Business Context and Reporting Period
Company: CTS Corporation (CTS)
Filing Type: Form 8-K (Current Report)
Date of Report: February 26, 1999
Event: Acquisition of the Component Products Division (CPD) of Motorola, Inc. by CTS Wireless Components, a wholly-owned subsidiary of CTS.
CTS acquired assets and assumed liabilities of Motorola's CPD to solidify its position as a major supplier of electronic component parts for the wireless communications industry. The acquired business will operate as CTS Wireless Components, with headquarters in Schaumburg, Illinois.
Key Financial Metrics and Transaction Details
- Acquisition Consideration:
- Cash paid at closing: $94 million.
- Debt assumed: $51 million (including pension obligations).
- Contingent payments: Up to $105 million over five fiscal years (1999–2003), based on CPD's results of operations. Annual caps are $25.4 million (1999), $27.4 million (2000), and $17.4 million for each of the following three years.
- Financing:
- Amended and Restated Credit Agreement established with a syndicate of lenders (Agent: NBD Bank, N.A.).
- Revolving loan commitment: $150 million.
- Term loan commitment: $66 million.
- Swing line loan commitment: $10 million.
- Acquired Business Performance (CPD - Year Ended Dec 31, 1998):
- Revenue: $315 million (unaudited).
- EBITDA: $23 million (unaudited).
- Projected Performance (1999):
- Projected sales revenue for the acquired business: Approximately $240 million.
- Customer Concentration: Motorola is expected to account for approximately 17% of CTS' total annual sales post-acquisition, becoming CTS' largest single customer.
Material Changes and Strategic Impact
The acquisition represents a strategic shift to expand CTS' presence in the wireless communications market. Approximately 40% of CTS' annual sales now originate from cellular telephone manufacturers and wireless device makers. The company expects the acquisition to be accretive to earnings immediately, prior to realizing cost savings.
Cost Synergies: CTS estimates annual cost savings of $3 million to $5 million to be phased in over the next three years.
Operational Scale: The acquired division employs over 3,000 people (over 600 in the U.S.) across facilities in the U.S., China, and Taiwan. Total CTS employment now exceeds 7,300.
Guidance, Outlook, and Risks
- Outlook: Management anticipates substantial synergies and revenue growth within the communications market by leveraging existing relationships with telecom manufacturers.
- Financial Covenants: The new credit agreement imposes strict financial covenants, including a Fixed Charge Coverage Ratio (minimum 1.10 to 1.00 initially) and a Leverage Ratio (maximum 3.00 to 1.00 initially).
- Risks:
- Forward-looking statements regarding earnings accretion and cost savings are subject to uncertainties.
- High customer concentration risk with Motorola as the largest single customer.
- Contingent purchase price obligations depend on future operating results.
Investor Verification Checklist
- Verify the pro forma financial statements (to be filed within 60 days) to assess the impact of the $155 million total initial outlay ($94M cash + $51M debt) on CTS' balance sheet.
- Monitor the achievement of the projected $3–$5 million in annual cost savings over the next three years.
- Track the contingent payment obligations to Motorola to ensure they do not exceed the capped amounts based on CPD's performance.
- Review the dependency on Motorola as a customer (17% of sales) and the status of the long-term strategic supply agreement.
- Confirm compliance with the new credit agreement's leverage and fixed charge coverage covenants in upcoming quarterly reports.