form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
Quarterly Period Ended July 1, 2007
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)
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|
|
905
West Boulevard North, Elkhart, IN
|
|
46514
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code: 574-293-7511
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of July 26, 2007: 35,582,031.
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Page
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PART
I.
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Item
1.
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3
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3
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- For
the Three and Six Months ended July 1, 2007 and July 2,
2006
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4
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-
As of July 1, 2007 and December 31, 2006
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5
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-
For the Six Months Ended July 1, 2007 and July 2, 2006
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6
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- For
the Three and Six Months Ended July 1, 2007 and July 2,
2006
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7
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Item
2.
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18
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Item
3.
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28
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Item
4.
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28
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PART
II.
|
|
30
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|
|
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|
Item
1.
|
|
30
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|
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|
Item
1A.
|
|
30
|
|
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|
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|
Item
2.
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30
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Item
4.
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31
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Item
6.
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31
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32
|
(In
thousands of dollars, except per share amounts)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
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|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
169,624
|
|
|
$ |
165,925
|
|
|
$ |
332,882
|
|
|
$ |
316,418
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
136,680
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|
|
|
134,157
|
|
|
|
269,600
|
|
|
|
254,609
|
|
Selling,
general and administrative expenses
|
|
|
20,940
|
|
|
|
19,222
|
|
|
|
42,210
|
|
|
|
35,612
|
|
Research
and development expenses
|
|
|
4,102
|
|
|
|
4,070
|
|
|
|
8,222
|
|
|
|
8,162
|
|
Restructuring
charge
|
|
|
—
|
|
|
|
920
|
|
|
|
—
|
|
|
|
2,882
|
|
Operating
earnings
|
|
|
7,902
|
|
|
|
7,556
|
|
|
|
12,850
|
|
|
|
15,153
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(681 |
) |
|
|
(1,034 |
) |
|
|
(1,372 |
) |
|
|
(2,145 |
) |
Interest
income
|
|
|
486
|
|
|
|
198
|
|
|
|
965
|
|
|
|
323
|
|
Other
|
|
|
(232 |
) |
|
|
59
|
|
|
|
154
|
|
|
|
62
|
|
Total
other expense
|
|
|
(427 |
) |
|
|
(777 |
) |
|
|
(253 |
) |
|
|
(1,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes
|
|
|
7,475
|
|
|
|
6,779
|
|
|
|
12,597
|
|
|
|
13,393
|
|
Income
tax expense - Note I
|
|
|
1,570
|
|
|
|
1,520
|
|
|
|
2,646
|
|
|
|
3,094
|
|
Net
earnings
|
|
$ |
5,905
|
|
|
$ |
5,259
|
|
|
$ |
9,951
|
|
|
$ |
10,299
|
|
Net
earnings per share - Note H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
$ |
0.16
|
|
|
$ |
0.15
|
|
|
$ |
0.28
|
|
|
$ |
0.29
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
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Diluted
|
|
$ |
0.15
|
|
|
$ |
0.14
|
|
|
$ |
0.26
|
|
|
$ |
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Cash
dividends declared per share
|
|
$ |
0.03
|
|
|
$ |
0.03
|
|
|
$ |
0.06
|
|
|
$ |
0.06
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
35,824
|
|
|
|
35,843
|
|
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|
35,824
|
|
|
|
35,832
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|
Diluted
|
|
|
40,302
|
|
|
|
40,145
|
|
|
|
40,355
|
|
|
|
40,189
|
|
See
notes to unaudited condensed consolidated financial statements.
(dollars
in thousands)
|
|
July
1,
2007
|
|
|
December
31, 2006*
|
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ASSETS
|
|
|
|
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Current
Assets
|
|
|
|
|
|
|
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|
Cash
and cash equivalents
|
|
$
|
37,161
|
|
|
$
|
38,630
|
|
Accounts
receivable, less allowances (2007 - $1,683; 2006 - $2,139)
|
|
|
104,990
|
|
|
|
106,012
|
|
Inventories,
net - Note C
|
|
|
74,018
|
|
|
|
60,543
|
|
Other
current assets
|
|
|
22,947
|
|
|
|
22,435
|
|
Total
current assets
|
|
|
239,116
|
|
|
|
227,620
|
|
Property,
plant and equipment, less accumulated depreciation (2007 - $269,114 ;
2006 - $259,548)
|
|
|
92,926
|
|
|
|
96,468
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Prepaid
pension asset - Note E
|
|
|
105,132
|
|
|
|
100,666
|
|
Goodwill
|
|
|
24,657
|
|
|
|
24,657
|
|
Other
intangible assets, net
|
|
|
37,593
|
|
|
|
39,154
|
|
Deferred
income taxes
|
|
|
32,955
|
|
|
|
37,401
|
|
Other
|
|
|
1,740
|
|
|
|
1,867
|
|
Total
other assets
|
|
|
202,077
|
|
|
|
203,745
|
|
Total
Assets
|
|
$
|
534,119
|
|
|
$
|
527,833
|
|
|
|
|
|
|
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|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable – Note D
|
|
$
|
1,506
|
|
|
$
|
5,425
|
|
Current
portion of long-term debt - Note D
|
|
|
—
|
|
|
|
186
|
|
Accounts
payable
|
|
|
81,611
|
|
|
|
78,205
|
|
Accrued
liabilities
|
|
|
43,052
|
|
|
|
41,865
|
|
Total
current liabilities
|
|
|
126,169
|
|
|
|
125,681
|
|
Long-term
debt - Note D
|
|
|
60,000
|
|
|
|
60,635
|
|
Other
long-term obligations
|
|
|
22,410
|
|
|
|
22,494
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - authorized 25,000,000 shares without par value; none
issued
|
|
|
—
|
|
|
|
—
|
|
Common
stock - authorized 75,000,000 shares without par value; 53,862,444
shares
issued at July 1, 2007 and 53,718,801 shares issued at December 31,
2006
|
|
|
278,214
|
|
|
|
276,553
|
|
Additional
contributed capital
|
|
|
27,504
|
|
|
|
27,899
|
|
Retained
earnings
|
|
|
323,177
|
|
|
|
315,370
|
|
Accumulated
other comprehensive loss
|
|
|
(29,463
|
)
|
|
|
(31,283
|
)
|
|
|
|
599,432
|
|
|
|
588,539
|
|
Cost
of common stock held in treasury (2007 – 18,247,708 shares and 2006
-17,895,708)
|
|
|
(273,892
|
)
|
|
|
(269,516
|
)
|
Total
shareholders’ equity
|
|
|
325,540
|
|
|
|
319,023
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
534,119
|
|
|
$
|
527,833
|
|
*
The balance sheet at December 31, 2006, has been derived from the
audited
financial statements at that date.
See
notes to unaudited condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
(In
thousands of dollars)
|
|
Six
Months Ended
|
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
9,951
|
|
|
$
|
10,299
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,552
|
|
|
|
13,218
|
|
Prepaid
pension asset
|
|
|
(4,466
|
)
|
|
|
(3,131
|
)
|
Amortization
of retirement benefit adjustments
|
|
|
2,128
|
|
|
|
—
|
|
Equity-based
compensation – Note B
|
|
|
1,636
|
|
|
|
2,065
|
|
Restructuring
charge
|
|
|
—
|
|
|
|
2,882
|
|
Deferred
income taxes
|
|
|
(195
|
)
|
|
|
—
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,021
|
|
|
|
(12,921
|
)
|
Inventories
|
|
|
(13,476
|
)
|
|
|
(2,366
|
)
|
Other
current assets
|
|
|
(331
|
)
|
|
|
(1,690
|
)
|
Accounts
payable and accrued liabilities
|
|
|
8,256
|
|
|
|
8,797
|
|
Other
|
|
|
(611
|
)
|
|
|
274
|
|
Total
adjustments
|
|
|
5,514
|
|
|
|
7,128
|
|
Net
cash provided by operating activities
|
|
|
15,465
|
|
|
|
17,427
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(6,271
|
)
|
|
|
(5,848
|
)
|
Proceeds
from sales of assets
|
|
|
45
|
|
|
|
1,227
|
|
Net
cash used in investing activities
|
|
|
(6,226
|
)
|
|
|
(4,621
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Payments
of long-term debt
|
|
|
(857
|
)
|
|
|
(61,268
|
)
|
Proceeds
from borrowings of long-term debt
|
|
|
—
|
|
|
|
57,190
|
|
Payments
of short-term notes payable
|
|
|
(5,026
|
)
|
|
|
(2,031
|
)
|
Proceeds
from borrowings of short-term notes payable
|
|
|
1,107
|
|
|
|
827
|
|
Dividends
paid
|
|
|
(2,145
|
)
|
|
|
(2,152
|
)
|
Purchase
of treasury stock
|
|
|
(4,343
|
)
|
|
|
(768
|
)
|
Other
|
|
|
198
|
|
|
|
(130
|
)
|
Net
cash used in financing activities
|
|
|
(11,066
|
)
|
|
|
(8,332
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
358
|
|
|
|
1,148
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,469
|
)
|
|
|
5,622
|
|
Cash
and cash equivalents at beginning of year
|
|
|
38,630
|
|
|
|
12,029
|
|
Cash
and cash equivalents at end of period
|
|
$
|
37,161
|
|
|
$
|
17,651
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,106
|
|
|
$
|
1,847
|
|
Income
taxes – net
|
|
$
|
1,146
|
|
|
$
|
2,729
|
|
See
notes
to unaudited condensed consolidated financial statements.
(In
thousands of dollars)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Net
earnings
|
|
$
|
5,905
|
|
|
$
|
5,259
|
|
|
$
|
9,951
|
|
|
$
|
10,299
|
|
Other
comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
549
|
|
|
|
1,448
|
|
|
|
550
|
|
|
|
1,983
|
|
Amortization
of retirement benefit adjustments (net of tax)
|
|
|
610
|
|
|
|
—
|
|
|
|
1,270
|
|
|
|
—
|
|
Comprehensive
earnings
|
|
$
|
7,064
|
|
|
$
|
6,707
|
|
|
$
|
11,771
|
|
|
$
|
12,282
|
|
See
notes to unaudited condensed
consolidated financial statements.
July
1, 2007
NOTE
A - Basis of Presentation
The
accompanying condensed consolidated 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,
2006.
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 unaudited
condensed consolidated financial statements to conform to the classifications
adopted in 2007.
NOTE
B - Equity-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 equity-based compensation awards in the
Unaudited Condensed Consolidated Statement of Earnings.
At
July
1, 2007, CTS had five equity-based compensation plans: the 1988
Restricted Stock and Cash Bonus Plan (1988 Plan), the 1996 Stock Option Plan
(1996 Plan), the 2001 Stock Option Plan (2001 Plan), the Nonemployee Directors’
Stock Retirement Plan (Directors’ Plan), and the 2004 Omnibus Long-Term
Incentive Plan (2004 Plan). As of December 2004, additional grants
can only be made under the 2004 Plan. CTS believes that equity-based
awards align the interest of employees with those of its
shareholders.
The
2004
Plan, and previously the 1996 Plan and 2001 Plan, provides for grants of
incentive stock options or nonqualified stock options to officers, key
employees, and nonemployee members of CTS’ board of directors. In
addition, the 2004 Plan allows for grants of stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units,
and other stock awards.
The
following table summarizes the compensation expense included in the Unaudited
Condensed Consolidated Statement of Earnings for the three and six-month periods
ending July 1, 2007 and July 2, 2006 relating to equity-based compensation
plans:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Stock
options (1)
|
|
$ |
58
|
|
|
$ |
548
|
|
|
$ |
236
|
|
|
$ |
771
|
|
Restricted
stock units
|
|
|
441
|
|
|
|
595
|
|
|
|
1,316
|
|
|
|
1,176
|
|
Restricted
stock
|
|
|
43
|
|
|
|
57
|
|
|
|
84
|
|
|
|
118
|
|
Total
|
|
$ |
542
|
|
|
$ |
1,200
|
|
|
$ |
1,636
|
|
|
$ |
2,065
|
|
(1)
|
Stock
option expense includes $3 and $11 in the quarters ending July 1,
2007 and
July 2, 2006, respectively, and $8 and $25 for the six-month periods
ending July 1, 2007 and July 2, 2006, respectively, related to
non-employee director stock
options.
|
_______________________
The
following table summarizes plan status as of July 1, 2007:
|
|
2004
Plan
|
|
|
2001
Plan
|
|
|
1996
Plan
|
|
Awards
originally available
|
|
|
6,500,000
|
|
|
|
2,000,000
|
|
|
|
1,200,000
|
|
Stock
options outstanding
|
|
|
315,475
|
|
|
|
859,813
|
|
|
|
297,800
|
|
Restricted
stock units outstanding
|
|
|
581,768
|
|
|
|
—
|
|
|
|
—
|
|
Awards
exercisable
|
|
|
162,488
|
|
|
|
854,213
|
|
|
|
297,800
|
|
Awards
available for grant
|
|
|
5,331,489
|
|
|
|
—
|
|
|
|
—
|
|
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.
A
summary
of the status of stock options as of July 1, 2007 and July 2, 2006, and changes
during the six-month periods then ended, is presented below:
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
|
Options
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding
at beginning of year
|
|
|
1,529,863
|
|
|
$ |
15.91
|
|
|
|
1,567,499
|
|
|
$ |
15.93
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
93,000
|
|
|
|
13.68
|
|
Exercised
|
|
|
(25,150 |
) |
|
|
8.96
|
|
|
|
(25,350 |
) |
|
|
8.55
|
|
Expired
|
|
|
(15,900 |
) |
|
|
29.64
|
|
|
|
(45,375 |
) |
|
|
23.41
|
|
Forfeited
|
|
|
(15,725 |
) |
|
|
12.29
|
|
|
|
(8,400 |
) |
|
|
9.45
|
|
Outstanding
at end of period
|
|
|
1,473,088
|
|
|
$ |
15.92
|
|
|
|
1,581,374
|
|
|
$ |
15.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,314,501
|
|
|
$ |
16.37
|
|
|
|
1,175,530
|
|
|
$ |
17.24
|
|
The
total
intrinsic value of stock options exercised during the six-month periods ended
July 1, 2007 and July 2, 2006 was $126,000 and $114,000
respectively. The exercise price of options granted during the
six-month period ending July 2, 2006 equaled the trading price of the company’s
stock on the grant date. There were no options granted during the
six-month period ending July 1, 2007.
A
summary
of the weighted-average remaining contractual term and aggregate intrinsic
value
of options outstanding and exercisable at July 1, 2007 is presented
below:
|
Weighted-average
Remaining
Contractual Life
|
Aggregate
Intrinsic
Value
|
Options
outstanding
|
5.3
years
|
$
2,722
|
Options
exercisable
|
5.0
years
|
$
2,580
|
A
summary
of the nonvested stock options as of July 1, 2007 and July 2, 2006, and changes
during the six-month periods then ended, is presented below:
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
|
Options
|
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
|
Options
|
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Nonvested
at beginning of year
|
|
|
340,900
|
|
|
$ |
6.11
|
|
|
|
488,943
|
|
|
$ |
6.94
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
93,000
|
|
|
|
6.53
|
|
Vested
|
|
|
(166,588 |
) |
|
|
5.69
|
|
|
|
(167,699 |
) |
|
|
5.35
|
|
Forfeited
|
|
|
(15,725 |
) |
|
|
7.58
|
|
|
|
(8,400 |
) |
|
|
4.57
|
|
Nonvested
at end of period
|
|
|
158,587
|
(1) |
|
$ |
6.41
|
|
|
|
405,844
|
|
|
$ |
5.59
|
|
(1)
Based on
historical experience, CTS currently expects approximately 100% of
these options to vest.
_____________________
The
total
fair value of shares vested during the quarters ended July 1, 2007 and July
2,
2006 was approximately $857,000 and $897,000 respectively. As of July
1, 2007, there was $300,724 of unrecognized compensation cost related to
nonvested stock options. 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.
The
following table summarizes information about stock options outstanding at July
1, 2007:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
Range
of
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Weighted-Average
|
|
Exercise
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Exercise
|
|
Prices
|
|
|
at
7/1/07
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
at
7/1/07
|
|
|
Price
|
|
$ |
7.70
– 11.11
|
|
|
|
833,363
|
|
|
|
6.11
|
|
|
$ |
9.39
|
|
|
|
742,626
|
|
|
$ |
9.19
|
|
|
13.68
– 16.24
|
|
|
|
229,425
|
|
|
|
6.26
|
|
|
|
14.12
|
|
|
|
161,575
|
|
|
|
14.26
|
|
|
23.00
– 33.63
|
|
|
|
308,550
|
|
|
|
3.53
|
|
|
|
24.61
|
|
|
|
308,550
|
|
|
|
24.61
|
|
|
35.97
– 50.00
|
|
|
|
101,250
|
|
|
|
3.21
|
|
|
|
46.96
|
|
|
|
101,250
|
|
|
|
46.96
|
|
|
55.06
– 79.25
|
|
|
|
500
|
|
|
|
2.41
|
|
|
|
79.25
|
|
|
|
500
|
|
|
|
79.25
|
|
Service-Based
Restricted Stock Units
Service-based
restricted stock units (RSUs) entitle the holder to receive one share of common
stock for each unit when the unit vests. RSUs are issued to officers
and key employees as compensation. Generally, the RSUs vest over a
five-year period. A summary of the status of RSUs as of July 1, 2007
and July 2, 2006, and changes during the six-month periods then ended is
presented below:
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
|
RSUs
|
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
|
RSUs
|
|
|
Weighted-average
Grant-Date
Fair
Value
|
|
Outstanding
at beginning of year
|
|
|
658,938
|
|
|
$ |
12.43
|
|
|
|
525,898
|
|
|
$ |
11.49
|
|
Granted
|
|
|
146,950
|
|
|
|
11.95
|
|
|
|
207,600
|
|
|
|
13.68
|
|
Converted
|
|
|
(170,437 |
) |
|
|
12.39
|
|
|
|
(99,760 |
) |
|
|
11.22
|
|
Forfeited
|
|
|
(53,683 |
) |
|
|
12.50
|
|
|
|
(21,930 |
) |
|
|
11.29
|
|
Outstanding
at end of period
|
|
|
581,768
|
|
|
$ |
12.32
|
|
|
|
611,808
|
|
|
$ |
11.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining contractual life
|
|
4.5
years
|
|
|
|
|
|
|
4.7
years
|
|
|
|
|
|
As
of
July 1, 2007, there was $3.9 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.
Performance-Based
Restricted Stock Units
During
the first quarter of 2007, CTS established performance-based restricted stock
unit awards for certain executives. Executives will receive between
0% to 200% of their target awards based on achievement of year-over-year sales
growth and free cash flow performance goals for fiscal year
2007. Restricted stock unit awards will be made in 2008 following a
determination of the extent to which performance goals were
achieved. Each performance-based restricted stock unit will cliff
vest and convert to one share of CTS common stock three years after the end
of
the 2007 fiscal year. CTS intends to review its assumptions
about the level of performance goal achievement on a quarterly basis and to
adjust the related compensation expense accordingly. CTS recorded
compensation expense of approximately $15,000 related to performance-based
restricted stock units during the six-months ending July 1, 2007.
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, 19,066
shares of Restricted Stock were outstanding as of July 1,
2007. Shares sold or awarded are subject to restrictions against
transfer and repurchase rights of CTS. In general, restrictions lapse
at the rate of 20% per year beginning one year from the grant
date. In addition, the 1988 Plan provides for a cash bonus to the
participant equal to the fair market value of shares on the dates restrictions
lapse, in the case of an award. The total bonus paid to any
participant during the restricted period is limited to twice the fair market
value of the shares on the date of award. As of July 1, 2007, there was $100,951
of total unrecognized compensation cost related to nonvested Restricted
Stock. That cost is expected to be recognized over a weighted-average
period of 0.7 years. CTS recognizes expense on a straight-line basis
over the requisite service period for each separately vesting portion of the
award as if the award was, in substance, multiple awards.
Stock
Retirement Plan
The
Directors’ Plan provides for a portion of the total compensation payable to
nonemployee directors to be deferred and paid in CTS stock. The
Directors Plan was frozen effective December 1, 2004. All future
grants will be from the 2004 Plan.
NOTE
C - Inventories
Inventories
consist of the following:
($
in thousands)
|
|
July
1,
2007
|
|
|
December
31, 2006
|
|
Finished
goods
|
|
$
|
13,057
|
|
|
$
|
12,336
|
|
Work-in-process
|
|
|
17,633
|
|
|
|
15,059
|
|
Raw
materials
|
|
|
43,328
|
|
|
|
33,148
|
|
Total
inventories
|
|
$
|
74,018
|
|
|
$
|
60,543
|
|
NOTE
D – Debt
Long-term
debt was comprised of the following:
($
in thousands)
|
|
July
1,
2007
|
|
|
December
31, 2006
|
|
Revolving
credit agreement due in 2011
|
|
$ |
—
|
|
|
$ |
—
|
|
Convertible,
senior subordinated debentures at a weighted-average interest rate
of
2.125%,
due in 2024
|
|
|
60,000
|
|
|
|
60,000
|
|
Term
loan, weighted-average interest rate of 8.0% (2007) and 7.3% (2006),
due
in 2011
|
|
|
—
|
|
|
|
821
|
|
|
|
|
60,000
|
|
|
|
60,821
|
|
Less
current maturities
|
|
|
—
|
|
|
|
186
|
|
Total
long-term debt
|
|
$ |
60,000
|
|
|
$ |
60,635
|
|
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 July 1,
2007. Interest rates on the new revolving credit agreement fluctuate
based upon LIBOR and the Company’s quarterly total leverage
ratio. CTS pays a commitment fee on the undrawn portion of the new
revolving credit agreement. The commitment fee varies based on the
quarterly leverage ratio and was 0.15 percent per annum at July 1,
2007. The new revolving credit agreement requires, among other
things, that CTS comply with a maximum total leverage ratio and a minimum fixed
charge coverage ratio. Failure of CTS to comply with these covenants
could reduce the borrowing availability under the new revolving credit
agreement. CTS was in compliance with all debt covenants at July 1,
2007.
Additionally,
the new revolving credit agreement contains restrictions relating to the amount
of secured debt the Company can have outstanding, the amounts allowed for
acquisitions or asset sales, and the amounts allowed for stock repurchases
and
dividend payments. The new revolving credit agreement expires in June
2011. The former $75 million revolving credit agreement was cancelled
in connection with the execution of the new revolving credit
agreement.
CTS
has
$60 million convertible senior subordinated debentures (2.125% Debentures).
These unsecured debentures bear interest at an annual rate of 2.125%, payable
semiannually on May 1 and November 1 of each year through the maturity date
of
May 1, 2024. The 2.125% Debentures are convertible, under certain circumstances,
into CTS common stock at a conversion price of $15.00 per share (which is
equivalent to an initial conversion rate of approximately 66.6667 shares per
$1,000 principal amount of the notes). Upon conversion of the 2.125% Debentures,
in lieu of delivering common stock, the Company may, at its discretion, deliver
cash or a combination of cash and common stock.
The
conversion price of the 2.125% Debentures will be adjusted if CTS completes
certain transactions, including: distribution of shares as a dividend
to substantially all shareholders; subdivision, combination or reclassification
of its common stock; distribution of stock purchase warrants to substantially
all shareholders; distribution of cash, stock or property to shareholders in
excess of $0.03 per share; or purchase of its common stock pursuant
to a tender offer or exchange offer under certain circumstances.
Holders
may convert the 2.125% Debentures at any time during a conversion period if
the
closing price of CTS common stock is more than 120% of the conversion price
($18.00 per share) for at least 20 of the 30 consecutive trading days
immediately preceding the first trading day of the conversion period. The
conversion periods begin on February 15, May 15, August 15, and November 15
of
each year. Holders may also convert the notes if certain corporate transactions
occur. As of July 1, 2007, 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.
As
of
December 31, 2006, the Company also had an $0.8 million (denominated in Thailand
Baht) outstanding term loan that was assumed in connection with the acquisition
of SMTEK. The loan was secured by machinery and equipment of the
Thailand manufacturing facility and was repaid by CTS in March
2007.
During
the six-months ended July 1, 2007, CTS paid down its foreign lines of credit,
classified as short-term notes payables through normal cash flow
generation.
NOTE
E - Retirement Plans
Effective
December 31, 2006, CTS adopted all of the provisions of FAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” FAS No.
158 requires employers to: a) recognize the funded status of a benefit
plan—measured as the difference between plan assets at fair value and the
benefit obligation—in its statement of financial position, b) recognize as a
component of other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost pursuant to FAS No. 87,
“Employers’ Accounting for Pensions,” or FAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” c) measure defined
benefit plan assets and obligations as of the date of the employer’s fiscal
year-end statement of financial position, and d) disclose in the notes to
financial statements additional information about certain effects on net
periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. As required by the standard, CTS has applied
these FAS No. 158 requirements prospectively.
Net
pension (income) / postretirement expense for the three and six-month periods
ended July 1, 2007 and July 2, 2006 includes the following
components:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
PENSION
PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
1,211
|
|
|
|
1,280
|
|
|
|
2,422
|
|
|
|
2,556
|
|
Interest
cost
|
|
|
3,002
|
|
|
|
3,017
|
|
|
|
5,998
|
|
|
|
6,029
|
|
Expected
return on plan assets (1)
|
|
|
(6,342 |
) |
|
|
(6,184 |
) |
|
|
(12,680 |
) |
|
|
(12,359 |
) |
Amortization
of prior service cost
|
|
|
225
|
|
|
|
135
|
|
|
|
450
|
|
|
|
269
|
|
Amortization
of (gain)/loss
|
|
|
839
|
|
|
|
644
|
|
|
|
1,678
|
|
|
|
1,288
|
|
Curtailment
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
325
|
|
Net
pension income
|
|
|
(1,065 |
) |
|
|
(1,108 |
) |
|
|
(2,132 |
) |
|
|
(1,892 |
) |
(1) Expected
return on plan assets is net of expected investment expenses and certain
administrative expenses.
________________________
In
the
first six months of 2006, CTS recognized a pension plan curtailment loss of
approximately $0.3 million due to reduced employment levels. Also,
effective April 1, 2006, CTS closed one of its U.S. defined benefit plans to
new
participants.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
OTHER
POSTRETIREMENT BENEFIT PLAN
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
5
|
|
|
$ |
5
|
|
|
$ |
11
|
|
|
$ |
9
|
|
Interest
cost
|
|
|
84
|
|
|
|
74
|
|
|
|
167
|
|
|
|
149
|
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of (gain)/loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Curtailment
gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(81 |
) |
Net
postretirement expense
|
|
$ |
89
|
|
|
$ |
79
|
|
|
$ |
178
|
|
|
$ |
77
|
|
In
the
first six months of 2006, CTS recognized postretirement benefit plan curtailment
gain of approximately $0.1 million due to reduced employment
levels.
NOTE
F - Segments
FAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” requires companies to provide certain information about their
operating segments. CTS has two reportable segments: 1) Electronics
Manufacturing Services (EMS) and 2) Components and Sensors.
EMS
includes the higher level assembly of electronic and mechanical components
into
a finished subassembly or assembly performed under a contract manufacturing
agreement with an Original Equipment Manufacturer (OEM) or other contract
manufacturer. Additionally, for some customers, CTS provides full
turnkey manufacturing and completion including design, bill-of-material
management, logistics, and repair.
Components
and sensors are products which perform specific electronic functions for a
given
product family and are intended for use in customer assemblies. Components
and sensors consist principally of automotive sensors and actuators used in
commercial or consumer vehicles; electronic components used in communications
infrastructure and computer markets; terminators, including ClearONE™
terminators, used in computer and other high speed applications, switches,
resistor networks, and potentiometers used to serve multiple
markets.
The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies in the Company’s annual report
on Form 10-K. Management evaluates performance based upon segment
operating earnings before restructuring and related charges, interest expense,
other non-operating income, and income tax expense.
Summarized
financial information concerning CTS’ reportable segments is shown in the
following table:
($
in thousands)
|
|
EMS
|
|
|
Components
and Sensors
|
|
|
Total
|
|
Second
Quarter of 2007
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
98,833
|
|
|
$
|
70,791
|
|
|
$
|
169,624
|
|
Segment
operating earnings
|
|
|
2,355
|
|
|
|
5,547
|
|
|
|
7,902
|
|
Total
assets
|
|
|
176,358
|
|
|
|
357,761
|
|
|
|
534,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter of 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
94,230
|
|
|
$
|
71,695
|
|
|
$
|
165,925
|
|
Segment
operating earnings
|
|
|
607
|
|
|
|
8,412
|
|
|
|
9,019
|
|
Total
assets
|
|
|
161,717
|
|
|
|
390,247
|
|
|
|
551,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
192,559
|
|
|
$
|
140,323
|
|
|
$
|
332,882
|
|
Segment
operating earnings
|
|
|
2,358
|
|
|
|
10,492
|
|
|
|
12,850
|
|
Total
assets
|
|
|
176,358
|
|
|
|
357,761
|
|
|
|
534,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
177,095
|
|
|
$
|
139,323
|
|
|
$
|
316,418
|
|
Segment
operating earnings
|
|
|
(174
|
)
|
|
|
18,911
|
|
|
|
18,737
|
|
Total
assets
|
|
|
161,717
|
|
|
|
390,247
|
|
|
|
551,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling
information between reportable segments’ operating earnings and CTS’
consolidated pre-tax income is shown in the following table:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
($
in thousands)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Total
segment operating earnings
|
|
$ |
7,902
|
|
|
$ |
9,019
|
|
|
$ |
12,850
|
|
|
$ |
18,737
|
|
Restructuring
and related charges - Components and Sensors
|
|
|
—
|
|
|
|
(1,463 |
) |
|
|
—
|
|
|
|
(3,584 |
) |
Interest
expense
|
|
|
(681 |
) |
|
|
(1,034 |
) |
|
|
(1,372 |
) |
|
|
(2,145 |
) |
Other
income
|
|
|
254
|
|
|
|
257
|
|
|
|
1,119
|
|
|
|
385
|
|
Earnings
before income taxes
|
|
$ |
7,475
|
|
|
$ |
6,779
|
|
|
$ |
12,597
|
|
|
$ |
13,393
|
|
NOTE
G -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
H - Earnings Per Share
FAS
No. 128, “Earnings per Share,” requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share (EPS) computations. The calculations below provide net
earnings, average common shares outstanding, and the resultant earnings per
share for both basic and diluted EPS for the three and six-month periods ending
July 1, 2007 and July 2, 2006.
($
in thousands, except per share amounts)
|
|
Net
Earnings
(Numerator)
|
|
|
Shares
(in
thousands) (Denominator)
|
|
|
Per
Share Amount
|
|
Second
Quarter 2007
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
5,905
|
|
|
|
35,824
|
|
|
$
|
0.16
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
251
|
|
|
|
4,000
|
|
|
|
|
|
Equity-based
compensation plans
|
|
|
—
|
|
|
|
478
|
|
|
|
|
|
Diluted
EPS
|
|
|
6,156
|
|
|
|
40,302
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
5,259
|
|
|
|
35,843
|
|
|
$
|
0.15
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
244
|
|
|
|
4,000
|
|
|
|
|
|
Equity-based
compensation plans
|
|
|
—
|
|
|
|
302
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
5,503
|
|
|
|
40,145
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
9,951
|
|
|
|
35,824
|
|
|
$
|
0.28
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
502
|
|
|
|
4,000
|
|
|
|
|
|
Equity-based
compensation plans
|
|
|
—
|
|
|
|
531
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
10,453
|
|
|
|
40,355
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months of 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
10,299
|
|
|
|
35,832
|
|
|
$
|
0.29
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
489
|
|
|
|
4,000
|
|
|
|
|
|
Equity-based
compensation plans
|
|
|
—
|
|
|
|
357
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
10,788
|
|
|
|
40,189
|
|
|
$
|
0.27
|
|
The
following table shows the potentially dilutive securities which have been
excluded from the three and six-month periods ending July 1, 2007 and July
2,
2006 dilutive earnings per share calculation because they are either
anti-dilutive, or the exercise price exceeds the average market
price.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(Number
of Shares in Thousands)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Stock
options where the assumed proceeds exceeds the average
market price
|
|
|
640
|
|
|
|
714
|
|
|
|
595
|
|
|
|
774
|
|
Securities
related to the 6.5% Debentures
|
|
|
—
|
|
|
|
201
|
|
|
|
—
|
|
|
|
238
|
|
NOTE
I - Income Taxes
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(FIN 48). FIN 48 clarifies the accounting for uncertainty
in income tax positions recognized in accordance with FAS No. 109,
“Accounting for Income Taxes.” FIN 48 requires that an enterprise must
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. A tax
position that meets the more-likely-than-not threshold is then measured to
determine the amount of benefit to recognize in the financial
statements.
At
the
date of adoption, CTS had approximately $4.3 million of unrecognized tax
benefits, which, if recognized, would affect the effective tax
rate. Of this amount, approximately $3.6 million was reclassified
from current tax liabilities to a reduction of the long-term deferred tax asset
in accordance with the provisions of FIN 48. The remaining $0.7
million was reclassified from current tax liabilities to long term deferred
tax
liabilities. Adoption of this interpretation had no other impact on
the Company’s condensed consolidated financial statements. For the
six months ended July 1, 2007, CTS did not have a change to its total
unrecognized tax benefits of $4.3 million. These benefits are not
expected to be realized within the next twelve
months.
CTS’
continuing practice is to recognize interest and/or penalties related to income
tax matters as income tax expense. As of July 1, 2007, there were no significant
amounts accrued for interest and/or penalties related to uncertain income tax
positions.
The
Company’s tax years are subject to examination for all U.S. jurisdictions from
2003 through 2006. The international tax statutes vary widely and the
tax years subject to examination range from 2001 through 2006. Taxing
authorities also have the ability to review prior tax years to the extent of
net
operating losses and tax credit carryforwards and apply these changes to open
tax years. CTS does not anticipate any significant changes in the unrecognized
tax benefits within the next twelve months as the result of examinations or
lapse of statutes of limitation.
The
provisions for income taxes for the six-months ending July 1, 2007 were
calculated using an estimated full year rate of 21.0% compared to 23.1% for
the
six-months ending July 2, 2006 and an actual effective rate of 21.1%
for the full year 2006. The reduction in the effective tax rate
between the six-months ending July 2, 2006 and six-months ending July 1, 2007
was attributable to a higher percentage of foreign earnings on lower taxed
jurisdictions relative to total foreign earnings.
NOTE
J – 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 expired June 29, 2007. Reacquired shares will be used
to support equity-based compensation programs and for other corporate purposes.
During the first half of 2007, CTS repurchased 350,000 shares at a total cost
of
$4.3 million.
In
June
2007, CTS’ Board of Directors authorized a program to repurchase up to two
million shares of common stock in the open market. The authorization
expires on June 30, 2009.
NOTE
K – New Accounting Pronouncements
EITF
06-03 “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)”
In
June
2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)” (EITF 06-03). EITF 06-03 provides that the
presentation of taxes assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and a customer
on
either a gross basis (included in revenue and costs) or on a net basis (excluded
from revenues) is an accounting policy decision that should be
disclosed. The provisions of EITF 06-3 were effective for CTS as of
January 1, 2007. CTS classifies sales taxes on a net basis in its
consolidated financial statements.
FAS
No. 157 “Fair Value Measurements”
In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
Value Measurements”(FAS No. 157). 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 beginning January
1, 2008. CTS is currently reviewing the provisions of FAS No. 157, but does
not
expect the provisions to have a material impact on its consolidated financial
statements.
FAS
No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities”
In
February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (FAS No.
159). FAS No. 159 provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility
in
financial reporting that can occur when related assets and liabilities are
recorded on different bases. This statement is effective for CTS
beginning January 1, 2008. CTS does not expect FAS No. 159 to have a
material impact on its consolidated financial statements.
FASB
Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No.
48”
In
May
2007, the FASB issued FASB Staff Position FIN 48-1 that amends FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FSP FIN
48-1) . FSP FIN 48-1 provides guidance on how an enterprise should determine
whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. CTS is currently reviewing the provisions
of FSP FIN 48-1 and does not expect the provisions to have a material impact
on
CTS’ financial statements.
EITF
06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards”
In
June
2007, the EITF reached a consensus reached on EITF Issue No. 06-11, “Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF
06-11). EITF 06-11 provides that a realized income tax benefit from
dividends that are charged to retained earnings and are paid to employees for
equity classified nonvested equity shares and units should be recognized as
an
increase to additional paid-in capital. The provisions of this EITF should
be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007. CTS currently pays dividends
on
its unvested Restricted Stock under the 1988 Plan. CTS has reviewed the
provisions of EITF 06-11 and does not expect the provisions to have a material
impact on its consolidated financial statements.
EITF
07-3, “Accounting for Nonrefundable Advance Payments for Goods and Services to
Be Used in Future Research and Development Activities”
In
June
2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for
Nonrefundable Advance payments for Goods and Services to Be Used in Future
Research and Development Activities” (EITF 07-3). EITF 07-3 provides
that nonrefundable advance payments for future research and development
activities should be deferred and capitalized and recognized as an expense
as
the goods are delivered or the related services are performed. The provisions
of
this EITF are effective for fiscal years beginning after December 15, 2007.
CTS
is currently reviewing the provisions of EITF 07-3 and does not expect the
provisions to have a material impact on its consolidated 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, medical and defense
and aerospace 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 segments, Electronics Manufacturing
Services (EMS) and Components and Sensors.
In
the
second quarter of 2007, sales of EMS and Components and Sensors segments
represented 58.3% and 41.7% of CTS’ total sales respectively, compared to 56.8%
and 43.2% respectively, in the second quarter of 2006.
As
discussed in more detail throughout the Management's Discussion and
Analysis:
·
|
Sales
increased by $3.7 million, or 2.2%, in the second quarter of 2007
from the
second quarter of 2006. Sales in the EMS segment increased by
4.9% compared to the second quarter of 2006, while sales in the Components
and Sensors segment decreased by 1.3% versus the second quarter of
2006.
|
·
|
Gross
margins, as a percent of sales, were 19.4% and 19.1% in the second
quarter
of 2007 and 2006, respectively, primarily resulting from lower
restructuring-related costs.
|
·
|
Selling,
general and administrative, and research and development expenses
were
14.8% of total sales in the second quarter of 2007 compared to 14.1%
of
total sales in the second quarter of 2006. These expenses, as a
percent of sales, increased 1.2% as a result of $2.1 million of legal
and
accounting fees, recognized in the second quarter of 2007, associated
with
the recent accounting investigation. (Refer to Note B,
“Restatement of Consolidated Financial Statements” in CTS’ Form 10-K that
was filed on May 15, 2007.)
|
·
|
Income
taxes for the six-months ended July 1, 2007 were calculated using
an
estimated full-year rate of 21.0% compared to 23.1% for the six-months
ended July 2, 2006 and an actual full year 2006 effective tax rate
of
21.1%.
|
·
|
Net
earnings were $5.9 million, or $0.15 per diluted share, in the second
quarter of 2007 compared with $5.3 million, or $0.14 per diluted
share, in
the second quarter of 2006.
|
·
|
Second
quarter 2007 earnings per diluted share were adversely impacted by
approximately $0.03 per diluted share of legal and accounting fees
associated with the recent accounting investigation. Second
quarter 2006 diluted earnings per share were $0.14, including
restructuring and related costs of $0.03 per diluted share for the
consolidation of the Berne, Indiana
operation.
|
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company’s unaudited condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.
Management
believes that judgment and estimates related to the following critical
accounting policies could materially affect its consolidated financial
statements:
§
|
Estimating
inventory valuation, the allowance for the doubtful accounts, and
other
accrued liabilities
|
§
|
Valuation
of long-lived and intangible assets, and depreciation/amortization
periods
|
§
|
Equity-based
compensation
|
In
the
second quarter of 2007, there were no material changes in the above critical
accounting policies.
Results
of Operations
Comparison
of Second Quarter 2007 and Second Quarter 2006
Segment
Discussion
Refer
to
Note F, “Segments,” for a description of the Company’s segments.
The
following table highlights the segment results for the three-month periods
ended
July 1, 2007 and July 2, 2006:
($
in thousands)
|
|
Components
& Sensors
|
|
|
EMS
|
|
|
Consolidated
Total
|
|
Second
Quarter 2007
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
70,791
|
|
|
$ |
98,833
|
|
|
$ |
169,624
|
|
Segment
operating earnings
|
|
|
5,547
|
|
|
|
2,355
|
|
|
|
7,902
|
|
%
of sales
|
|
|
7.8 |
% |
|
|
2.4 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
71,695
|
|
|
$ |
94,230
|
|
|
$ |
165,925
|
|
Segment
operating earnings
|
|
|
8,412
|
|
|
|
607
|
|
|
|
9,019
|
|
%
of sales
|
|
|
11.7 |
% |
|
|
0.6 |
% |
|
|
5.4 |
% |
Sales
in
the Components and Sensors segment decreased $0.9 million, or approximately
1.3%
from the second quarter of 2006, attributed primarily to a decrease in
electronic component sales partially offset by higher automotive component
sales.
The
Components and Sensors segment operating earnings decreased $2.9 million in
the
second quarter of 2007. The unfavorable earnings change resulted from
less favorable product mix, higher operating expenses including incremental
legal and accounting fees associated with the recent accounting investigation,
operational inefficiencies due to the start-up of our Czech Republic facility
and increased severance costs.
The
EMS
segment recorded a sales increase of $4.6 million, or 4.9%, in the second
quarter of 2007 versus the second quarter of 2006. The increase in
sales was attributable primarily to higher sales into the defense and aerospace
and industrial markets, partially offset by continuing lower sales into the
computer market.
The
EMS
segment operating earnings improved $1.7 million in the second quarter of 2007
primarily due to increased gross margins resulting from higher sales volume
and
more favorable product mix, partially offset by higher legal and accounting
fees
associated with the recent accounting investigation.
Total
Company Discussion
The
following table highlights changes in significant components of the unaudited
condensed consolidated statements of earnings for the three-month periods ended
July 1, 2007 and July 2, 2006:
|
|
Three
months ended
|
|
|
|
|
($
in thousands, except net earnings per share)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
|
Increase
(Decrease)
|
|
Net
sales
|
|
$
|
169,624
|
|
|
$
|
165,925
|
|
|
$
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related
costs
|
|
|
-
|
|
|
|
542
|
|
|
|
(542
|
)
|
%
of net sales
|
|
|
-
|
%
|
|
|
0.3
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
32,944
|
|
|
|
31,768
|
|
|
|
1,176
|
|
%
of net sales
|
|
|
19.4
|
%
|
|
|
19.1
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
20,940
|
|
|
|
19,222
|
|
|
|
1,718
|
|
%
of net sales
|
|
|
12.3
|
%
|
|
|
11.6
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
4,102
|
|
|
|
4,070
|
|
|
|
32
|
|
%
of net sales
|
|
|
2.4
|
%
|
|
|
2.5
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charge
|
|
|
-
|
|
|
|
920
|
|
|
|
(920
|
)
|
%
of net sales
|
|
|
-
|
%
|
|
|
0.6
|
%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
7,902
|
|
|
|
7,556
|
|
|
|
346
|
|
%
of net sales
|
|
|
4.7
|
%
|
|
|
4.6
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
1,570
|
|
|
|
1,520
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
5,905
|
|
|
|
5,259
|
|
|
|
646
|
|
%
of net sales
|
|
|
3.5
|
%
|
|
|
3.2
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - diluted
|
|
$
|
0.15
|
|
|
|
0.14
|
|
|
$
|
0.01
|
|
Second
quarter sales of $169.6 million increased $3.7 million, or 2.2%, from the second
quarter of 2006. The increase was attributable primarily to higher
sales of $4.6 million from the EMS segment. The Components and
Sensors segment sales decreased $0.9 million from weak electronic component
demand, partially offset by automotive new product demand.
Gross
margin as a percent of sales was 19.4% in the second quarter of 2007 compared
to
19.1% in the second quarter of 2006 due to lower restructuring-related
costs. Despite higher sales, the company experienced unfavorable
segment sales mix, less favorable product mix and operational inefficiencies
due
to the start-up of our Czech Republic facility. The Components and
Sensors segment, which inherently has higher gross margins, decreased to 41.7%
of total sales in the second quarter of 2007 compared to 43.2% of total sales
in
the same period of 2006.
Selling,
general and administrative expenses were $20.9 million, or 12.3% of sales,
in
the second quarter of 2007 versus $19.2 million, or 11.6% of sales in the second
quarter of 2006. A 1.2% increase in selling, general and
administrative expenses as a percent of sales relates to $2.1 million of legal
and accounting fees associated with the recent accounting investigation that
were recorded in the second quarter of 2007. Research and development
expenses were $4.1 million, or 2.4% of sales in the second quarter of 2007
versus $4.1 million, or 2.5% of sales in the second quarter of
2006.
Operating
earnings were $7.9 million in the second quarter of 2007 compared to $7.6
million in the second quarter of 2006. The increase in
operating earnings resulted from higher gross margin dollars on higher sales
and
lower restructuring charges and restructuring-related costs of $1.4 million,
partially offset by investigation costs of $2.1 million which were incurred
in
the second quarter of 2007.
Net
earnings were $5.9 million, or $0.15 per diluted share, in the second quarter
of
2007 compared $5.3 million, or $0.14 per diluted share, in the second quarter
of
2006.
Comparison
of First Six Months 2007 and First Six Months 2006
Segment
Discussion
The
following table highlights the segment results for the six-month periods ended
July 1, 2007 and July 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Components
&
Sensors
|
|
EMS
|
|
Consolidated
Total
|
First
Six Months 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
140,323
|
|
|
$
|
192,559
|
|
|
$
|
332,882
|
|
Segment
operating earnings
|
|
|
10,492
|
|
|
|
2,358
|
|
|
|
12,850
|
|
%
of sales
|
|
|
7.5
|
%
|
|
|
1.2
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Six Months 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
139,323
|
|
|
$
|
177,095
|
|
|
$
|
316,418
|
|
Segment
operating earnings
|
|
|
18,911
|
|
|
|
(174)
|
|
|
|
18,737
|
|
%
of sales
|
|
|
13.6
|
%
|
|
|
(0.1)
|
%
|
|
|
5.9
|
%
|
During
the first six months of 2007, sales of Components and Sensors and EMS products,
as a percentage of total sales, were 42.2% and 57.8% respectively. The first
six
months of 2006 sales of Components and Sensors and EMS products, as a percentage
of total sales, were 44.0% and 56.0% respectively.
The
Components and Sensors segment sales increased $1.0 million or 0.7% from the
first half of 2006. The increase was primarily due to higher sales of
automotive products, partially offset by decreased sales of electronic
components. The Components and Sensors segment operating earnings
decreased $8.4 million, despite slightly higher sales, from legal and accounting
expenses related to the recent accounting investigation, lower royalty income,
lower fixed asset gains, the one-time insurance settlement received in the
first
quarter of 2006, and operational inefficiencies due to the start-up of our
Czech
Republic facility.
EMS
segment sales increased by $15.5 million in the first six months of 2007, or
8.7% from the first six months of 2006. The increase is due to higher
sales into the industrial and defense and aerospace markets, partially offset
by
lower computer market sales. The EMS segment operating earnings
increased $2.5 million due to higher sales volumes versus 2006, improved product
mix and efficiency gains.
Total
Company Discussion
The
following table highlights changes in significant components of the condensed
consolidated statements of earnings for the six-month periods ended July 1,
2007
and July 2, 2006:
|
|
Six
Months Ended
|
|
|
|
|
($
in thousands, except net earnings per share)
|
|
July
1, 2007
|
|
July
2, 2006
|
|
Increase
(Decrease)
|
Net
sales
|
|
$
|
332,882
|
|
|
$
|
316,418
|
|
|
$
|
16,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring-related
costs
|
|
|
-
|
|
|
|
701
|
|
|
|
(701
|
)
|
%
of net sales
|
|
|
-
|
%
|
|
|
0.2
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
63,282
|
|
|
|
61,809
|
|
|
|
1,473
|
|
%
of net sales
|
|
|
19.0
|
%
|
|
|
19.5
|
%
|
|
|
(0.5
|
)%
|
|
Selling,
general and administrative expenses
|
|
|
42,210
|
|
|
|
35,612
|
|
|
|
6,598
|
|
%
of net sales
|
|
|
12.7
|
%
|
|
|
11.3
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
8,222
|
|
|
|
8,162
|
|
|
|
60
|
|
%
of net sales
|
|
|
2.5
|
%
|
|
|
2.6
|
%
|
|
|
(0.1
|
)%
|
|
Restructuring
charge
|
|
|
-
|
|
|
|
2,882
|
|
|
|
(2,882
|
)
|
%
of net sales
|
|
|
-
|
%
|
|
|
0.9
|
%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
12,850
|
|
|
|
15,153
|
|
|
|
(2,303
|
)
|
%
of net sales
|
|
|
3.9
|
%
|
|
|
4.8
|
%
|
|
|
(0.9
|
)%
|
|
Income
tax expense
|
|
|
2,646
|
|
|
|
3,094
|
|
|
|
(448
|
)
|
|
Net
earnings
|
|
$
|
9,951
|
|
|
$
|
10,299
|
|
|
$
|
(348
|
)
|
%
of net sales
|
|
|
3.0
|
%
|
|
|
3.3
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - diluted
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
(0.01
|
)
|
|
First
six
month sales of $332.9 million increased $16.5 million, or 5.2%, from the first
six months of 2006. The Components and Sensors segment sales increase of $1.0
million is attributable to higher sales of automotive products offset primarily
by a decrease of electronic components sales mainly into the infrastructure
market. The EMS segment experienced a sales increase of $15.5 million
in the first six months of 2007, or 8.7%, from the first six months of
2006. The EMS revenue increase was driven by higher sales into the
industrial and defense and aerospace markets partially offset by the lower
computer and communication market sales.
Gross
margin increased $1.5 million for the first half of 2007 from higher sales
volume, lower restructuring-related costs and margin improvements within the
EMS
segment. Improvements were partially offset by decreased Components
and Sensors gross margins from unfavorable product mix, operational
inefficiencies due to the start-up of our Czech Republic facility and lower
royalty income. As a percentage of sales, gross margin decreased to
19.0% in the first half of 2007 compared to 19.5% in the first half of
2006.
Selling,
general and administrative expenses increased $6.6 million, primarily driven
by
$3.4 million of legal and accounting fees associated with the recent accounting
investigation, higher salaries and other employment costs.
Research
and development expenses were $8.2 million, or 2.5% of sales in the first half
of 2007, versus $8.2 million, or 2.6% of sales, in the first half of
2006. The percentage of sales decrease was due to higher sales in the
first half of 2007.
Income
taxes for the six-months ended July 1, 2007 were calculated using an estimated
full-year rate of 21.0% compared to 23.1% for the six-months ended July 1,
2006
and an actual full year 2006 effective tax rate of 21.1%.
Interest
and other expenses through the first half of 2007 were $0.3 million, $1.5
million lower than first half 2006. Compared to the prior year,
interest income increased $0.6 million, favorable foreign currency gain
increased $0.2 million and interest expense was $0.8 million lower primarily
from lower outstanding debt balances.
In
the
first half of 2007, net earnings of $10.0 million, or 3.0% of sales, decreased
$0.3 million versus the first half of 2006. Net earnings per diluted
share of $0.26 were $0.01 lower than the first half of 2006.
Outlook
Based
on
the first half results and the outlook for the remainder of the year, CTS
expects full-year 2007 sales to grow by 5% - 6% over 2006. Full-year
diluted earnings per share are expected to be in a range of $0.71 to $0.75
for
2007.
Liquidity
and Capital Resources
Overview
Cash
and
cash equivalents were $37.2 million at July 1, 2007 compared to $38.6 million
at
December 31, 2006. Total debt on July 1, 2007 was $61.5 million
compared to $66.3 million at the end of 2006, primarily from decreased notes
payable. Total debt as a percentage of total capitalization, defined
as the sum of notes payable, current portion of long-term debt and long-term
debt as a percent of total debt and shareholder’s equity, was 15.9% at the end
of the second quarter of 2007, compared with 17.2% at the end of
2006.
Working
capital increased $11.0 million in the first six-months of 2007 primarily due
to
higher levels of inventory that was attributable to a planned build-ahead for
a
certain customer program, and a reduction in notes payable, partially offset
by
higher accounts payable and accrued liabilities.
Cash
Flow
Operating
Activities
Net
cash
provided by operating activities was $15.5 million for the first half of 2007.
Components of net cash provided by operating activities include net
earnings of $10.0 million, depreciation and amortization expense of $11.6
million and equity-based compensation of $1.6 million, and net changes in assets
and liabilities of $7.7 million. The changes in assets and
liabilities were due to increased inventory of $13.5 million and an increase
in
prepaid pension asset of $4.4 million, partially offset by increased accounts
payable and accrued liabilities of $8.3 million and decreased accounts
receivable of $1.0 million.
Net
cash
provided by operating activities was $17.4 million for the first half of 2006.
Components of net cash provided by operating activities included net
earnings of $10.3 million, depreciation and amortization expense of $13.2
million, equity-based compensation of $2.1 million, restructuring charges of
$2.9 million, increased prepaid pension assets of $3.1 million and an increase
in assets and liabilities of $7.9 million. The increase in assets and
liabilities were primarily due to increased accounts receivables of $12.9
million, an increase in inventory of $2.4 million, an increase in other current
assets of $1.7 million, and an increase in accounts payable and accrued
liabilities of $8.8 million.
Total
free cash flow in the first half of 2007 was $9.2 million compared to free
cash
flow in the first half of 2006 of $11.6 million.
Free
cash
flow is a non-GAAP financial measure that CTS defines as net cash provided
by
operations less capital expenditures. The most comparable GAAP
measure is net cash provided by operations. CTS' management uses free
cash flow to evaluate financial performance and in strategic planning,
specifically, for investing and financing decisions. CTS' management
believes that free cash flow is a useful measure because it indicates the
ability of a business operation to fund its own required capital
investments. CTS' management believes that the non-GAAP measure free
cash flow is useful to investors because it reflects the performance of its
overall operations more accurately than net cash provided by operations and
because it provides investors with the same results that management uses as
the
basis for making decisions about the business. Free cash flow is not
an indicator of residual cash available for discretionary spending, because
it
does not take into account mandatory debt service or other non-discretionary
spending requirements which are not deducted in the calculation of free cash
flow. CTS' management takes these limitations into account when using
free cash flow to make investing and financing decisions.
The
following table summarizes free cash flow for CTS:
|
|
Six
Months Ended
|
|
($
in millions)
|
|
July
1, 2007
|
|
|
July
2, 2006
|
|
Net
cash provided by operations
|
|
$ |
15.5
|
|
|
$ |
17.4
|
|
Capital
expenditures
|
|
|
(6.3 |
) |
|
|
(5.8 |
) |
Free
cash flow
|
|
$ |
9.2
|
|
|
$ |
11.6
|
|
Net
cash
used in investing activities was $6.2 million for the first half of 2007,
primarily for capital expenditures.
Net
cash
used in investing activities was $4.6 million for the first half of 2006,
including $5.8 million used for capital expenditures partially offset by $1.2
million in proceeds from sales of assets.
Net
cash
used in financing activities for the first half of 2007 was $11.1 million,
consisting primarily of a $4.3 million purchase of treasury stock, $3.9 million
in decreased short-term debt and $2.1 million in dividend payments.
Net
cash
used in financing activities for the first half of 2006 was $8.3 million,
consisting primarily of a net $4.1 million reduction in long-term debt primarily
related to the early prepayment of $5.5 million 6.5%
debentures. Additional financing activities included $2.2 million in
dividend payments, a decrease in short-term notes payable of $1.2 million,
and
$0.8 million purchase of treasury stock.
Capital
Resources
Refer
to
Note D, “Debt,” for further discussion.
On
June
28, 2007 CTS’ Board of Directors authorized a program to repurchase up to two
million shares of common stock. Reacquired shares will be used to
support equity-based compensation programs and for other corporate
purposes. This authorization expires June 30, 2009.
In
November 2005, CTS’ Board of Directors authorized a program to repurchase up to
one million shares of common stock. The authorization expired June
29, 2007. Reacquired shares will be used to support equity-based
compensation programs and for other corporate purposes. During 2006,
CTS repurchased 170,600 shares at a total cost of $2.3
million. During the first half of 2007 350,000 shares were
repurchased at a total cost of $4.3 million.
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 July 1,
2007. Interest rates on the new revolving credit agreement fluctuate
based upon LIBOR and the Company’s quarterly total leverage
ratio. CTS pays a commitment fee on the undrawn portion of the new
revolving credit agreement. The commitment fee varies based on the
quarterly leverage ratio and was 0.15 percent per annum at July 1,
2007. The new revolving credit agreement requires, among other
things, that CTS comply with a maximum total leverage ratio and a minimum
fixed charge coverage ratio. Failure of CTS to comply with these covenants
could reduce the borrowing availability under the new revolving credit
agreement. CTS was in compliance with all debt covenants at July 1,
2007. Additionally, the new revolving agreement contains restrictions
limiting 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; engage in certain transactions with CTS' subsidiaries and
affiliates, and limiting 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
terminated 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.
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. On May
9, 2007, CTS filed a post-effective amendment on Form S-1 to deregister all
of
the securities remaining unsold under the registration statement.
New
Accounting Pronouncements
EITF
06-03 “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)”
In
June
2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)” (EITF 06-03). EITF 06-03 provides that the
presentation of taxes assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and a customer
on
either a gross basis (included in revenue and costs) or on a net basis (excluded
from revenues) is an accounting policy decision that should be
disclosed. The provisions of EITF 06-3 were effective for CTS as of
January 1, 2007. CTS classifies sales taxes on a net basis in its
consolidated financial statements.
FAS
No. 157 “Fair Value Measurements”
In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
Value Measurements”(FAS No. 157). 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 beginning January
1, 2008. CTS is currently reviewing the provisions of FAS No. 157, but does
not
expect the provisions to have a material impact on its consolidated financial
statements.
FAS
No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities”
In
February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (FAS No.
159). FAS No. 159 provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility
in
financial reporting that can occur when related assets and liabilities are
recorded on different bases. This statement is effective for CTS
beginning January 1, 2008. CTS does not expect FAS No. 159 to have a
material impact on its consolidated financial statements.
FASB
Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No.
48”
In
May
2007, the FASB issued FASB Staff Position FIN 48-1 that amends FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FSP FIN
48-1). FSP FIN 48-1 provides guidance on how an enterprise should
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. CTS is currently reviewing
the
provisions of FSP FIN 48-1 and does not expect the provisions to have a material
impact on its consolidated financial statements.
EITF
06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards”
In
June
2007, the EITF reached a consensus reached on EITF Issue No. 06-11, “Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF
06-11). EITF 06-11 provides that a realized income tax benefit from
dividends that are charged to retained earnings and are paid to employees for
equity classified nonvested equity shares and units should be recognized as
an
increase to additional paid-in capital. The provisions of this EITF should
be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007. CTS currently pays dividends
on
its unvested Restricted Stock under the 1988 Plan. CTS has reviewed the
provisions of EITF 06-11 and does not expect the provisions to have a material
impact on its consolidated financial statements.
EITF
07-3, “Accounting for Nonrefundable Advance Payments for Goods and Services to
Be Used in Future Research and Development Activities”
In
June
2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for
Nonrefundable Advance payments for Goods and Services to Be Used in Future
Research and Development Activities” (EITF 07-3). EITF 07-3 provides
that nonrefundable advance payments for future research and development
activities should be deferred and capitalized and recognized as an expense
as
the goods are delivered or the related services are performed. The provisions
of
this EITF are effective for fiscal years beginning after December 15, 2007.
CTS
is currently reviewing the provisions of EITF 07-3 and does not expect the
provisions to have a material impact on its consolidated financial
statements.
*****
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. Forward-looking statements
are based on management’s expectations, certain assumptions and currently
available information. 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. Examples of factors that may affect future operating
results and financial condition include, but are not limited to: rapid
technological change; general market conditions in the automotive,
communications, and computer industries, as well as conditions in the
industrial, defense & aerospace, and medical markets; reliance on key
customers; the ability to protect our intellectual property; pricing pressures
and demand for our products; and risks associated with our international
operations, including trade and tariff barriers, exchange rates and political
and geopolitical risks; and the impact of the accounting misstatements at its
Moorpark and Santa Clara, California locations, including the results or the
impact of the SEC’s informal inquiry into these misstatements. 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.
There
have been no material changes in CTS’ market risk since December 31,
2006.
CTS’
management is responsible for establishing and maintaining effective disclosure
controls and procedures, as such term is defined in Exchange Act Rule
13a-15(e).
In
February 2007, CTS announced that it was investigating incorrect accounting
entries at its Moorpark, California manufacturing location and that its
financial statements for the first three quarters of 2006 should not be relied
upon. The investigation determined that incorrect entries transferred
significant costs from income statement accounts, primarily cost of goods sold,
to balance sheet accounts, primarily accounts payable, beginning in 2005 and
continuing through 2006. For more information on these matters,
please refer to Item 1A, Risk Factors; Item 9A Controls and Procedures; Note
B
to the consolidated financial statements, “Restatement of the Consolidated
Financial Statements”; and Management 's Report on Internal Control over
Financial Reporting in CTS’ 2006 Annual Report on Form 10-K filed May 15,
2007. Management determined that the effect of the misstatements on
CTS' 2006 consolidated financial statements was material and accordingly
amendments to CTS’ 2006 Quarterly Reports on Form 10-Q/A restating CTS'
condensed consolidated financial statements for each of the first three quarters
of 2006 were filed contemporaneously with CTS’ 2006 Annual Report on Form 10-K.
In addition, as a result of the incorrect entries discussed above CTS restated
its consolidated financial statements for the year ended December 31, 2005
in
its 2006 Annual Report on Form 10-K.
In
its assessment of internal control
over financial reporting for the year ended December 31, 2006, CTS' management
concluded that a material weakness existed in CTS' internal control over
financial reporting. The
following control deficiencies, on a combined basis, resulted in the material
weakness related to the Moorpark and Santa Clara, California manufacturing
locations:
·
|
Monitoring
and accountability over the operating effectiveness of controls
including
effective operation of designed controls over reconciliations,
journal
entry approval and oversight.
|
·
|
Ability
to set-up fictitious vendors and ability to make payments to vendors
without appropriate support and
approval.
|
·
|
Lack
of effectiveness of the internal audit function to obtain an understanding
of process and controls at the Moorpark and Santa Clara, California
locations.
|
Prior
to
identifying the material weakness described above, CTS’ management had taken
actions to strengthen the Moorpark and Santa Clara accounting
organization by replacing the Moorpark plant controller and adding a Santa
Clara
plant controller. Since identifying the material weakness, CTS has
implemented the following changes to strengthen its internal control over
financial reporting:
·
|
Increased
review and approval of all manual journal entries by the entity
controllers.
|
·
|
Increased
review and approval of all account reconciliation activities by the
entity
controllers.
|
·
|
Added
a senior Corporate accountant to provide additional review and oversight
of all key accounting processes globally, including manual journal
entries
and key account reconciliations.
|
·
|
Increased
internal audit resources and revised internal audit programs to increase
the scope and frequency of audits.
|
·
|
Standardized
and strengthened the account reconciliation process at both Moorpark
and
Santa Clara.
|
·
|
Completed
a review of all Moorpark and Santa Clara
vendors.
|
·
|
Removed
the entity controllers’ ability to set-up vendors and make payments
through the financial information
system.
|
·
|
Removed
the entity controllers’ security access to record journal
entries.
|
Management
believes these actions have strengthened the internal control environment at
both Moorpark and Santa Clara and that these actions have remediated the
material weakness described above. These internal control
enhancements will be tested throughout the year by CTS’ Internal Audit
organization to confirm that they are operating effectively.
In
addition, CTS intends to implement the following changes over the course of
2007
to further strengthen its internal control environment:
·
|
Further
enhance the Moorpark and Santa Clara reporting system documentation
and
user training.
|
·
|
Continue
to strengthen operating policies, including policies around pricing
adjustments, customer returns and vendor disputes at all CTS
locations.
|
·
|
Institute
additional operational monitoring reports to review and track early
warning signs e.g. short payments, premium freight and customer rejects
at
all CTS locations.
|
·
|
Further
enhance and document CTS’ annual vendor certification process at all CTS
locations.
|
·
|
Standardize
and strengthen the account reconciliation process at all CTS
locations.
|
As
of
July 1, 2007 CTS' management, including its Chief Executive Officer and its
Interim Chief Financial Officer, have carried out an evaluation of the
effectiveness of CTS' disclosure controls and procedures. Based on
the determination that the material weakness remediations in CTS' internal
control over financial reporting described above have not been fully tested,
CTS’ Chief Executive Officer and Interim Chief Financial Officer have determined
that CTS' disclosure controls and procedures were not effective as of July
1,
2007.
Changes
in Internal Control Over Financial Reporting
Except
as
described above, there were no changes in CTS' internal control over financial
reporting for the quarter ended July 1, 2007 that have materially affected
or
are reasonably likely to materially affect CTS' internal control over financial
reporting.
Certain
processes in the manufacturer of CTS’ current and past products create hazardous
waste by-products as currently defined by federal and state laws and
regulations. CTS has been notified by the U.S. Environmental
Protection Agency, state environmental agencies and, in some cases, generator
groups that it is or may be a Potentially Responsible Party (PRP) regarding
hazardous waste remediation at several non-CTS sites. In addition to
these non-CTS sites, CTS has an ongoing practice of providing
reserves for probably remediation activities at certain of its manufacturing
locations and for claims and proceedings against CTS with respect to other
environmental matters. In the opinion of management, based upon
presently available information relating to all such matters, either adequate
provision for 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 by insurance, accruals or
otherwise, or the ultimate anticipated costs resulting will not materially
affect CTS’ consolidated financial position, results of operations or cash
flows.
CTS
was
recently informed that the staff of the SEC has begun an informal inquiry
relating to the accounting misstatements of its Moorpark and Santa Clara,
California manufacturing facilities. CTS had previously informed the
SEC of the Moorpark and Santa Clara situation and is cooperating in connection
with the inquiry.
There
have been no significant changes in the Company’s risk factors since December
31, 2006.
The
following table summarizes the repurchases of CTS common stock made by the
Company during the three-month period ending July 1, 2007:
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,000
|
|
May
30, 2007 – June 29, 2007
|
|
|
350,000
|
|
|
$
|
12.41
|
|
|
|
350,000
|
|
|
|
—
|
|
Total
|
|
|
350,000
|
|
|
$
|
12.41
|
|
|
|
350,000
|
|
|
|
|
|
_______________________________
(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 expired June 29,
2007.
|
The
Annual Meeting of Shareholders of CTS Corporation was held on June 28, 2007.
At the meeting, the following matters were submitted to a vote of the
stockholders of CTS:
The
election of nine directors to serve for one year beginning at the 2007 annual
shareholders' meeting and expiring at the 2008 annual shareholders' meeting.
A summary of votes by directors is shown below:
|
Director
|
|
For
|
|
Withheld
|
|
|
Walter
S. Catlow
|
|
31,129,519
|
|
1,661,950
|
|
|
Lawrence
J. Ciancia
|
|
31,069,863
|
|
1,721,606
|
|
|
Thomas
G. Cody
|
|
20,731,079
|
|
12,060,390
|
|
|
Gerald
H. Frieling
|
|
31,125,252
|
|
1,666,217
|
|
|
Roger
R. Hemminghaus
|
|
32,284,110
|
|
507,359
|
|
|
Michael
A. Henning
|
|
31,040,738
|
|
1,750,731
|
|
|
Robert
A. Profusek
|
|
28,915,695
|
|
3,875,774
|
|
|
Donald
K. Schwanz
|
|
31,931,987
|
|
859,482
|
|
|
Patricia
K. Vincent
|
|
32,291,233
|
|
500,236
|
|
The
approval of the 2007 Management Incentive Plan. A summary of votes is
shown below:
|
For
|
|
Against
|
|
Abstain
|
|
|
30,746,741
|
|
1,157,172
|
|
887,551
|
|
|
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CTS
Corporation
|
|
CTS
Corporation
|
|
|
|
/s/
Richard G. Cutter III
|
|
/s/
Vinod M. Khilnani
|
Richard
G. Cutter III
Vice
President, Secretary and General Counsel
|
|
Vinod
M. Khilnani
President
and Chief Executive Officer
|
|
|
|
Dated:
July 31, 2007
|
|
Dated:
July 31, 2007
|