those
periods:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands, except per share amounts)
|
|
October
2, 2005
|
|
October
2, 2005
|
|
Net
earnings, as reported
|
|
$
|
6,330
|
|
$
|
13,659
|
|
Deduct:
Stock-based employee compensation cost, net of tax, as if fair
value based
method
were used
|
|
|
(192
|
)
|
|
(472
|
)
|
Pro
forma net earnings
|
|
$
|
6,138
|
|
$
|
13,187
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - basic, as reported
|
|
$
|
0.17
|
|
$
|
0.37
|
|
Pro
forma net earnings per share - basic
|
|
|
0.17
|
|
|
0.36
|
|
Net
earnings per share - diluted, as reported
|
|
|
0.16
|
|
|
0.35
|
|
Pro
forma net earnings per share - diluted
|
|
$
|
0.16
|
|
$
|
0.34
|
|
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 nine-month periods ending October
1,
2006 is shown in the following table:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands, except per share amounts)
|
|
October
1, 2006
|
|
October
1, 2006
|
|
Impact
of adopting FAS No. 123(R) on:
|
|
|
|
|
|
|
|
Operating
earnings
|
|
$
|
157
|
|
$
|
903
|
|
Earnings
before income taxes
|
|
|
157
|
|
|
903
|
|
Net
earnings
|
|
|
94
|
|
|
542
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
—
|
|
$
|
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 $157,000 and $35,000 of these excess tax benefits as financing
cash
flows for the nine-month periods ending October 1, 2006 and October 2, 2005,
respectively.
At
October 1, 2006, CTS had five equity-based compensation plans: the 1988
Restricted Stock and Cash Bonus Plan (1988 Plan), the 1996 Stock Option Plan
(1996 Plan), the 2001 Stock Option Plan (2001 Plan), the Nonemployee Directors’
Stock Retirement Plan (Directors’ Plan), and the 2004 Omnibus Long-Term
Incentive Plan (2004 Plan). As of December 2004, additional grants can only
be
made under the 2004 Plan. CTS believes that equity-based awards align the
interest of employees with those of its shareholders.
The
2004
Plan, and previously the 1996 Plan and 2001 Plan, provides for grants of
incentive stock options or nonqualified stock options to officers, key
employees, and nonemployee members of CTS’ board of directors. In addition, the
2004 Plan allows for grants of stock appreciation rights, restricted stock,
restricted stock units, performance shares, performance units, and other
stock
awards.
The
following table summarizes the compensation expense included in the Unaudited
Condensed Consolidated Statement of Earnings for the three and nine-month
periods ending October 1, 2006 and October 2, 2005 relating to equity-based
compensation plans:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Stock
options (1)
|
|
$
|
167
|
|
$
|
25
|
|
$
|
938
|
|
$
|
71
|
|
Restricted
stock units
|
|
|
680
|
|
|
584
|
|
|
1,856
|
|
|
1,546
|
|
Restricted
stock
|
|
|
48
|
|
|
74
|
|
|
166
|
|
|
225
|
|
Total
|
|
$
|
895
|
|
$
|
683
|
|
$
|
2,960
|
|
$
|
1,842
|
|
(1) |
Stock
option expense includes $10 and $25 in the quarters ending October
1, 2006
and October 2, 2005, respectively, and $35 and $71 for the nine-month
periods ending October 1, 2006 and October 2, 2005, respectively,
related
to non-employee director stock
options.
|
_______________________
The
following table summarizes plan status as of October 1, 2006:
|
|
2004
Plan
|
|
2001
Plan
|
|
1996
Plan
|
|
Awards
originally available
|
|
|
6,500,000
|
|
|
2,000,000
|
|
|
1,200,000
|
|
Stock
options outstanding
|
|
|
332,000
|
|
|
916,225
|
|
|
313,550
|
|
Restricted
stock units outstanding
|
|
|
639,918
|
|
|
—
|
|
|
—
|
|
Awards
exercisable
|
|
|
85,350
|
|
|
834,675
|
|
|
300,250
|
|
Awards
available for grant
|
|
|
5,390,101
|
|
|
—
|
|
|
—
|
|
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.
|
|
Nine
Months Ended
|
|
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Expected
volatility
|
|
|
53.3%
- 58.2%
|
|
|
52.4%
|
|
Weighted-average
expected 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 October 1, 2006 and October 2, 2005,
and
changes during the nine-month periods then ended, is presented
below:
|
|
October
1, 2006
|
|
October
2, 2005
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding
at beginning of year
|
|
|
1,567,499
|
|
$
|
15.93
|
|
|
1,636,900
|
|
$
|
16.80
|
|
Granted
|
|
|
93,000
|
|
|
13.68
|
|
|
136,600
|
|
|
11.11
|
|
Exercised
|
|
|
(37,624
|
)
|
|
8.53
|
|
|
(24,950
|
)
|
|
8.60
|
|
Expired
|
|
|
(52,150
|
)
|
|
23.07
|
|
|
(118,750
|
)
|
|
24.86
|
|
Forfeited
|
|
|
(8,950
|
)
|
|
9.43
|
|
|
(36,800
|
)
|
|
9.14
|
|
Outstanding
at end of period
|
|
|
1,561,775
|
|
$
|
15.76
|
|
|
1,593,000
|
|
$
|
15.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,220,275
|
|
$
|
16.94
|
|
|
996,007
|
|
$
|
19.07
|
|
The
total
intrinsic value of stock options exercised during the nine-month periods
ended
October 1, 2006 and October 2, 2005 was $183,000 and $86,000 respectively.
The
exercise price of options granted during the nine-month periods ending October
1, 2006 and October 2, 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 October 1, 2006 is presented
below:
|
|
Weighted-average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding
|
|
|
6.1
years
|
|
|
—
|
|
Options
exercisable
|
|
|
5.5
years
|
|
|
—
|
|
A
summary
of the nonvested stock options as of October 1, 2006 and October 2, 2005,
and
changes during the nine-month periods then ended, is presented
below:
|
|
October
1, 2006
|
|
October
2, 2005
|
|
|
|
Options
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Options
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Nonvested
at beginning of year
|
|
|
488,943
|
|
$
|
5.35
|
|
|
813,400
|
|
$
|
5.87
|
|
Granted
|
|
|
93,000
|
|
|
6.53
|
|
|
136,600
|
|
|
6.51
|
|
Vested
|
|
|
(231,493
|
)
|
|
4.74
|
|
|
(316,207
|
)
|
|
7.24
|
|
Forfeited
|
|
|
(8,950
|
)
|
|
4.52
|
|
|
(36,800
|
)
|
|
4.53
|
|
Nonvested
at end of period
|
|
|
341,500
|
(1) |
$
|
6.11
|
|
|
596,993
|
|
$
|
5.24
|
|
(1)
Based on historical experience, CTS currently expects approximately 292,408
of
these options to vest.
_____________________
The
total
fair value of shares vested during the nine-months ended October 1, 2006
and
October 2, 2005 was approximately $1,097,277 and $2,289,000 respectively.
As of
October 1, 2006, there was $811,000 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
October 1, 2006:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Range
of
|
|
Number
|
|
Remaining
|
|
Weighted-Average
|
|
Number
|
|
Weighted-Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
Prices
|
|
at
10/1/06
|
|
Life
(Years)
|
|
Price
|
|
at
10/1/06
|
|
Price
|
$
|
7.70
- 11.11
|
|
|
897,175
|
|
|
|
6.83
|
|
|
$
|
9.36
|
|
|
|
660,675
|
|
|
$
|
8.94
|
|
|
13.68
- 16.24
|
|
|
237,800
|
|
|
|
7.10
|
|
|
|
14.10
|
|
|
|
132,800
|
|
|
|
14.34
|
|
|
23.00
- 33.63
|
|
|
321,800
|
|
|
|
4.28
|
|
|
|
24.56
|
|
|
|
321,800
|
|
|
|
24.56
|
|
|
35.97
- 50.00
|
|
|
103,500
|
|
|
|
3.95
|
|
|
|
47.02
|
|
|
|
103,500
|
|
|
|
47.02
|
|
|
56.94
- 79.25
|
|
|
1,500
|
|
|
|
3.03
|
|
|
|
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 October 1, 2006 and October 2, 2005,
and
changes during the nine-month periods then ended is presented
below:
|
|
October
1, 2006
|
|
October
2, 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
|
|
|
236,700
|
|
|
13.67
|
|
|
340,438
|
|
|
11.75
|
|
Settled
|
|
|
(100,110
|
)
|
|
11.23
|
|
|
(52,410
|
)
|
|
11.34
|
|
Cancelled
|
|
|
(22,570
|
)
|
|
11.34
|
|
|
(31,090
|
)
|
|
11.28
|
|
Outstanding
at end of period
|
|
|
639,918
|
|
$
|
12.11
|
|
|
508,938
|
|
$
|
11.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining contractual life
|
|
|
4.2
years
|
|
|
|
|
|
4.7
years
|
|
|
|
|
As
of
October 1, 2006, there was $4.8 million of unrecognized compensation cost
related to nonvested RSUs. That cost is expected to be recognized over a
weighted-average period of 1.7 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, 32,666 shares
of
Restricted Stock were outstanding as of October 1, 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 October 1, 2006, there was $241,000 of total
unrecognized compensation cost related to nonvested Restricted Stock. That
cost
is expected to be recognized over a weighted-average period of 1.2 years.
CTS
recognizes expense on a straight-line basis over the requisite service period
for each separately vesting portion of the award as if the award was, in
substance, multiple awards.
Stock
Retirement Plan
The
Directors’ Plan provides for a portion of the total compensation payable to
nonemployee directors to be deferred and paid in CTS stock. The Directors’ Plan
was frozen effective December 1, 2004. All future grants will be from the
2004
Plan.
NOTE
C—Restructuring Charges
In
January 2006, CTS announced its intention to consolidate its Berne, Indiana
manufacturing operations into three of its other existing facilities. Automotive
product operations at Berne were transferred to CTS’ automotive facilities in
Matamoros, Mexico and Elkhart, Indiana. Electronic components operations
in
Berne were moved to CTS’ Singapore facility. While the Berne facility is
currently being marketed for sale, CTS continues to use the facility for
certain
electronic component-related service functions. As of October 1, 2006, the
Berne
consolidation process was substantially completed, with all expected charges
recorded.
The
following table displays the planned costs associated with the Berne
consolidation, as well as a summary of the actual costs incurred through
October
1, 2006:
($
in millions)
|
|
Planned
Costs
|
|
Actual
incurred through
October
1, 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
|
|
|
0.5
|
|
Other
employee related costs
|
|
|
0.3
|
|
|
0.5
|
|
Restructuring-related
costs
|
|
|
0.6
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Total
restructuring and restructuring-related costs
|
|
$
|
4.0
|
|
$
|
3.9
|
|
Additionally,
during the third quarter of 2006, CTS recorded a pre-tax restructuring charge
of
$0.4 million, or $0.3 million after-tax and $0.01 per diluted share, when
it
revised its estimate of the fair value of the remaining net liability of
the
operating lease for the idle Marlborough facility.
Of
the
restructuring and restructuring-related costs, $3.9 million relates to the
Components and Sensors business segment and $0.4 million relates to the EMS
business segment. Restructuring charges are reported on a separate line on
the
Unaudited Condensed Consolidated Statement of Earnings and the
restructuring-related costs are included in cost of goods sold.
The
following table displays the restructuring reserve activity for the Berne
consolidation for the nine-month period ending October 1, 2006:
($
in millions)
|
|
|
|
|
|
|
|
Restructuring
liability at January 1, 2006
|
|
$
|
—
|
|
First
nine months of 2006 charge
|
|
|
3.9
|
|
Costs
paid
|
|
|
(2.8
|
)
|
Restructuring
liability at October 1, 2006
|
|
$
|
1.1
|
|
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 nine-month period ending October 2, 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
Nine
Months Ended
October
2, 2005
|
|
|
|
|
|
Revenues
|
|
$
|
472,933
|
|
Net
income
|
|
$
|
13,833
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.35
|
|
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)
|
|
October
1,
2006
|
|
December
31, 2005
|
|
Finished
goods
|
|
$
|
12,730
|
|
$
|
11,771
|
|
Work-in-process
|
|
|
16,029
|
|
|
16,039
|
|
Raw
materials
|
|
|
38,470
|
|
|
32,754
|
|
Total
inventories
|
|
$
|
67,229
|
|
$
|
60,564
|
|
NOTE
G—Debt
Long-term
debt was comprised of the following:
($
in thousands)
|
|
October
1,
2006
|
|
December
31,
2005
|
|
Revolving
credit agreement, weighted-average interest rate of 6.2%, due in
2011
|
|
$
|
—
|
|
$
|
—
|
|
Former
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 7.1% (2006) and 5.8% (2005),
due
in 2011
|
|
|
821
|
|
|
875
|
|
Other
debt, weighted-average interest rate of 6.3%
|
|
|
—
|
|
|
2
|
|
|
|
|
60,821
|
|
|
68,457
|
|
Less
current maturities
|
|
|
176
|
|
|
164
|
|
Total
long-term debt
|
|
$
|
60,645
|
|
$
|
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. There were no amounts outstanding under
the
new revolving credit agreement at October 1, 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 October 1, 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 October 1, 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 October 1, 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 October 1, 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 $0.8 million at October 1, 2006. The term loan is secured by
machinery and equipment of the Thailand manufacturing facility and requires
monthly payments through May 2011.
NOTE
H—Retirement Plans
Net
pension (income) / postretirement expense for the three and nine-month periods
ended October 1, 2006 and October 2, 2005 includes the following components:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
PENSION
PLANS
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,283
|
|
$
|
1,310
|
|
$
|
3,839
|
|
$
|
3,940
|
|
Interest
cost
|
|
|
3,020
|
|
|
2,839
|
|
|
9,049
|
|
|
8,524
|
|
Expected
return on plan assets (1)
|
|
|
(6,188
|
)
|
|
(6,311
|
)
|
|
(18,547
|
)
|
|
(18,940
|
)
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition
obligation
|
|
|
—
|
|
|
(76
|
)
|
|
—
|
|
|
(228
|
)
|
Prior
service cost
|
|
|
135
|
|
|
189
|
|
|
404
|
|
|
600
|
|
Recognized
(gain) loss
|
|
|
645
|
|
|
201
|
|
|
1,933
|
|
|
569
|
|
Curtailment
loss
|
|
|
—
|
|
|
—
|
|
|
325
|
|
|
475
|
|
Net
pension income
|
|
$
|
(1,105
|
)
|
$
|
(1,848
|
)
|
$
|
(2,997
|
)
|
$
|
(5,060
|
)
|
(1) Expected
return on plan assets is net of expected investment expenses and certain
administrative expenses.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
OTHER
POSTRETIREMENT BENEFIT PLAN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
5
|
|
$
|
7
|
|
$
|
14
|
|
$
|
21
|
|
Interest
cost
|
|
|
75
|
|
|
79
|
|
|
224
|
|
|
237
|
|
Curtailment
gain
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
Net
postretirement expense
|
|
$
|
80
|
|
$
|
86
|
|
$
|
157
|
|
$
|
258
|
|
CTS
recognized a pension plan curtailment loss of approximately $0.3 million
in 2006
and $0.5 million in 2005, and a postretirement benefit plan curtailment gain
of
approximately $0.1 million in 2006, due to reduced employment levels. Also,
effective April 1, 2006, CTS closed one of its U.S. defined benefit plans
to new
participants.
NOTE
I—Business Segments
FAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” requires companies to provide certain information about their
operating segments. CTS has two reportable business segments: 1)
Electronics Manufacturing Services (EMS) and 2) Components and
Sensors.
EMS
includes the higher level assembly of electronic and mechanical components
into
a finished subassembly or assembly performed under a contract manufacturing
agreement with an OEM or other contract manufacturer. Additionally, for some
customers, CTS provides full turnkey manufacturing and completion including
design, bill-of-material management, logistics, and repair.
Components
and sensors are products which perform specific electronic functions for
a given
product family and are intended for use in customer assemblies. Components
and sensors consist principally of automotive sensors and actuators used
in
commercial or consumer vehicles; electronic components used in communications
infrastructure and computer markets; terminators, including ClearONE™
terminators, used in computer and other high speed applications, switches,
resistor networks, and potentiometers used to serve multiple markets.
The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies in the Company’s annual report
on Form 10-K. Management evaluates performance based upon segment
operating earnings before restructuring and related charges, interest expense,
other non-operating income, and income tax expense.
Summarized
financial information concerning CTS’ reportable segments is shown in the
following table:
($
in thousands)
|
|
EMS
|
|
Components
and Sensors
|
|
Total
|
|
Third
Quarter of 2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
100,832
|
|
$
|
64,844
|
|
$
|
165,676
|
|
Segment
operating earnings
|
|
|
3,336
|
|
|
5,596
|
|
|
8,932
|
|
Total
assets
|
|
|
170,051
|
|
|
391,434
|
|
|
561,485
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter of 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
89,111
|
|
$
|
60,099
|
|
$
|
149,210
|
|
Segment
operating earnings
|
|
|
2,129
|
|
|
7,075
|
|
|
9,204
|
|
Total
assets
|
|
|
160,052
|
|
|
388,812
|
|
|
548,864
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Nine Months of 2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
277,927
|
|
$
|
204,167
|
|
$
|
482,094
|
|
Segment
operating earnings
|
|
|
6,926
|
|
|
23,939
|
|
|
30,865
|
|
Total
assets
|
|
|
170,051
|
|
|
391,434
|
|
|
561,485
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Nine Months of 2005
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
272,148
|
|
$
|
190,738
|
|
$
|
462,886
|
|
Segment
operating earnings
|
|
|
7,110
|
|
|
18,086
|
|
|
25,196
|
|
Total
assets
|
|
|
160,052
|
|
|
388,812
|
|
|
548,864
|
|
Reconciling
information between reportable segments’ operating earnings and CTS’
consolidated pre-tax income is shown in the following table:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Total
segment operating earnings
|
|
$
|
8,932
|
|
$
|
9,204
|
|
$
|
30,865
|
|
$
|
25,196
|
|
Restructuring
and related charges - Components and Sensors
|
|
|
(265
|
)
|
|
—
|
|
|
(3,849
|
)
|
|
—
|
|
Restructuring
charge - EMS
|
|
|
(475
|
)
|
|
—
|
|
|
(475
|
)
|
|
—
|
|
Interest
expense
|
|
|
(803
|
)
|
|
(1,254
|
)
|
|
(2,948
|
)
|
|
(4,553
|
)
|
Other
income
|
|
|
430
|
|
|
272
|
|
|
815
|
|
|
787
|
|
Earnings
before income taxes
|
|
$
|
7,819
|
|
$
|
8,222
|
|
$
|
24,408
|
|
$
|
21,430
|
|
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 nine-month periods
ending
October 1, 2006 and October 2, 2005.
($
in thousands, except per share amounts)
|
|
Net
Earnings
(Numerator)
|
|
Shares
(in
thousands) (Denominator)
|
|
Per
Share Amount
|
|
Third
Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
5,912
|
|
|
35,861
|
|
$
|
0.16
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
240
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
405
|
|
|
|
|
Diluted
EPS
|
|
$
|
6,152
|
|
|
40,266
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2005
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
6,330
|
|
|
36,284
|
|
$
|
0.17
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
245
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
729
|
|
|
|
|
Diluted
EPS
|
|
$
|
6,575
|
|
|
41,013
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Nine Months of 2006
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
18,453
|
|
|
35,841
|
|
$
|
0.51
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
724
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
374
|
|
|
|
|
Diluted
EPS
|
|
$
|
19,177
|
|
|
40,215
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Nine Months of 2005
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
13,659
|
|
|
36,434
|
|
$
|
0.37
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
740
|
|
|
4,000
|
|
|
|
|
Equity-based
compensation plans
|
|
|
|
|
|
638
|
|
|
|
|
Diluted
EPS
|
|
$
|
14,399
|
|
|
41,072
|
|
$
|
0.35
|
|
The
following table shows the potentially dilutive securities which have been
excluded from the three and nine-month periods ending October 1, 2006 and
October 2, 2005 dilutive earnings per share calculation because they are
either
anti-dilutive, or the exercise price exceeds the average market
price.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
(Number
of Shares in Thousands)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Stock
options where the assumed proceeds exceeds the average
market price
|
|
|
701
|
|
|
624
|
|
|
750
|
|
|
675
|
|
Securities
related to the 6.5% Debentures
|
|
|
—
|
|
|
997
|
|
|
159
|
|
|
1,108
|
|
NOTE
L—Leases
During
the third quarter of 2006, CTS entered into a sales / leaseback agreement
related to its Albuquerque facility. The building, which had a net book value
of
$8.8 million, was sold for net proceeds of $12.5 million. A portion of the
building was leased back under a five-year operating lease. CTS recognized
approximately $0.7 million of the gain on the sale in the third quarter of
2006.
The remaining gain of $3.0 million was deferred and is being amortized over
the
term of the operating lease.
CTS
incurred approximately $4.2 million and $6.4 million of rent expense in the
nine-month periods ending October 1, 2006 and October 2, 2005, respectively.
The
future minimum lease payments under the Company’s operating leases are $1.2
million for the remainder of 2006, $5.4 million in 2007, $4.5 million in
2008,
$4.3 million in 2009, $3.0 million in 2010, and $4.1 million
thereafter.
NOTE
M—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
nine
months of 2006, CTS repurchased 70,600 shares at a total cost of $0.9 million.
CTS is authorized to repurchase an additional 790,000 shares.
NOTE
N—New
Accounting Pronouncements
In
September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FAS Nos. 87, 88,
106, and 132(R).” FAS No. 158 requires employers
to: a) recognize the funded status of a benefit plan—measured as the difference
between plan assets at fair value and the benefit obligation—in its statement of
financial position, b) recognize as a component of other comprehensive income,
net of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit
cost pursuant to FAS No. 87, “Employers’
Accounting for Pensions,” or
FAS
No. 106, “Employers’
Accounting for Postretirement Benefits Other Than Pensions,” c)
measure defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial position, and d) disclose in
the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. The
requirements of FAS No. 158 are to be applied prospectively upon adoption.
The
requirements under FAS No. 158 to recognize the funded status of a defined
benefit postretirement plan and provide related disclosures are effective
for
CTS as of December 31, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s statement of financial position is
effective in 2008. CTS is currently assessing the impact of adopting FAS
No. 158
on its financial statements. However, based on the funded status of its defined
benefit pension and postretirement plans as of December 31, 2005 (the most
recent measurement date), significant changes to CTS’ consolidated balance sheet
would have been a reduction to its prepaid pension asset and an increase
in
long-term deferred tax asset resulting in a decrease in shareholders’ equity of
approximately $45 million, net of taxes. This estimate may vary from the
actual
impact of adopting FAS No. 158. The ultimate amounts recorded are highly
dependent on a number of assumptions, including the discount rates in effect
at
December 31, 2006 and the actual rate of return on CTS’ pension assets for 2006.
Changes in these assumptions since out last measurement date could increase
or
decrease the expected impact of adopting FAS No. 158 in our consolidated
financial statements at December 31, 2006.
In
September 2006, the FASB also issued FAS No. 157, “Fair Value Measurements.” FAS
No. 157, defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. FAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and accordingly,
does not require any new fair value measurements. FAS No. 157 is effective
for
CTS in 2008. The
Company is currently reviewing the provisions of FAS No. 157, but does not
expect it to have a material impact on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 provides
interpretive guidance on how the effects of prior-year uncorrected misstatements
should be considered when quantifying misstatements in the current year
financial statements. SAB No. 108 requires registrants to quantify misstatements
using both an income statement (“rollover”) and balance sheet (“iron curtain”)
approach and evaluate whether either approach results in a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. If prior year errors that had been previously considered immaterial
now are considered material based on either approach, no restatement is required
so long as management properly applied its previous approach and all relevant
facts and circumstances were considered. If prior years are not restated,
the
cumulative effect adjustment is recorded in opening accumulated earnings
as of
the beginning of the fiscal year of adoption. SAB No. 108 is effective for
CTS
at December 31, 2006. The Company is currently reviewing the provisions of
SAB
No. 108, but does not expect it to have a material impact on its financial
statements.
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
third quarter of 2006, sales of EMS and Components and Sensors business segments
represented 60.9% and 39.1% of CTS’ total sales respectively, compared to 59.7%
and 40.3% respectively in the third quarter of 2005.
As
discussed in more detail throughout the Management's Discussion and
Analysis:
· |
Sales
increased by $16.5 million, or 11.0%, in the third quarter of 2006
from
the third quarter of 2005. Sales in the EMS business segment increased
by
13.2% compared to the third quarter of 2005, while sales in the Components
and Sensors business segment increased by 7.9% compared to the third
quarter of 2005.
|
· |
Gross
margins, as a percent of sales, were 17.4% and 19.4% in the third
quarter
of 2006 and 2005, respectively. Gross margins increased within the
EMS
business segment, but decreased within the Components and Sensors
business
segment. Gross margins within the Component and Sensors segment were
lower
primarily due to certain automotive launch related costs for new
product
initiatives, commodity price increases, and foreign exchange rate
changes.
|
· |
Selling,
general and administrative, and research and development expenses
as a
percent of sales decreased to 13.0%
in
the third quarter of 2006 compared to 13.5%
in
the third quarter of 2005.
The
Company was able to leverage existing resources with higher sales
despite
the increases for equity based compensation expenses and certain
start up
costs related to the Czech Republic.
|
· |
In
the third quarter of 2006, a $0.3 million pre-tax expense, or $0.01
per
diluted share, was incurred for restructuring and related charges
associated with the consolidation of CTS’ Berne, Indiana manufacturing
operations into three of its other existing facilities. As of October
1,
2006, the Berne consolidation process was substantially completed
with all
expected charges recorded. Additionally, in the third quarter of
2006 a $0.4 million pre-tax expense, or $0.01 per diluted share,
was
incurred for restructuring and related charges when CTS revised its
estimate of fair value of the remaining net liability of the operating
lease for the idle Marlborough facility.
|
· |
In
the third quarter of 2006, a $0.7 million pre-tax gain was realized
for
the sale/leaseback of the Albuquerque
building.
|
· |
Net
earnings were $5.9 million, or $0.15 per diluted share, in the third
quarter of 2006 compared to $6.3 million, or $0.16 per diluted share,
in
the third 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
first nine months 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 Third Quarter 2006 and Third 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 October 1, 2006 and October 2, 2005:
($
in thousands)
|
|
Components
& Sensors
|
|
EMS
|
|
Consolidated
Total
|
|
Third
Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
64,844
|
|
$
|
100,832
|
|
$
|
165,676
|
|
Segment
operating earnings
|
|
|
5,596
|
|
|
3,336
|
|
|
8,932
|
|
%
of sales
|
|
|
8.6
|
%
|
|
3.3
|
%
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2005
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
60,099
|
|
$
|
89,111
|
|
$
|
149,210
|
|
Segment
operating earnings
|
|
|
7,075
|
|
|
2,129
|
|
|
9,204
|
|
%
of sales
|
|
|
11.8
|
%
|
|
2.4
|
%
|
|
6.2
|
%
|
Sales
in
the Components and Sensors business segment increased by
$4.7
million,
or approximately 7.9%
from the
third quarter of 2005. The increase in sales was attributable primarily to
growth in automotive product sales and growth in the sale of electronic
components into infrastructure applications. The increase in sales was partially
offset by lower sales due to the divestiture of the Low Temperature Co-fired
Ceramics (LTCC) business, and decreased sales into mobile handset applications
as CTS continues to de-emphasize these products.
The
Components and Sensors business segment operating earnings were $5.6
million
in
the third quarter of 2006 versus $7.1
million
in the third quarter of 2005. Operating earnings decreased primarily due
to
certain automotive launch related costs for new product initiatives, commodity
price increases, the adverse impact of foreign exchange rate changes, start
up
costs related to expansion in the Czech Republic, increased expenses related
to
recognizing the fair value of stock-based compensation, higher salaries and
fringes, and lower pension income. The reductions to operating earnings were
partially offset by margin contribution from the higher sales volume and
the
gain recognized on the sale/leaseback of the Albuquerque building.
In
the
third quarter of 2006, CTS recorded pension income of
$1.1
million
compared to $1.8
million
of pension income recorded in the third 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.
Sales
in
the EMS business segment increased by $11.7
million,
or 13.2%, in the third quarter of 2006 versus the third quarter of 2005.
The
increase in sales was attributable primarily to higher sales into the
communication, defense, and medical markets partially offset by a decrease
in
computer-related sales.
The
EMS
business segment operating earnings increased $1.2
million
primarily due to margin contribution from the higher sales volume and
improved product mix partially offset by adverse foreign exchange rate
impacts.
Total
Company Discussion
The
following table highlights changes in significant components of the unaudited
condensed consolidated statements of earnings for the three-month periods
ended
October 1, 2006 and October 2, 2005:
|
|
Three
Months Ended
|
|
|
|
($
in thousands, except net earnings per share)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Increase
(Decrease)
|
|
Net
sales
|
|
$
|
165,676
|
|
$
|
149,210
|
|
$
|
16,466
|
|
Restructuring-related
costs
|
|
|
254
|
|
|
-
|
|
|
254
|
|
%
of net sales
|
|
|
0.2
|
%
|
|
-
|
%
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
28,846
|
|
|
28,986
|
|
|
(140
|
)
|
%
of net sales
|
|
|
17.4
|
%
|
|
19.4
|
%
|
|
(2.0
|
)%
|
|
Selling,
general and administrative expenses
|
|
|
17,725
|
|
|
16,159
|
|
|
1,566
|
|
%
of net sales
|
|
|
10.7
|
%
|
|
10.8
|
%
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
3,775
|
|
|
3,976
|
|
|
(201
|
)
|
%
of net sales
|
|
|
2.3
|
%
|
|
2.7
|
%
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of assets
|
|
|
(1,332
|
)
|
|
(353
|
)
|
|
(979
|
)
|
%
of net sales
|
|
|
(0.8
|
)%
|
|
(0.2
|
)%
|
|
(0.6
|
)%
|
|
Restructuring
charge
|
|
|
486
|
|
|
-
|
|
|
486
|
|
%
of net sales
|
|
|
0.3
|
%
|
|
-
|
%
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
8,192
|
|
|
9,204
|
|
|
(1,012
|
)
|
%
of net sales
|
|
|
4.9
|
%
|
|
6.2
|
%
|
|
(1.3
|
)%
|
|
Income
tax expense
|
|
|
1,907
|
|
|
1,892
|
|
|
(15
|
)
|
|
Net
earnings
|
|
$
|
5,912
|
|
$
|
6,330
|
|
$
|
(418
|
)
|
%
of net sales
|
|
|
3.6
|
%
|
|
4.2
|
%
|
|
(0.6
|
)%
|
|
Net
earnings per share - diluted
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
(0.01
|
)
|
Third
quarter sales of $165.7 million increased
$16.5
million, or 11.0%, from the third quarter of 2005. The EMS business segment
increase was mainly attributable to higher sales into the communication,
defense, and medical markets partially offset by a decline in computer-related
sales. The
Components and Sensors business segment sales growth was attributable to
automotive product sales and growth in the sale of electronic components
into
infrastructure applications which was partially offset by lower
sales due to the divestiture of the LTCC business, and
decreased sales into mobile handset applications as CTS continues to
de-emphasize these products.
Gross
margin decreased by $0.1 million in the third quarter of 2006 from the third
quarter of 2005 due to the Components
and Sensor business segment, primarily
related to certain
automotive launch related costs for new product initiatives, commodity price
increases, and reduced pension income. Gross margins were also negatively
impacted by unfavorable foreign exchange rate changes and unfavorable business
segment sales mix, partially offset by gross margin improvement on higher
overall sales and improved product mix within the EMS business segment.
Sales in the Components and Sensors business segment, which inherently generates
a higher gross margin, decreased to 39.1% of total sales in the third quarter
of
2006 compared to 40.3% of total sales in the same period of 2005.
Selling,
general and administrative expenses were $17.7 million, or 10.7% of sales,
in
the third quarter of 2006 versus $16.2
million, or 10.8% of sales in the third quarter of 2005.
The
increase was driven by expenses related to recognizing the fair value of
stock-based compensation,
higher
salaries and fringe benefits, and lower pension income.
Research
and development expenses were $3.8 million, or 2.3% of sales in the third
quarter of 2006 versus $4.0 million, or 2.7% of sales in the third quarter
of
2005. The
decrease was primarily due to reductions related to project spending, 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 $8.2 million in the third quarter of 2006 compared to $9.2
million
in the third quarter of 2005. Operating earnings decreased due to the gross
margin items addressed above and $0.3
million
of expenses, or $0.01
per
diluted share, from restructuring and restructuring-related charges associated
with the consolidation of CTS’ Berne, Indiana manufacturing operations and
$0.4
million pre-tax expense, or $0.01 per diluted share,
for restructuring related to CTS’ revised estimate of the fair value of the
remaining net liability of the operating lease for the idle Marlborough
facility. Additionally,
in the third quarter of 2006, pension income was lower by $0.7
million compared
to the third 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. Operating
earnings decreases were partially offset by a $0.7 million pre-tax gain,
or
$0.01 per diluted share, for the sale/leaseback of the Albuquerque building.
Net
earnings of
$5.9
million, or 3.6%
of
sales, decreased $0.4
million
versus the third quarter of 2005. Net earnings per diluted share of $0.15
were $0.01 lower
than
third quarter 2005.
Comparison
of First Nine Months of 2006 and First Nine Months of 2005.
Business
Segment Discussion
The
following table highlights the business segment results for the nine-month
periods ending October 1, 2006 and October 2, 2005:
($
in thousands)
|
|
Components
&
Sensors
|
|
EMS
|
|
Consolidated
Total
|
|
First
Nine Months 2006
|
|
|
|
|
|
|
|
Sales
|
|
$
|
204,167
|
|
$
|
277,927
|
|
$
|
482,094
|
|
Segment
operating earnings
|
|
|
23,939
|
|
|
6,926
|
|
|
30,865
|
|
%
of sales
|
|
|
11.7
|
%
|
|
2.5
|
%
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
First
Nine Months 2005
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
190,738
|
|
$
|
272,148
|
|
$
|
462,886
|
|
Segment
operating earnings
|
|
|
18,086
|
|
|
7,110
|
|
|
25,196
|
|
%
of sales
|
|
|
9.5
|
%
|
|
2.6
|
%
|
|
5.4
|
%
|
During
the first nine months of 2006, sales of Components
and Sensors and EMS products, as a percentage of total sales, were 42.4%
and
57.6% respectively. The first nine months of 2005 sales of Components and
Sensors and EMS products, as a percentage of total sales, were 41.2% and
56.8%
respectively.
The
Components and Sensors business segment sales increased $13.4 million or
7.0%
from prior year. 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 lower
sales
due to the divestiture of the LTCC business and decreased sales into mobile
handset applications as CTS continues to de-emphasize these products.
The
Component and Sensors business segment operating earnings increased
$5.9
million
due primarily to margin contribution from the higher sales volume, favorable
product mix as the sales shifted from the less profitable handset market
into
the more profitable infrastructure applications, savings associated with
the
divestiture of the LTCC business, increased royalties, gain recognized from
the
sale of assets, and the favorable impact of personnel expenses related to
headcount reductions taken in 2005. These favorable items were partially
offset
by certain automotive launch related costs for new product initiatives, lower
pension income, increased expenses related to recognizing the fair value
of
stock-based compensation, commodity price increases, foreign exchange rate
changes, start up costs related expansion in the Czech Republic, and higher
salaries and fringes.
In
the
first nine months of 2006, CTS has recorded pension income of $3.0
million compared to $5.1
million
of pension income recorded in the first nine months 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.
The
EMS
segment experienced a sales increase of $5.8
million
in the first nine months of 2006, or 2.1%
from the
first nine months of 2005. The EMS revenue increase is due primarily to higher
sales in the communication, medical, and defense markets partially offset
by a
decrease in computer-related sales.
EMS
segment operating earnings decreased $0.2
million
primarily due to increased salaries and fringes and unfavorable expense
allocations versus 2005 partially offset by a favorable product mix as a
greater
percentage of sales came from the higher margin industrial, medical, and
defense
markets.
Total
Company Discussion
The
following table highlights changes in significant components of the condensed
consolidated statements of earnings for the nine-month periods ended October
1,
2006 and October 2, 2005:
|
|
Nine
Months Ended
|
|
|
|
($
in thousands, except net earnings per share)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Increase
(Decrease)
|
|
Net
sales
|
|
$
|
482,094
|
|
$
|
462,886
|
|
$
|
19,208
|
|
Restructuring-related
costs
|
|
|
956
|
|
|
-
|
|
|
956
|
|
%
of net sales
|
|
|
0.2
|
%
|
|
-
|
%
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
94,900
|
|
|
89,493
|
|
|
5,507
|
|
%
of net sales
|
|
|
19.7
|
%
|
|
19.3
|
%
|
|
0.4
|
%
|
|
Selling,
general and administrative expenses
|
|
|
55,168
|
|
|
51,773
|
|
|
3,395
|
|
%
of net sales
|
|
|
11.4
|
%
|
|
11.2
|
%
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
11,937
|
|
|
13,330
|
|
|
(1,393
|
)
|
%
of net sales
|
|
|
2.5
|
%
|
|
2.9
|
%
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of assets
|
|
|
(2,114
|
)
|
|
(806
|
)
|
|
(1,308
|
)
|
%
of net sales
|
|
|
(0.4
|
)%
|
|
(0.2
|
)%
|
|
(0.2
|
)%
|
|
Restructuring
charge
|
|
|
3,368
|
|
|
-
|
|
|
3,368
|
|
%
of net sales
|
|
|
0.7
|
%
|
|
-
|
%
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
26,541
|
|
|
25,196
|
|
|
1,345
|
|
%
of net sales
|
|
|
5.5
|
%
|
|
5.4
|
%
|
|
0.1
|
%
|
|
Income
tax expense
|
|
|
5,955
|
|
|
7,771
|
|
|
(1,816
|
)
|
|
Net
earnings
|
|
$
|
18,453
|
|
$
|
13,659
|
|
$
|
4,794
|
|
%
of net sales
|
|
|
3.8
|
%
|
|
3.0
|
%
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - diluted
|
|
$
|
0.48
|
|
$
|
0.35
|
|
$
|
0.13
|
|
First
nine month sales of $482.1 million increased $19.2 million, or 4.1%, from
the
first nine months of 2005. The Components and Sensors business segment sales
increased $13.4 million or 7.0% from prior year. 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 the loss of sales associated with the divested LTCC business and
decreased sales into mobile handset applications as CTS continues to
de-emphasize these products. The EMS segment experienced a sales increase
of
$5.8
million
in the first nine months of 2006, or 2.1%
from the
first nine months of 2005. The EMS revenue increase is due primarily to higher
sales in the communication, medical, and defense markets partially offset
by a
decrease in computer-related sales.
Gross
margin increased $5.5
million,
or
6.1%,
for the
first nine months of 2006 primarily due to contribution from higher sales,
margin improvements within the EMS business segment, and favorable business
segment sales mix. As a percentage of sales, gross margin increased to
19.7%
in the
first nine months of 2006 compared to 19.3%
in the
first nine months of 2005. The gross margin was adversely impacted by
certain
automotive launch related costs for new product initiatives, commodity price
increases, and reduced pension income.
Selling,
general and administrative expenses increased $3.4
million,
primarily driven by expenses related to recognizing the fair value of
stock-based compensation, higher salaries, and lower pension income, partially
offset by an insurance claim settlement received in the first quarter of
2006
and by savings related to personnel reductions taken primarily in the first
quarter of 2005.
Research
and development expenses were $11.9
million,
or 2.5%
of sales
versus $13.3
million,
or 2.9%
of
sales
in the first nine months of 2005. The
decrease was primarily due to savings from personnel reductions taken in
the
first quarter of 2005 and reductions
related to project spending
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 $26.5
million
in the first nine months of 2006 compared to $25.2
million
in the first nine months of 2005. The operating earnings improved due to
the
gross margin items addressed above, cost reductions from the divestiture
of the
LTCC business, the favorable impact from an insurance claim settlement of
approximately
$1.5
million pre-tax, or $0.03 per
diluted share in the first quarter of 2006, and a $0.7 million pre-tax gain,
or
$0.01 per diluted share, for the sale/leaseback of the Albuquerque building
recognized in the third quarter of 2006.
Operating
earnings were adversely impacted by
$3.9
million
of pre-tax expenses, or $0.07
per
diluted share, from restructuring and restructuring related charges associated
with the consolidation of CTS’ Berne, Indiana manufacturing operations, and
a
$0.4
million pre-tax expense, or $0.01 per diluted share, restructuring charge
for
CTS’ revised estimate of fair value of the remaining net liability of the
operating lease for the idle Marlborough facility.
In
the
first nine months of 2006, CTS’ pension income was lower by $2.1
million
compared
to the first nine months 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.
In
the
first nine months of 2005, income tax expense included a net impact of
$2.8
million, or $0.07
per
diluted 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 $18.5
million,
or 3.8%
of
sales, increased $4.8
million
versus the first nine months of 2005. Net earnings per diluted share of
$0.48
were $0.13
higher
than first nine months of 2005.
Outlook-
2006 Sales Growth and Full Year Earnings:
Based
on
the first nine months 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 $0.74 to
$0.77,
which excludes the full-year Berne and Marlborough restructuring and
restructuring-related charges of approximately $0.08 per diluted
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
|
|
$
|
0.66-
$0.69
|
Tax
affected charges to reported diluted Earnings
per share:
|
|
|
|
|
|
|
|
Restructuring
and restructuring related charges
|
|
|
0.08
|
|
|
|
|
Adjusted
earnings per share, diluted
|
|
$
|
0.74-
$0.77
|
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
full year adjusted projected earnings per share, diluted for 2006 to exclude
the
per share impact of restructuring and restructuring-related charges. We exclude
the impact of these items because each 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.
Liquidity
and Capital Resources
Overview
Cash
and
cash equivalents were $29.7 million
at the end of October 1, 2006 compared to $12.0 million at December 31, 2005.
Total debt on October 1, 2006 was $70.3 million versus $81.8 million at December
31, 2005. Total debt as a percentage of total capitalization was 16.7% at
the
end of the third quarter of 2006, compared with 19.9% at December 31,
2005.
Working
capital increased $27.6 million in the first nine months of 2006 primarily
driven by the change in the cash and cash equivalents balance as noted above
and
the following:
· |
Accounts
receivables increased by $10.5 million. The primary driver for the
increase was due to an $11.1 million increase in sales in the third
quarter of 2006 from the fourth quarter of
2005.
|
· |
Inventory
increased by $6.7 million due primarily to increased
sales of $8.5 million or 9.2% in
the EMS business segment compared to the fourth quarter of 2005,
certain
automotive launch related inventory builds, and inventory related
to the
start up of the new facility in the Czech Republic.
|
· |
Other
current assets increased by $4.4 million due primarily to an increase
in
receivables related to customer tooling and taxes receivable related
to
foreign jurisdictions.
|
· |
Short-term
notes payable decreased by $3.8 million driven by positive cash flows
from
foreign operations.
|
Working
capital increases were partially offset by:
· |
Accounts
payable increased by $8.4 million primarily driven by increased purchases
to support the higher sales volume.
|
· |
Accrued
liabilities increased by $7.0 million primarily driven by increased
accrued severance expenses and increased accrued salaries and
wages.
|
Cash
Flow
Operating
Activities
Net
cash
provided by operating activities was $28.5 million for the first nine months
of
2006. Components
of net cash provided by operating activities included net earnings of $18.5
million, depreciation and amortization expense of $19.0 million, equity-based
compensation of $3.0 million and restructuring charges of $3.4 million partially
offset by an increase to the prepaid pension asset of $4.7 million, gain
on
sales of assets of $2.1 million and an unfavorable change in assets and
liabilities of $8.5 million.
The
increase in assets and liabilities were primarily due to increased accounts
receivables of $10.5 million, an increase in inventory of $6.7 million, an
increase in other current assets of $4.4 million partially offset an increase
in
accounts payable and accrued liabilities of $11.7 million.
Net
cash
provided by operating
activities was $29.7 million
in the
first nine months of 2005. Components of net cash provided by operating
activities included net earnings of
$13.7
million and
depreciation and amortization expense of $19.8
million,
deferred income taxes of $3.0 million, equity-based compensation of $1.8
million, and a $1.3 million unfavorable change in assets and liabilities.
The
unfavorable changes in assets and liabilities were primarily due to
a decrease
of $4.7 million in accounts payable and accrued liabilities, an increase
in other current assets of $2.9
million,
an increase in inventory of
$1.4
million partially offset by the accounts receivables decrease of $6.3
million. Net cash provided by operating activities was partially offset by
the
unfavorable change in the prepaid pension asset of $6.6 million.
Total
free cash
flow in
the first nine months of 2006 was $17.4 million. Total free cash flow in
the
first nine months of 2005 was $17.2
million.
Free
cash
flow is a non-GAAP financial measure which CTS defines as net cash provided
by
operations less capital expenditures. The most comparable GAAP measure is
net
cash provided by operations. CTS' management uses free cash flow to evaluate
financial performance and in strategic planning, specifically, for investing
and
financing decisions. CTS' management believes free cash flow is a useful
measure
because it indicates the ability of a business operation to fund its own
required capital investments. CTS' management believes that the non-GAAP
measure
free cash flow is useful to investors because it reflects the performance
of its
overall operations more accurately than net cash provided by operations and
because it provides investors with the same results that management uses
as the
basis for making decisions about the business. Free cash flow is not an
indicator of residual cash available for discretionary spending, because
it does
not take into account mandatory debt service or other non-discretionary spending
requirements which are not deducted in the calculation of free cash flow.
CTS'
management takes these limitations into account when using free cash flow
to
make investing and financing decisions.
The
following table summarizes free cash flow for CTS:
|
|
Nine
Months Ended
|
|
($
in millions)
|
|
October
1, 2006
|
|
October
2, 2005
|
|
Net
cash provided by operations
|
|
$
|
28.5
|
|
$
|
29.7
|
|
Capital
expenditures
|
|
|
(11.1
|
)
|
|
(12.5
|
)
|
Free
cash flow
|
|
$
|
17.4
|
|
$
|
17.2
|
|
Net
cash
provided
by investing activities were $3.3 million for the first nine months of 2006,
including $14.5 million in proceeds for sale of assets, primarily related
to the
$12.5 million proceeds for the sale of the Albuquerque facility, partially
offset by $11.1 million used for capital expenditures.
Net
cash
used in investing activities totaled $46.5 million in the first nine months
of
2005. The cash used for the SMTEK acquisition was $35.6 million, and capital
expenditures were $12.6 million.
Net
cash
used in financing activities were $15.9 million in first nine months of 2006,
consisting primarily of a net $7.7 million reduction in long-term debt
associated with the payment of the $5.5 million of 6.5% debenture, a decrease
in
short- term notes payable of $3.8 million, $3.2 million in dividends payments,
and a $0.9 million purchase of treasury stock.
Net
cash
used in financing activities were $24.8 million in first nine months of 2005,
consisting primarily of $13.0 million from the repayment of debt related
to the
SMTEK acquisition, $7.5 million purchase of treasury stock and $3.3 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 does
not
have an outstanding balance at October 1, 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 October 1, 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. 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
revolving credit agreement 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 nine months 2006, CTS
repurchased 70,600 shares
at
a total cost of $945,956. At
October 1, 2006, CTS was authorized to repurchase approximately 790,000 additional
shares.
In
November 2001, CTS’ Form S-3 registration statement registering two million
shares of CTS common stock to be issued under the CTS’ Direct Stock Purchase
Plan was declared effective by the Securities and Exchange Commission. In
November 2005, CTS terminated the direct stock purchase plan under this
registration statement.
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 nine months of 2006, CTS did
not issue any securities under this registration statement. As of October
1, 2006, CTS could offer up to $435.1 million of additional debt and/or equity
securities under this registration statement.
Capital
Requirements
The
following table sets forth the impact that contractual obligations, as of
October 1, 2006, are expected to have on the Company's liquidity and cash
flow
in future periods:
|
|
Payments
Due by Period
|
|
($
in millions)
|
|
Total
|
|
2006
|
|
2007
- 2008
|
|
2009
- 2010
|
|
2011
- beyond
|
|
Long-term
debt (1)
|
|
$
|
83.5
|
|
$
|
0.4
|
|
$
|
2.9
|
|
$
|
2.9
|
|
$
|
77.3
|
|
Operating
leases
|
|
|
22.5
|
|
|
1.2
|
|
|
9.9
|
|
|
7.3
|
|
|
4.1
|
|
Purchase
obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Retirement
obligations
|
|
|
14.8
|
|
|
0.4
|
|
|
3.1
|
|
|
3.2
|
|
|
8.1
|
|
|
|
$
|
120.8
|
|
$
|
2.0
|
|
$
|
15.9
|
|
$
|
13.4
|
|
$
|
89.5
|
|
(1)
|
|
Includes
2.125% Debentures issued in May 2004. Investor may convert the
debentures,
under certain circumstances, at any time 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, should CTS 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
September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FAS Nos. 87, 88,
106, and 132(R).” FAS No. 158 requires employers
to: a) recognize the funded status of a benefit plan—measured as the difference
between plan assets at fair value and the benefit obligation—in its statement of
financial position, b) recognize as a component of other comprehensive income,
net of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit
cost pursuant to FAS No. 87, “Employers’
Accounting for Pensions,” or
FAS
No. 106, “Employers’
Accounting for Postretirement Benefits Other Than Pensions,” c)
measure defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial position, and d) disclose in
the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. The
requirements of FAS No. 158 are to be applied prospectively upon adoption.
The
requirements under FAS No. 158 to recognize the funded status of a defined
benefit postretirement plan and provide related disclosures are effective
for
CTS as of December 31, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s statement of financial position is
effective in 2008. CTS is currently assessing the impact of adopting FAS
No. 158
on its financial statements. However, based on the funded status of its defined
benefit pension and postretirement plans as of December 31, 2005 (the most
recent measurement date), significant changes to CTS’ consolidated balance sheet
would have been a reduction to its prepaid pension asset and an increase
in
long-term deferred tax asset resulting in a decrease in shareholders’ equity of
approximately $45 million, net of taxes. This estimate may vary from the
actual
impact of adopting FAS No. 158. The ultimate amounts recorded are highly
dependent on a number of assumptions, including the discount rates in effect
at
December 31, 2006 and the actual rate of return on CTS’ pension assets for 2006.
Changes in these assumptions since out last measurement date could increase
or
decrease the expected impact of adopting FAS No. 158 in our consolidated
financial statements at December 31, 2006.
In
September 2006, the FASB also issued FAS No. 157, “Fair Value Measurements.” FAS
No. 157, defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. FAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and accordingly,
does not require any new fair value measurements. FAS No. 157 is effective
for
CTS in 2008. The
Company is currently reviewing the provisions of FAS No. 157, but does not
expect it to have a material impact on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 provides
interpretive guidance on how the effects of prior-year uncorrected misstatements
should be considered when quantifying misstatements in the current year
financial statements. SAB No. 108 requires registrants to quantify misstatements
using both an income statement (“rollover”) and balance sheet (“iron curtain”)
approach and evaluate whether either approach results in a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. If prior year errors that had been previously considered immaterial
now are considered material based on either approach, no restatement is required
so long as management properly applied its previous approach and all relevant
facts and circumstances were considered. If prior years are not restated,
the
cumulative effect adjustment is recorded in opening accumulated earnings
as of
the beginning of the fiscal year of adoption. SAB No. 108 is effective for
CTS
at December 31, 2006. The Company is currently reviewing the provisions of
SAB
No. 108, but does not expect it to have a material impact on its financial
statements.
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 $4.2 million and $6.4 million
of rent expense in the nine months ending October 1, 2006 and October 2,
2005,
respectively. The future minimum lease payments under the Company's operating
leases are $1.2 million for the remainder of 2006, $5.4 million in 2007,
$4.5
million in 2008, $4.3 million in 2009, $3.0 million in 2010, and $4.1 million
thereafter.
__________________________________________________
*****
Forward-Looking
Statements
This
document contains statements that are, or may be deemed to be, forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of
1995. These forward-looking statements include, but are not limited to, any
financial or other guidance, statements that reflect our current expectations
concerning future results and events, and any other statements that are not
based solely on historical fact. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date
hereof. These forward-looking statements are made subject to certain risks,
uncertainties and other factors, which could cause our actual results,
performance or achievements to differ materially from those presented in
the
forward-looking statements. For more detailed information on the risks and
uncertainties associated with CTS’ business, see our reports filed with the SEC.
CTS undertakes no obligation to publicly update its forward-looking statements
to reflect new information or events or circumstances that arise after the
date
hereof, including market or industry changes. 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
October 1, 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 a final evaluation of
the effectiveness of the internal control over financial reporting for the
SMTEK
business, as described further below.
The
SMTEK
business has facilities located in Moorpark and Santa Clara, California;
and
Bangkok, Thailand. Each of these facilities reports financial results that
are
included in this report for the quarter ended October 1, 2006. CTS’ management
has completed an initial evaluation of the SMTEK business’ internal controls
over financial reporting during the nine months ended October 1, 2006. Based
on
the results of the initial evaluation, the controls and procedures in place
at
the SMTEK businesses are effective. The assessment of these controls and
processes will be complete during the fourth quarter of 2006. Other than
changes
resulting from CTS’ acquisition of SMTEK, there were no changes in CTS’ internal
control over financial reporting during the quarter ended October 1, 2006
that
materially affected, or are reasonably likely to materially affect, CTS’
internal control over financial reporting.
Refer
to
Note J, “Contingencies” in Notes to Condensed Consolidated Financial Statements
in Part I of this Form 10-Q.
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
October 1, 2006, CTS’ long-term debt balance was $60.8 million, consisting of
$60.0 million of 2.125% convertible senior subordinated notes 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 October 1, 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
|
|
|
|
|
|
|
|
|
|
803,200
|
|
July
3, 2006 - July 30, 2006
|
|
|
8,200
|
|
$
|
13.48
|
|
|
8,200
|
|
|
795,000
|
|
July
31, 2006 - August 27, 2006
|
|
|
5,000
|
|
|
13.52
|
|
|
5,000
|
|
|
790,000
|
|
Total
|
|
|
13,200
|
|
$
|
13.50
|
|
|
13,200
|
|
|
|
|
_________________________________
(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.
|
|
|
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
|
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|
|
|
|
/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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Date:
November 2, 2006
|
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Date:
November 2, 2006
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