UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _________________ For Quarter Ended Commission File Number March 30, 1997 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 905 West Boulevard North Elkhart, IN 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219)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 and 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_______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 18, 1997: 5,228,396 Page 1 of 10 CTS CORPORATION AND SUBSIDIARIES INDEX Page No. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Earnings - For the Three Months Ended March 30, 1997, and March 31, 1996 3 Condensed Consolidated Balance Sheets - As of March 30, 1997, and December 31, 1996 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended March 30, 1997, and March 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 9 Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES 10 Page 2 of 10 Part I. -- FINANCIAL INFORMATION Item 1. Financial Statements CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS UNAUDITED (In thousands of dollars, except per share amounts) Three Months Ended March 30, March 31, 1997 1996 Net sales $91,269 $80,186 Costs and expenses: Cost of goods sold 65,978 60,387 Selling, general and administrative expenses 11,824 10,952 Research and development expenses 2,974 2,260 Operating earnings 10,493 6,587 Other expenses (income): Interest expense 263 436 Other (808) (855) Total other expenses (income) (545) (419) Earnings before income taxes 11,038 7,006 Income taxes 4,084 2,592 Net earnings $ 6,954 $ 4,414 Net earnings per share $ 1.32 $ .83 Cash dividends declared per share $ .18 $ .15 Average common and common equivalent shares outstanding 5,267,396 5,294,933 See notes to condensed consolidated financial statements. Page 3 of 10 Part I. -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) March 30, December 31, 1997 1996* ASSETS (Unaudited) Current Assets Cash $ 46,556 $ 44,957 Accounts receivable, less allowances (1997--$669; 1996--$622) 54,654 43,984 Inventories--Note C 37,197 38,761 Other current assets 5,500 3,787 Deferred income taxes 6,712 6,712 Total current assets 150,619 138,201 Property, Plant and Equipment, less accumulated depreciation (1997--$132,386; 1996--$133,286) 56,919 56,103 Other Assets Goodwill, less accumulated amortization (1997--$8,531; 1996-$8,361) 3,861 4,039 Prepaid pension 51,826 50,152 Other 757 877 Total other assets 56,444 55,068 $263,982 $249,372 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term obligations $2,416 $2,427 Accounts payable 22,965 17,146 Accrued liabilities 35,793 31,818 Total current liabilities 61,174 51,391 Long-term Obligations 11,210 11,220 Deferred Income Taxes 16,146 16,146 Postretirement Benefits 4,315 4,383 Shareholders' Equity: Common stock-authorized 8,000,000 shares without par value; issued 5,807,031 shares 33,401 33,540 Retained earnings 150,125 144,112 Cumulative translation adjustment 349 1,373 183,875 179,025 Less cost of common stock held in treasury: 1997--579,635 shares; 1996--582,075 shares 12,738 12,793 Total shareholders' equity 171,137 166,232 $263,982 $249,372 *The balance sheet at December 31, 1996, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. Page 4 of 10 Part I. -- FINANCIAL INFORMATION CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars) Three Months Ended March 30, March 31, 1997 1996 Cash flows from operating activities: Net earnings $ 6,954 $ 4,414 Depreciation and amortization 3,768 3,250 (Increase) decrease in: Accounts receivable (10,670) (2,153) Inventories 1,564 784 Other current assets (1,713) (1,114) Prepaid pension asset (1,674) (1,309) Other 43 (105) Increase in: Accounts payable & accrued liabilities 9,794 4,624 Total adjustments 1,112 3,977 Net cash provided by operating activities 8,066 8,391 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 6 128 Capital expenditures (4,833) (4,247) Net cash used in investing activities (4,827) (4,119) Cash flows from financing activities: Payments of long-term obligations (1) Increase in notes payable 1,365 Dividend payments (940) (783) Other (150) 113 Net cash (used in) provided by financing activities (1,090) 694 Effect of exchange rate changes on cash (550) 66 Net increase in cash 1,599 5,032 Cash at beginning of year 44,957 37,271 Cash at end of period $46,556 $42,303 Supplemental cash flow information Cash paid during the period for: Interest $ 278 $ 429 Income Taxes--Net $ 852 $ 1,179 See notes to condensed consolidated financial statements. Page 5 of 10 Part I. -- FINANCIAL INFORMATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 30, 1997 NOTE A--BASIS OF PRESENTATION The accompanying condensed interim consolidated financial data is unaudited; however, in the opinion of management, the interim data includes all adjustments considered necessary for a fair presentation of the results for the interim period. Operating results for the three-month period ended March 30, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's 1996 Annual Report on Form 10-K. NOTE B--RECLASSIFICATIONS Certain reclassifications have been made to prior periods to conform to the classifications adopted in 1997. NOTE C--INVENTORIES The components of inventory consist of the following: (In thousands) March 30, December 31, 1997 1996 Finished goods $ 6,838 $ 8,504 Work-in-process 16,374 17,138 Raw material 13,985 13,119 $37,197 $38,761 NOTE D--LITIGATION and CONTINGENCIES Contested claims involving various matters, including environmental claims brought by government agencies, are being litigated by CTS, both in legal and administrative forums. In the opinion of management, based upon currently available information, adequate provision for potential costs has been made, or the costs which could ultimately result from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Page 6 of 10 Part I. -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Material Changes in Financial Condition: Comparison of March 30, 1997, to December 31, 1996 The following table highlights significant changes in balance sheet captions and ratios and other information related to liquidity and capital resources: (Dollars in thousands) March 30, December 31, Increase 1997 1996 (Decrease) Cash $ 46,556 $ 44,957 $1,599 Accounts receivable, net 54,654 43,984 10,670 Inventories, net 37,197 38,761 (1,564) Current assets 150,619 138,201 12,418 Accounts payable 22,965 17,146 5,819 Current liabilities 61,174 51,391 9,783 Working capital 89,445 86,810 2,635 Current ratio 2.46 2.69 (.23) Interest bearing debt 13,408 13,428 (20) Net tangible worth 167,276 162,193 5,083 Ratio of interest bearing debt to net tangible worth .08 .08 -- From December 31, 1996, to March 30, 1997, working capital of CTS Corporation and its subsidiaries ("CTS" or "Company") increased $2.6 million. The improved working capital position primarily reflects a general increase in business activity which resulted in higher cash and accounts receivable balances. These effects were offset by related, but lower, increases in accounts payable and accrued liabilities. The current ratio decreased due to the relative increase in current liabilities, primarily accounts payable. Capital expenditures were $4.8 million during the first quarter, compared with $4.2 million for the same period a year earlier. These capital expenditures were primarily for increased manufacturing capacity, new products and manufacturing improvement programs. Page 7 of 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Material Changes in Results of Operations: Comparison of First Quarter 1997 to First Quarter 1996 The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ending March 30, 1997, and March 31, 1996: (Dollars in thousands) March 30, March 31, Increase 1997 1996 (Decrease) Net sales $91,269 $80,186 $11,083 Gross earnings 25,291 19,799 5,492 Gross earnings as a percent of sales 27.71% 24.69% 3.02% Selling, general and administrative expenses 11,824 10,952 872 Selling, general and administrative expenses as a percent of sales 12.96% 13.66% (0.70)% Research and development expenses 2,974 2,260 714 Operating earnings 10,493 6,587 3,906 Operating earnings as a percent of sales 11.50% 8.21% 3.29% Interest expense 263 436 (173) Earnings before income taxes 11,038 7,006 4,032 Income taxes 4,084 2,592 1,492 Income tax rate 37.00% 37.00% Net sales increased by $11.1 million, or 13.8% from the first quarter of 1996. Sales increases occurred principally as a result of increased customer demand for interconnect, automotive sensor, resistor networks and microelectronics products in the North American and European markets. Gross earnings improved primarily due to the sales and production volume increases, as well as continuing efforts to control manufacturing expenses. Selling, general and administrative expenses in dollars increased slightly as a result of the increased business levels, but decreased as a percentage of sales due to continued expense controls. Research and development expenses increased 31.6% as the Company continued investment efforts in new product development and improvements. Page 8 of 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Material Changes in Results of Operations: Comparison of First Quarter 1997 to First Quarter 1996 (Continued) The increase in operating earnings is principally due to the higher sales volume, higher absorption of manufacturing expenses and continued control of operating expenses. Part II -- OTHER INFORMATION Item 1. Legal Proceedings CTS is involved in litigation and in other administrative proceedings with government agencies regarding the protection of the environment, and other matters, the results of which are not yet determinable. In the opinion of management, based upon currently available information, adequate provision for anticipated costs has been made, or the ultimate costs resulting from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Item 6. Exhibits and Reports on Form 8-K a. Exhibits (99) Additional exhibit Severance Agreement, dated April 11, 1997, between CTS Corporation and Joseph P. Walker, Philip T. Christ, Stanley J. Aris, Jeannine M. Davis, James L. Cummins, James N. Hufford, Donald R. Schroeder, George T. Newhart, Gary N. Hoipkemier, Ian M. Archer, James K. C. Chen, R. Clayton Crum, George A. Harding, Timothy L. Hartigan, William J. Kaska and John D. Watson. b. Forms 8-K None Page 9 of 10 SIGNATURES 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/ Jeannine M. Davis /s/ Stanley J. Aris Jeannine M. Davis Stanley J. Aris Vice President, Secretary Vice President Finance and General Counsel and Chief Financial Officer Dated: April 22, 1997 Page 10 of 10