Filed by CTS Corporation
Commission File No. 001-04639
333-117826
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: SMTEK International, Inc.
Commission File No. 001-08101
This document is being filed pursuant to Rule 425 under the Securities Act of
1933 and is deemed filed pursuant to Rule 14a-12 under the Securities Exchange
Act of 1934.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 1
CTS CORPORATION
NOVEMBER 14, 2004
12:30 P.M. CST
Moderator Welcome to the CTS Corporation conference call. At
this time, all participants are in a listen-only
mode. Later, we will conduct a question and answer
session. As a reminder, this conference is being
recorded today, Wednesday, November 17, 2004. I would
now like to turn the conference over to our host, Mr.
Donald Schwanz, President and CEO of CTS Corporation.
Please go ahead, sir.
D. Schwanz With me today are Vinod Khilnani, CTS Senior
Vice-President and Chief Financial Officer; Don
Schroeder, CTS Executive Vice-President; and Kirk
Waldron, President of SMTEK International. Thank you
all for joining us today.
Before beginning the business discussion, I would
like to remind our listeners that the conference call
contains forward-looking statements.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 2
These statements are subject to a number of risks and
uncertainties that could cause actual results to
differ materially from those expressed in the
forward-looking statements. Additional information
regarding these risks and uncertainties were set
forth in today's press release and more information
can be found in the company's SEC filings. To the
extent that today's discussion refers to any non-GAAP
measures relative to Regulation G, the required
explanations and reconciliation are available on our
Web site in the Investor Relations section.
This morning we announced a definitive agreement to
acquire SMTEK International, a NASDAQ listed
electronic manufacturing services company
headquartered in Moorpark, California just outside of
Los Angeles and having operations in Marlborough,
Massachusetts; Santa Clara, California; and Bangkok,
Thailand, in addition to Moorpark. The agreement,
which is subject to the approval of SMTEK
shareholders, provides that CTS will acquire all
outstanding shares of SMTEK with a combination of
cash and CTS stock, as well as assume the outstanding
debt of SMTEK.
Total consideration to be paid for each share of
SMTEK is initially set at $14.30 per share with 75%
of this to be paid in cash and the remainder in
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 3
CTS stock. However, the stock portion is subject to
adjustment up or down based upon the trading value of
CTS stock over the next 20 days. This adjustment is
collared such that the total consideration, including
cash and stock, can range between a low of $14.20 per
share and a maximum of $15 per share.
SMTEK revenues in their last reported 12 months,
which ended September 30, 2004, were $102.4 million
and operating earnings were $4 million. As I noted,
SMTEK is a provider of electronics manufacturing
services. Their business model focuses on providing
turnkey supply chain solutions to customers with high
mix needs for complex electronic products. Primary
markets served include medical, industrial and
security, aerospace and defense, and communications.
Customers include companies such as Medtronics,
Achem, L-3 Communications, Raytheon, Phillips, Haas,
Fuji Curra and Pentair.
SMTEK capabilities include design engineering and
test services, building material management, printed
circuit board assembly, and box build. SMTEK is an
extremely well run operation with an excellent
customer base and strong management team and it is an
excellent strategic fit with our EMS business.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 4
In assessing SMTEK as an EMS acquisition target, we
focused on three strategies. First, strengthening our
position as a provider of high mix turnkey EMS
services; second, accelerating our expansion into
industrial, medical and other growth markets that we
felt were underserved; and third, positioning
ourselves to more effectively serve the West Coast
market and customers. SMTEK provides an excellent fit
to all three of these strategies.
As regards the first strategy, to strengthen CTS as a
provider of high mix EMS services, SMTEK's business
model is to serve customers with high mix needs and
complex products and they do this extremely well.
They have key process certifications and know how in
medical and aerospace and a broad base of skills and
capabilities in complex printed circuit board
operations including design and test development
capability, and they have process expertise in
applying these skills and capabilities to the
benefits of customer with complex products and high
mix needs.
About 80% of their revenues are derived from PCBA
operations and 20% from box build. CTS is nearly the
reverse with about 80% of our revenues from box build
and 20% from printed circuit board operations. CTS
also
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 5
has extensive experience in direct ship service
models. In combining, we are bringing together
significant complimentary capabilities that can be
leveraged across the combined business to better
serve our customers and enable us to more readily
attract new customers.
Clearly, the acquisition of SMTEK facilitates the
second strategy, accelerating our expansion into new
markets. CTS's EMS business, as you may know, has
largely been focused on customers in enterprise
computing and communications, including networking.
In the last year or so, we have been aggressively
working to expand our EMS operations into new
markets. We have had considerable success, winning
over 15 new customers, including customers in the
medical, industrial, security and automotive markets.
In contrast, about 15% of SMTEK's sales are from the
communications market and only a couple of percent
from computing. Most of their sales come from the
medical, industrial and security, and aerospace
markets, so the acquisition of SMTEK strongly
positions us in several key markets where our
complimentary capabilities are ideally suited to the
customer.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 6
A third important strategy was to look for a strong
presence on the West Coast where CTS has no EMS
operating presence today. SMTEK, in contrast, has two
operations there, one in Moorpark, outside of L.A.,
and the other in Santa Clara, up in Northern
California. As a result of the combination, CTS will
have strong operational capability on both coasts of
the U.S. as well as in Europe and Asia. We believe
this strategic combination positions CTS as a very
strong global competitor for high mix EMS customers
and expect that we should outgrow the market.
We also see the potential for operational
efficiencies in the combination. These would come
from leveraging shared services, cross utilization of
resources such as engineering, capacity balancing,
and the wider use of global purchasing leverage. We
expect the deal to close in the first quarter next
year and to be accretive in the first year of
operation. Between now and the closing, we will be
contacting the customers of both companies to more
fully explain our plans and expectations. Clearly, we
believe this deal is very positive for both CTS and
SMTEK customers.
Additionally, we have established a joint integration
team that will plan the integration of the two
companies over the next several months thus allowing
a very quick start to the integration process once
the deal closes.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 7
I've asked Vinod Khilnani, our CFO, to provide some
additional color on the transaction from a financial
perspective.
V. Khilnani Thanks, Don. As stated earlier, CTS announced this
morning a definitive agreement to acquire all
outstanding shares of SMTEK at a price between $14.20
and $15 per share plus assumption of all of its
outstanding debt obligations. SMTEK has total
outstanding shares of approximately 3.12 million,
which include the equivalent shares of all
outstanding options using the treasury method of
calculation. The transaction will, therefore, have a
total equity valuation in the range of $44.3 million
and $46.8 million. Assuming the current level of debt
obligation of around $15 million, this will give us
an estimated total enterprise value in the range of
$59 million and $62 million.
The cash component of this transaction is expected to
be approximately $49 million with stock components of
approximately $10 million to $12 million in value.
Please note that if we assume a CTS stock price of
$13.50 this is expected to translate into 800,000 to
900,000 shares of CTS common stock, or less than 2.5%
of our total outstanding diluted common shares.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 8
Funding for the total cash component of approximately
$50 million, which includes paying off all of the
SMTEK debt obligations, is expected to come primarily
from our current cash balances. Our debt to capital
ratio, therefore, is expected to remain at the lower
end of our target range of 20% to 30%. Please also
note that 80% to 90% of our existing revolving credit
facility is expected to remain unutilized and
available to fund other future needs.
We expect this transaction to be $0.02 to $0.03 per
share accretive in the first year. With that brief
comment and description, I will hand it back to you,
Don.
D. Schwanz Thank you, Vinod. We are very excited about this
acquisition and delighted to have SMTEK and all of
those employees who have worked to make SMTEK
successful join CTS. Now I will open the call to
questions.
Moderator Our first question comes from the line of Ray
Carpenter. Please state your company name followed by
your questions.
R. Carpenter First question is could you provide a little more
detail into the integration plans as far as IT
systems and what have you? I think SMTEK's on a
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 9
common IT system right now, but could you provide
more detail into that and what your plans are there?
D. Schwanz Ray, there is a lot of this that still has to be
worked out. As I said, we'll be putting together an
integration team over the next week. That team will
address all of those aspects that are typical to
putting two companies together, everything from
combining phone systems and how you mesh together the
accounting and get the information back and forth to
looking at processes and how we service customers and
how the various sites work back and forth with each
other. We don't have a lot of those details ironed
out at this point in time.
R. Carpenter The core business of SMTEK, are their operating
margins primarily superior to yours currently?
V. Khilnani They are equal to or better than our EMS business.
R. Carpenter There is going to be an opportunity once the combined
entities are together that you may see a normalized
improvement in operating margins for the business.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 10
D. Schwanz We may.
R. Carpenter The last question, did you see any synergies or any
opportunity to improve working capital management
maybe to free up some incremental cash in the near
term?
V. Khilnani I think at this point we are comfortable to say that
their working capital ratios are very similar to our
EMS business, so we don't see any major change from
that point of view.
R. Carpenter No overlap of customers?
D. Schwanz Essentially, no; one minor overlap.
R. Carpenter Thank you, guys.
Moderator Our next question comes from the line of Scott
Merlis. Please go ahead with your question.
S. Merlis Congratulations. A question about marketing synergy
and maybe manufacturing synergy, the acquisition gets
you much deeper into medical
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 11
and industrial. Can that translate to winning more
medical and industrial customers into your existing
facilities elsewhere?
D. Schwanz Absolutely.
S.Merlis The fact that you have West Coast facilities now, are
there any existing customers that might need those
facilities on the West Coast? I'm looking for
marketing synergies and manufacturing synergies.
D. Schwanz Let me take them a piece at a time. We already have
customers that are from the industrial markets,
medical markets, security markets, but in terms of
the percent of our business, it's smaller. We do work
in those markets. We have experience dealing with
those kinds of customers, and as I mentioned, those
markets are the primary markets for SMTEK.
What we do is reinforce the strength and capabilities
that we have with the customers in those markets. I
think there is going to be a lot of synergy from that
standpoint. We have different kinds of design
strengths. As I mentioned, we've got direct ship
capability. We can bring those complimentary
strengths to the customer sets and I think it will
make us much more competitive and allow us to go out
and capture a lot of new business.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 12
Except from a medical certification standpoint, we
can put the business just about anywhere to satisfy
the customers and we certainly can get the medical
certifications that we would need if a customer
wanted to use another one of our facilities.
To your second part of your question, part of our
business model is a concept of working locally with
the customer to do their new product integration, but
then having the capability of doing fulfillment for
them in the U.S., in Europe, in Asia, basically
around the globe. As you know, Scott, we do that for
a number of customers today. You get companies that
are multi-national and serve markets around the
world, and that is a real attractive proposition to
them. To the extent that we've got customers today
that want to take advantage of having completion or
their products done on the West Coast or in any one
of SMTEK's facilities, we're readily able to handle
that kind of transition if it serves our customers
better.
S. Merlis Because there is room in the plants.
D. Schwanz Yes.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 13
S. Merlis Did you mention Bangkok, or was I hearing things?
D. Schwanz No, I did mention Bangkok.
S. Merlis What is the significance of that? What is the
opportunity there, if any?
D. Schwanz They have a facility and an operation in Bangkok
right now. I'm not sure I understand your question.
S. Merlis How can that be leveraged? In other words, when you
moved to Singapore it opened up a lot of new business
for you in that region of the world. Does Bangkok
open up new business for you for Thailand or other
parts of Asia? How big is it or how big can that be?
D. Schwanz I think it will open up other opportunities. It's got
a medical certification.
S. Merlis Thank you very much. I appreciate your answers
Moderator Our next question comes from the line of Lee Zeltser.
Please go ahead with your question.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 14
L. Zeltser Guys, question on your business mix. First off, the
company is increasingly prone in the direction of EMS
now comprising the majority of your revenues. Can you
talk about your plans for the business mix going
forward?
V. Khilnani Lee, the business mix between our two segments is
obviously going to change with this acquisition in
the short and medium term. If you layer SMTEK
revenues on top of ours and look back the last couple
of quarters, our mix of EMS business will go from 50%
of the company to approximately 60% of the company.
We already stated that the profitability of SMTEK is
equal to or higher than our EMS business, so from a
segment point of view, it will improve the
profitability.
Overall, if you combine the two businesses with
higher mix of EMS business, there may be a slight
negative impact on the operating margin percent, but
as you know, we had stated earlier that because of
the less capital intensity of this business our
return on assets numbers would not be affected
adversely. Actually, it will improve with the numbers
we have for SMTEK, so that is a positive.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 15
L. Zeltser To follow up on that, you mentioned in the short to
medium term it will be a little bit more than half of
the revenue base. Directionally, is the company
looking to build itself a larger presence in EMS than
the component business, or is this kind of a
temporary situation?
D. Schwanz We don't look at it that way that we're trying to
drive the EMS business to some certain percentage or
the component sensors to a different percentage. We
take the various markets that we serve with the
products and the technology that we have and we
pursue strategies intended to grow those pieces of
the business profitably as rapidly as we can on a
sustained basis. As you know from the things that
we've said in the marketplace in the past, if you
looked at the automotive market that we've served
with our sensors and components, we're seeing
extremely strong growth there and expect to continue
to do that.
In the components markets, we've got some markets
that are showing pretty rapid growth and some others
that we have chosen to de-emphasize, so on aggregate
that part of it is not growing quite as fast, but
that doesn't say anything about our intent at all.
You'll get slightly different growth factors, but
there are clearly opportunities that we like in the
sensors and components side of the business, as well
as the EMS side of the business.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 16
That's why we've done this because we see it as a
real attractive opportunity for the company.
L. Zeltser You mentioned some of the cost synergies, in
particular, give us a sense of those size of those
synergies and how long it might take to achieve them.
V. Khilnani Lee, they may be substantial, but at this point, we
are not spelling those out. There are some which are
obvious that tempt at being a publicly traded
company. Some of those costs are going to go away. We
believe there are other opportunities, but at this
point, we are not quantifying them.
L. Zeltser Are some of the assumptions already baked into your
accretion number, or is that basically not in the
formula at this point?
V. Khilnani Some very conservative assumptions have been baked
into our accretion assumptions. The other thing I
would highlight is that included in the accretion for
the first year we have also baked in certain
assumptions for integration costs, which only will be
there in the first year but will not be there beyond
that, so those have also been baked into our numbers.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 17
L. Zeltser Presumably, it sounds like some of the cost synergy
assumptions are pretty conservative and there could
be upside to that accretion number.
V. Khilnani Beyond the first year there may be upside.
L. Zeltser Thanks very much.
Moderator Our next question comes from the line of Steven
Dayan. Please go ahead with your question.
S. Dayan I have a couple of questions concerning the
transaction. The value of the deal is $14.30, 75% in
cash and 25% in stock. Is that correct as I
understand it?
V. Khilnani That is correct, and you know that we have talked
about a collar around it, too.
S. Dayan Can you explain in detail the collar and how it
works? Is it starting with today's pricing,
tomorrow's pricing? How does that work, and exactly
what are the collar points on the CTS stock?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 18
V. Khilnani That is a good question. The final price will be
determined by starting from a base of $14.30, as we
talked about, and then adjusting it within a collar
of $14.20 on one end and $15 on the other. This
adjustment is calculated by taking 25% of change in
the average CTS stock price in the next 20 days from
the average of the last 20 days. The last 20 days
average we already know is $13.43. For example, if in
the next 20 days the volume rated average price of
CTS stock is up $1 to say $14.43 then 25% of that $1
change, or $0.25, will get added to the $14.30 base
to arrive at the final price of $14.55.
S. Dayan When does that day start, tomorrow or today?
D. Schwanz Today. One clarification is 20 trading days.
S. Dayan Then does it become a fixed ratio at that point?
V. Khilnani At that time, the value gets determined and then we
would go 20 days prior to the closing and we will
take the average price of CTS stock at that point,
which will then determine the ratio.
S. Dayan Is there also going to be an election and a
proration?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 19
V. Khilnani Say some more. What do you mean by that?
S. Dayan If someone wants to elect all stock or someone wants
to elect all cash, is that a possibility?
V. Khilnani No. It is predetermined at 75% cash and 25% in CTS
stocks.
S. Dayan Can you give a little bit better timeline on when you
expect to close the deal?
V. Khilnani We are estimating that to take place sometime in the
February timeframe next year.
S. Dayan What special approvals are required?
V. Khilnani S-4. I don't believe there is any Hart-Scott
requirement, and shareholder approval from SMTEK
shareholders.
S. Dayan Thank you very much.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 20
Moderator Our next question comes from the line of Kevin
Kessell. Please go ahead with your question.
K. Kessell On SMTEK's medical side, is it Class Two certified or
Class Three, or both?
D. Schwanz I think it is Class Three.
K. Kessell It is up to Class Three in ...?
D. Schwanz Yes. I'm sorry. I misspoke. It is Class Two.
K. Kessell In terms of the biggest medical customer, it seemed
like a year ago that was Phillips at close to 17% of
sales and then in the most recent fiscal year it was
below 10%. How is the relationship with Phillips
medical? Is it still strong because we were under the
impression that they were consolidating their EMS
supplier down dramatically?
D. Schwanz No, it is still strong. We are still doing the same
lines of business that we were before.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 21
K. Kessell Is that in MRI? What products are you involved in?
V. Khilnani Portable defibulators.
K. Kessell You guys had mentioned, Don, I think earlier that
you're going to be going to the major customers now
and explaining to them the integration process. Had
you gone to any of the major customers ahead of this
deal being announced to get a feel for reaction?
D. Schwanz No.
K. Kessell What was the capacity utilization in the most recent
period?
D. Schwanz Domestically I would say it was approximately 40% to
50% maximum. Overseas, it was probably 90%. In fact,
today or tomorrow we are having our opening ceremony
on the expansion of our building in Thailand that
will double its size and certainly increase our
capacity there.
K. Kessell How large is Thailand? It seems like it was only 11%
or so of revenue.
D. Schwanz In terms of the square footage?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 22
K. Kessell In terms of square footage and SMT lines?
D. Schwanz In terms of square footage, it is approximately
44,000 square feet as of today.
K. Kessell That has doubled from 22,000 square feet or so. In
terms of SMT lines?
D. Schwanz In terms of SMT lines, by the early January timeframe
we'll be up to three lines.
K. Kessell If I heard correctly, it's qualified for medical. Is
that its predominant focus, or is it broader?
D. Schwanz It is broader than that. We also do industrial test
and controls out there as well as some telecom. In
terms of the medical certification, the 1345 out
there will not be accomplished for probably another
couple of weeks to four weeks.
K. Kessell In terms of the industrial automation customers, I
think the largest one appears to be Haas. What are
the other customers there because that is the biggest
segment for SMTEK?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 23
D. Schwanz Pentair Pool Products would be considered industrial
test and controls. I don't have a list in front of
me.
K. Kessell Would Raytheon and those be in the defense aerospace?
D. Schwanz Yes, they would be security and defense. MicroLES
would also be industrial test and controls.
K. Kessell The other defense besides Raytheon, I don't know if I
heard Don mention any others in the beginning. Was it
maybe L-3?
D. Schwanz We do L-3. We lump it together as a security and
defense. We do several different product lines for
L-3, one of them in the cockpits of surveillance
systems, as well as a security system in airport
scanners.
K. Kessell On the components side, Don, do you see any cross
selling opportunities in terms of selling CTS
components into some of SMTEK's existing customers?
D. Schwanz Certainly.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 24
K. Kessell Is there a particular end market that you think is
more attractive, or right now does it look like a
broad opportunity? How would you define it?
D. Schwanz I don't think that there is an end market that
obviously jumps out at me from that standpoint.
K. Kessell Last question for Vinod, you mentioned purchase
prices in terms of cash will be about $49 million.
You don't plan to use a revolver even though you
recently increased the revolver, I think, to $75
million. That would leave you guys with cash on the
balance sheet of virtually only a few million
dollars. What is the reason for not wanting to use
the revolver at this point in time?
V. Khilnani We, frankly, look at the revolver and our cash as
intermingled to some extent because we don't keep any
cash. As soon as we have cash, we sweep it into the
bank accounts. I look at my revolver capacity and
cash in hand as really a joint pool of liquid assets
for us.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 25
K. Kessell In terms of keeping cash on the balance sheet, you're
saying it's the same way. If you had a zero cash it
wouldn't be concerning to you as long as the revolver
was fully available for use.
V. Khilnani That is correct.
K. Kessell Thank you very much.
Moderator Our next question comes from the line of John
Franzreb. Please go ahead with your question.
J. Franzreb I just want to confirm, you said that capacity
utilization was 40% to 50% domestically for SMTEK?
D. Schwanz Yes.
J. Franzreb Looking at the K, it looks like their industrial
instrumentation revenue is up nearly 45% from '03 to
'04. Could you provide some color on what's driving
that?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 26
D. Schwanz Two-fold, we have landed some new business throughout
the year, as well as our established customer base
has also increased orders. It really has been a
two-fold positive event for us.
J. Franzreb There is nothing particularly large that stands out
on that mix?
D. Schwanz No, not that hasn't already been mentioned.
J. Franzreb Thank you.
Moderator Our next question comes from the line of Ron Vannuki.
Please go ahead with your question.
R. Vannuki From the standpoint of the SMTEK shareholders, is
there going to be a fairness opinion issued in
connection with the pricing of this acquisition?
D. Schwanz Yes, there will be, and it was actually. That was
part of getting to where we got yesterday.
R. Vannuki Is there a breakup fee built into the definitive
agreement?
D. Schwanz Yes, there is. It's 2% of the equity value.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 27
R. Vannuki One last question, Kirk, are the control shareholders
not given any election or proration the same as the
rest of the shareholders?
K. Waldron All shareholders are treated equally the same.
R. Vannuki Thank you.
Moderator Our next question comes from the line of John
McManus. Please go ahead with your question.
J. McManus Could you tell us what kind of steps you've taken
there to lock in key management of SMTEK? Are there
contracts involved there in locking this management
in?
D. Schwanz We have employment agreements with them going
forward, yes.
J. McManus How long would they run?
D. Schwanz It varies.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 27
J. McManus Could you tell us what the capacity utilization is of
the CTS offshore plants?
D. Schwanz From the EMS business perspective, I assume that's
your question, the operation in Tangen is 40% to 50%.
We just finished an expansion over there, which added
capacity. We had been at our capacity limit until we
just added that. Singapore is 70%, that kind of
range. The Scotland facility is more 40% to 50%
range.
M Also New Hampshire.
J. McManus Is there any thought there in looking at synergies of
closing any plants?
D. Schwanz We have no plans to do that at this point. We looked
at the synergies from a geographic standpoint and a
different way. We see a lot of opportunities to go
capture new customers and to grow the business and
believe that the complimentary capabilities will make
it very attractive to customers. The idea is to fill
them.
J. McManus Could you tell me which bankers were involved on both
sides of the transaction?
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 29
V. Khilnani On the CTS side there were no bankers, per se,
involved. On the SMTEK side, Duff and Phelps and
there was a small investment bank or investment
consulting, TW Associates.
J. McManus Thank you.
Moderator Our next question comes from the line of Amy Yunker.
Please go ahead with your question.
A. Yunker Just a couple of quick questions for Kirk. First,
looking at the last couple of quarters, the gross
margins have been somewhat volatile. Can you just
help us understand what has been happening there? Is
it more a function of seasonality, or is it
inefficiencies resulting from the number of new
programs you've won, or something else that is
happening? What do you envision as a sustainable
long-term goal?
K. Waldron What we have said before in the comments that we have
made about our gross margin has been that it is
certainly subject more to a product mix to the extent
that we have any one customer in a quarter. I
wouldn't suggest it is seasonality as much as it is
just product mix, but that we certainly
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 30
believe and we have continued to see double-digit
gross margins. I think from June to September it went
from approximately 13.5% or 14% down to about 12%. I
think that on a stand-alone basis we could certainly
expect to see some continued variance in that line
but nothing dramatic in either direction.
A. Yunker You would think at least 12% going forward would be
reasonable, and possibly higher?
K. Waldron I didn't say that.
V. Khilnani I don't think we should make any forward-looking
statements.
A. Yunker Can you tell us what the status is for getting the
sub-lease for your Poway, California facility? I
think that has been vacant for a few months at this
point.
K. Waldron We are in the final throes of finishing that off.
We've reached an agreement in principle, and quite
frankly, if it hadn't been for the distraction the
last couple of days, I think I could have brought
that to
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 31
fruition. That is something I think we're going to
have to turn our attention back to in the next day or
two.
A. Yunker When does your lease expire on that facility?
K. Waldron A long time. I don't know, five or six years out.
A. Yunker Thank you.
Moderator Our next question comes from the line of Steve
Gerbal. Please go ahead with your question.
S. Gerbal This is Steve Gerbal from Chicago Capital Management.
Is there going to be an opportunity for shareholders
to elect between the cash and stock, or are you
simply going to get 75% cash and 25% of your book?
V. Khilnani I think it's fixed, that 75% cash and 25% CTS stock.
S. Gerbal There will be no election opportunity for
shareholders.
V. Khilnani No.
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 32
S. Gerbal Thank you.
Moderator We have a follow up question from the line of Ron
Vannuki. Please go ahead with your question.
R. Vannuki When you mentioned the name of the bankers involved,
is there any possibility that TW Associates is an
affiliate of the controlling shareholder of SMTEK?
K. Waldron No, completely unrelated. It's just a coincidence.
R. Vannuki Thanks, Kirk.
Moderator There are no further questions at this time. Sir,
please go ahead.
D. Schwanz We'll end the conference call then. I thank all of
those that called in.
Moderator Ladies and gentlemen, this conference will be
available for replay today after 5:00 p.m. central
time through November 24th. You may access the AT&T
Teleconference Replay System at any time by dialing
1-800-475-
CTS CORPORATION
MODERATOR: VINOD KHILNANI
NOVEMBER 17, 2004/12:30 P.M. CST
PAGE 33
6701 and entering the access code 757237.
International participants dial 320-365-3844. That
concludes our conference for today. Thank you for
your participation and for using AT&T Executive
Teleconference.
SECURITIES LAW LEGENDS
CTS Corporation intends to file with the Commission a registration statement on
Form S-4 that will include a proxy statement and a prospectus and other relevant
documents in connection with the proposed transaction. In addition, CTS
Corporation will publish and make available to shareholders of SMTEK
International, Inc. and file with the Commission, a prospectus. Investors and
security holders are urged to carefully read the prospectus regarding the
acquisition when it becomes available because it will contain important
information on which to exclusively base their investment decision. Investors
and security holders of SMTEK International, Inc. are urged to read the proxy
statement and prospectuses and other relevant materials when they become
available because they will contain important information about CTS Corporation
and SMTEK International, Inc. and the proposed transaction. Investors and
security holders may obtain a free copy of these materials when they are
available and other documents filed with the Commission at its Web site at
www.sec.gov. Investors and security holders also may obtain a free copy of these
materials when they are available and other documents filed with the Commission
by directing a written request to CTS Corporation, 905 West Boulevard North,
Elkhart, Indiana 46514, Attention: Corporate Secretary.
CTS Corporation and its respective executive officers and directors may be
deemed to be participants in the solicitation of proxies from the SMTEK
International, Inc. stockholders with respect to the proposed transaction.
Information regarding the interests of these officers and directors in the
proposed transaction will be included in the proxy statement and prospectuses.