-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TN5FYVq6lDMi9+yMH6EiaX4bWyDicloNB+fgkAENjrv+ua5niaTFEiFkrO9CD7qH Q+vIlMmsbNyNlW/x2PfPzQ== 0000026058-06-000015.txt : 20060227 0000026058-06-000015.hdr.sgml : 20060227 20060227162047 ACCESSION NUMBER: 0000026058-06-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060227 DATE AS OF CHANGE: 20060227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04639 FILM NUMBER: 06646871 BUSINESS ADDRESS: STREET 1: 905 WEST BOULEVARD NORTH CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 5742937511 MAIL ADDRESS: STREET 1: 905 W BLVD NORTH CITY: ELKHART STATE: IN ZIP: 46514 10-K 1 form10-k.htm CTS CORPORATION FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2005 CTS Corporation Form 10-K for the Period Ended December 31, 2005


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2005

OR

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-4639

CTS CORPORATION
(Exact name of registrant as specified in its charter)

 
Indiana
  
35-0225010
  
 
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification Number)
  

 
905 West Boulevard North,
      
 
Elkhart, IN
  
46514
  
 
(Address of principal executive offices)
  
(Zip Code)
  

Registrant’s telephone number, including area code: 574-293-7511

Securities registered pursuant to Section 12(b) of the Act:

 
Title of Each Class
  
Name of Each Exchange on Which Registered
  
 
Common stock, without par value
 
New York Stock Exchange
  

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes o No x

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   Noo 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filed, 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

The aggregate market value of the voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS common stock on July 1, 2005, was approximately $438.3 million. There were 35,877,635 shares of common stock, without par value, outstanding on February 23, 2006.


DOCUMENTS INCORPORATED BY REFERENCE

(1)
Portions of the 2005 Annual Report to shareholders are incorporated herein by reference in Parts I and II.

Portions of the Proxy Statement to be filed for the annual meeting of shareholders to be held on or about
 
May 3, 2006 are incorporated by reference in Part III.





ITEM
 
PAGE
 
PART I
  
1.
1
1A.
8
1B.
14
2.
15
3.
16
4.
16
 
 
  
 
PART II
  
 
 
  
5.
17
6.
17
7.
17
7A.
18
8.
18
9.
18
9A.
19
9B.
19
     
 
PART III
  
     
10.
20
11.
21
12.
21
13.
22
14.
22
     
 
PART IV
  
     
15.
23
 
 
  
27


i






CTS Corporation (CTS) is a global manufacturer of electronic components and sensors and a supplier of electronics manufacturing services. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. The principal executive offices are located in Elkhart, Indiana. CTS maintains a website at http://www.ctscorp.com. Filings on Forms 10-K, 10-Q and 8-K and amendments thereto made by CTS with the Securities and Exchange Commission may be obtained, free of charge, on this website, as soon as reasonably practicable after filing.

CTS designs, manufactures, assembles, and sells a broad line of electronic components and sensors and provides electronics manufacturing services (EMS) primarily to original equipment manufacturers (OEMs), for the automotive, computer, communications, medical, and industrial markets. CTS operates manufacturing facilities located throughout North America, Asia, and Europe and serves major markets globally. Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives, and distributors.
 
Effective January 31, 2005, CTS acquired 100% of the outstanding capital stock of SMTEK International, Inc. (SMTEK). The results of SMTEK’s operations have been included in the consolidated financial statements since that date. SMTEK is an EMS provider serving original equipment manufacturers in the medical, industrial, instrumentation, telecommunications, security, financial services, automation, aerospace, and defense industries. As a result of the acquisition, CTS expects to expand into new EMS markets, reduce customer concentrations, and increase its global footprint. SMTEK had four facilities located in Moorpark and Santa Clara, California; Marlborough, Massachusetts; and Bangkok, Thailand. Subsequent to the acquisition, CTS consolidated the Marlborough, Massachusetts facility into its Londonderry, New Hampshire facility. See further discussion of the acquisition in Note B, “Acquisition,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15(a)(1) and (2).
 

BUSINESS SEGMENTS AND PRODUCTS BY MAJOR MARKETS

CTS has two reportable business segments: 1) Electronics Manufacturing Services (EMS) and 2) Components and Sensors.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer. Additionally for some customers CTS provides full turnkey manufacturing and completion including design, bill-of-material, management, logistics, and repair.

Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies. Components and sensors consist principally of automotive sensors and actuators used in commercial or consumer vehicles; electronic components used in communications infrastructure and computer markets; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks, and potentiometers used to serve multiple markets and fabricated piezo-electric materials and substrates used primarily in medical and industrial markets.

Products from the EMS business segment are principally sold into the communications, computer, medical, and industrial OEM markets. Other smaller markets include OEM customers in consumer electronics, instruments and controls, defense/aerospace, and networking. Products from the Components and Sensors business segment are principally sold into three major OEM markets: 1) automotive, 2) communications, and 3) computer.


 
The following tables provide a breakdown of net sales by business segment and market in dollars and as a percent of consolidated net sales:


   
EMS
  
Components & Sensors
  
Total
  
(As a % of consolidated net sales)
 
2005
  
2004
  
2003
  
2005
  
2004
  
2003
  
2005
  
2004
  
2003
  
Markets
                                                        
Automotive
    
—
%
  
—
%
  
—
%
  
23
%
  
25
%
  
26
%
  
23
%
  
25
%
  
26
%
Communications
    
14
%
  
15
%
  
9
%
  
7
%
  
12
%
  
16
%
  
21
%
  
27
%
  
25
%
Computer
    
29
%
  
35
%
  
35
%
  
2
%
  
3
%
  
6
%
  
31
%
  
38
%
  
41
%
Medical
    
5
%
  
—
%
  
—
%
  
1
%
  
1
%
  
1
%
  
6
%
  
1
%
  
1
%
Industrial
    
8
%
  
—
%
  
—
%
  
—
%
  
—
%
  
—
%
  
8
%
  
—
    
—
  
Other
    
3
%
  
1
%
  
1
%
  
8
%
  
8
%
  
6
%
  
11
%
  
9
%
  
7
%
% of consolidated net sales
    
59
%
  
51
%
  
45
%
  
41
%
  
49
%
  
55
%
  
100
%
  
100
%
  
100
%


Net sales to external customers, segment operating earnings, total assets by segment, net sales by geographic area, and long-lived assets by geographic area, are contained in Note M, “Business Segments,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

General market conditions in the global automotive, communications, computer, medical, and industrial markets and in the overall economy affect the business of CTS. Any adverse occurrence that results in a significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could have a material adverse effect on our business, financial condition, and results of operations.


 
The following table identifies major products by their business segment and markets. Many products are sold into several OEM markets:


Product Description
Automotive
Market
Communications Market
Computer Market
Medical Market
Industrial Market
Other Markets
EMS:
Integrated Interconnect Systems and Backpanels, Including Final Assembly and Test
  
Ÿ
Ÿ
  
Ÿ
Ÿ
Complex Printed Circuit Board Assemblies
  
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Components and Sensors:
Ceramic Filters and Duplexers
Ÿ
Ÿ
Ÿ
    
Ÿ
Quartz Crystals, Clocks, Precision Oscillators and Frequency Modules
Ÿ
Ÿ
Ÿ
    
Ÿ
 
Automotive Sensors
Ÿ
          
 
Resistor Networks
Ÿ
Ÿ
Ÿ
    
Ÿ
 
ClearONE™ Terminators
  
Ÿ
Ÿ
    
Ÿ
DIP Switches and Potentiometers
Ÿ
Ÿ
Ÿ
    
Ÿ
 
Actuators
Ÿ
          
 
Piezoceramics Products
      
Ÿ
Ÿ
Ÿ




MARKETING AND DISTRIBUTION

Sales and marketing to OEMs, for both business segments, is accomplished through CTS sales engineers, independent manufacturers representatives, and distributors. CTS maintains sales offices in China, Hong Kong, Japan, Scotland, Singapore, Taiwan, and the United States. Approximately 86% of 2005 net sales was attributable to coverage by CTS sales engineers.

CTS sales engineers generally service the largest customers with application specific products. The engineers work closely with major customers in designing and developing products to meet specific customer requirements.

CTS utilizes the services of independent manufacturers’ representatives in the United States and other countries for customers not serviced directly by CTS sales engineers for both of its business segments. Independent manufacturers’ representatives receive commissions from CTS. During 2005, 11% of net sales was attributable to coverage by independent manufacturers’ representatives. CTS also uses independent distributors for customers in its Components and Sensors business segment. Independent distributors purchase component and sensor products from CTS for resale to customers. In 2005, independent distributors accounted for approximately 3% of net sales.


RAW MATERIALS

CTS utilizes a wide variety of raw materials and purchased parts in its manufacturing processes. The following are the most significant raw materials and purchased parts, identified by business segment:

EMS:
Power supplies and converters, prefabricated steel, printed circuit boards, passive electronics components and semiconductors, integrated circuits, connectors, cables, and modules.
   
Components and Sensors:
Conductive inks and contactors which contain precious metals (primarily silver and palladium), passive electronic components, integrated circuits and semiconductors, rare earths (for ceramic compositions), ceramic components, plastic components, molding compounds, printed circuit boards and assemblies, quartz blanks and crystals, wire harness assemblies, copper, brass, and steel-based raw materials and components.

These raw materials are purchased from several vendors, and except for certain semiconductors, rare earth, and conductive inks, CTS does not believe it is dependent upon one or a limited number of vendors. Although CTS purchases all of its semiconductors, rare earth, and conductive inks from a limited number of vendors, alternative sources are available. In 2005, substantially all of these materials were available in adequate quantities to meet CTS’ production demands.

CTS does not currently anticipate any raw material shortages that would slow production. However, the lead times between the placement of orders for certain raw materials and purchased parts and actual delivery to CTS may vary. Occasionally CTS might need to order raw materials in greater quantities and at higher than optimal prices to compensate for the variability of lead times for delivery.

Precious metal prices may have a significant effect on the cost and selling price of many CTS products, particularly some ceramic filters, sensors, resistor networks, and switches.



WORKING CAPITAL

Working capital requirements are generally dependent on the overall level of business activities. CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. CTS is not generally required to carry significant amounts of inventory in anticipation of rapid delivery requirements because most customer orders are custom built. CTS has “just-in-time” arrangements with certain customers and vendors to efficiently meet delivery requirements.

CTS carries raw materials, including certain semiconductors, work-in-process, and finished goods inventories which are unique to particular customers. In the event of reductions or cancellations of orders, some inventories may not be useable or returnable to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover a significant portion of the financial exposure of CTS for inventories that are unique to a customer. CTS does not customarily grant special return or payment privileges to customers. CTS’ working capital requirements and businesses reflect some seasonality and cyclicality. For example, the Components and Sensors business segment experiences lower third quarter sales, due to the automotive industry’s model year changeovers and summer shutdowns. The EMS business segment experiences higher fourth quarter sales in line with its industry, particularly from increased computing market demand.

PATENTS, TRADEMARKS, AND LICENSES

CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents and trademarks. CTS was issued 14 new U.S. patents in 2005 and currently holds in excess of 300 U.S. patents with hundreds of non-U.S. counterpart patents.

CTS has licensed the right to use several of its patents to both U.S. and non-U.S. companies. In 2005, license and royalty income was less than 1% of net sales. CTS believes its success is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee.

MAJOR CUSTOMERS

CTS’ 15 largest customers represented 61% of net sales in 2005, 69% of net sales in 2004, and 71% of net sales in 2003. This percentage is decreasing as the Company continues efforts to broaden its customer base. Sales to Hewlett-Packard Company (Hewlett-Packard) amounted to 28% of net sales in 2005, and 33% of net sales in each 2004 and 2003. Sales to Motorola, Inc. (Motorola) accounted for less than 10% of net sales in 2005 and 13% of net sales in each of 2004 and 2003.

EMS business segment revenues from Hewlett-Packard represented $173.3 million, or 48%, $177.3 million, or 66%, and, $151.8 million, or 72%, of the segment’s revenue for the years ended December 31, 2005, 2004, and 2003, respectively. EMS business segment revenues from Motorola were $40.3 million, or 13%, $60.9 million, or 23%, and $40.2 million, or 19%, of the segment’s revenue for the years ended December 31, 2005, 2004, and 2003, respectively.

Although the Company is making efforts to broaden its customer base, it depends on a small number of customers for a large portion of its business. Changes in the level of its customers’ orders have, in the past, had a significant impact on its operating results. If a major customer reduces the amount of business it does with CTS, or substantially changes the terms of that business, there would be an adverse impact on CTS’ operating results.

Additionally, CTS expects to continue to depend on sales to its major customers. Because CTS’ customers are under no obligation to continue to do business with the Company on a long-term basis, there is always the possibility that one or more customers may choose to work with a competitor and reduce their business with CTS. Customers may also reduce or delay their business with CTS because of economic or other conditions or decisions that reduce their need for CTS products or services. Since it is difficult to replace lost business on a timely basis, it is likely that CTS’ operating results would be adversely affected if one or more of its major customers were to cancel, delay, or reduce a large amount of business with CTS in the future. If one or more of its customers were to become insolvent or otherwise unable to pay for CTS’ products and/or services, CTS’ operating results, financial condition, and cash flows could be adversely affected.

 
ORDER BACKLOG

Order backlog may not provide an accurate indication of present or future revenue levels for CTS. For many components and sensors and EMS products, the period between receipt of orders and expected delivery is relatively short. Additionally, large orders from major customers may include backlog covering an extended period of time. Production scheduling and delivery for these orders could be changed or canceled by the customer on relatively short notice.

The following table shows order backlog by segment and in total as of January 29, 2006 and January 30, 2005. The increase in backlog in 2006 relates primarily to the acquisition of SMTEK in 2005 (refer to Note B, “Acquisition”, appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15(a)(1) and (2)).

 
($ in millions)
 
January 29, 2006
  
January 30, 2005
EMS
  
$
21.4
  
$
12.7
Components and Sensors
    
61.3
    
57.8
Total
 
$
82.7
  
$
70.5

Order backlog at the end of January 2006 will generally be filled during the 2006 fiscal year.


COMPETITION

In the EMS segment, CTS competes with a number of well-established U.S. and non-U.S. manufacturers on the basis of process capability, price, technology, quality, reliability, and delivery in the markets in which it participates. Some of its competitors have greater manufacturing and financial resources.  However, CTS generally does not pursue extremely high volume, highly price sensitive business, as do some of its larger competitors.  

In the Components and Sensors business segment, CTS competes with many U.S. and non-U.S. manufacturers principally on the basis of product features, price, technology, quality, reliability, delivery, and service. Most CTS product lines encounter significant global competition. The number of significant competitors varies from product line to product line. No one competitor competes with CTS in every product line, but many competitors are larger and more diversified than CTS. Some competitors are divisions or affiliates of CTS customers. Some competitors are also CTS customers for components and sensors, as well as EMS products.

In both the EMS and Components and Sensors business segments, some customers have reduced or plan to reduce their number of suppliers, while increasing the volume of their purchases. Most customers are demanding higher quality, reliability, and delivery standards from CTS as well as its competitors. These trends create opportunities for CTS, but also increase the risk of loss of business to competitors. CTS is subject to competitive risks that are part of the nature of the electronics industry, including short product life cycles and technical obsolescence.

CTS believes it competes most successfully in custom products manufactured to meet specific applications of major OEMs and with EMS products oriented toward high mix and low to medium volume outsourcing needs of OEMs.


NON-U.S. REVENUES

In 2005, 55% of net sales to external customers originated from non-U.S. operations compared to 63% in 2004 and 60% in 2003. The lower percentage of non-U.S. net sales in 2005, as compared to prior years, primarily results from the acquisition of SMTEK (refer to Note B, “Acquisition” appearing in notes to the consolidated financial statements as noted in the Index appearing under Item 15(a)(1) and (2)). At December 31, 2005, approximately 31% of total CTS assets were located at non-U.S. operations compared to 36% of total CTS assets at the end of 2004. A substantial portion of these assets, other than cash and equivalents, cannot readily be liquidated. CTS believes the business risks to its non-U.S. operations, though substantial, are normal risks for non U.S. businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations and expropriation. CTS’ non-U.S. manufacturing facilities are located in Canada, China, Mexico, Scotland, Singapore, Thailand, and Taiwan.

 
Net sales to external customers originating from non-U.S. operations for the EMS business segment were $203.4 million in 2005, compared to $187.0 million in 2004, and $132.3 million in 2003. Net sales to external customers originating from non-U.S. operations for the Components and Sensors business segment were $135.7 million in 2005 compared to $146.8 million in 2004, and $144.0 million in 2003. Additional information about net sales to external customers, operating earnings and total assets by segment, and net sales to external customers and long-lived assets by geographic area, is contained in Note M, “Business Segments,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).
 

RESEARCH AND DEVELOPMENT ACTIVITIES

In 2005, 2004, and 2003, CTS spent $17.1 million, $19.1 million, and $21.5 million respectively, for research and development. The reductions in research and development spending from 2003 to 2005 reflect savings due to changing business mix, organizational consolidation, and streamlining of research and development activities. Significant ongoing research and development activities continue in CTS’ Components and Sensors business segment, particularly for automotive products in support of growth initiatives. CTS’ research and development investment is primarily focused at expanded applications and new product development, as well as current product and process enhancements. Research and development expenditures in the EMS business segment are typically very low.

CTS believes a strong commitment to research and development is required for future growth. Most CTS research and development activities relate to developing new, innovative products and technologies, improving product flow, and adding product value to meet the current and future needs of its customers. CTS provides its customers with full systems support to ensure quality and reliability through all phases of design, launch, and manufacturing to meet or exceed customer requirements. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. CTS expenses all research and development costs as incurred.


EMPLOYEES

CTS employed 4,902 people at December 31, 2005, and 71% of these people were employed outside the United States. Approximately 263 CTS employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2005. One agreement which covers 43 employees is scheduled to expire in 2009 and the other which covers 220 employees is scheduled to expire in 2008. CTS employed 4,487 people at December 31, 2004.



ADDITIONAL INFORMATION

Information responsive to Item 401(b) of Regulation S-K is contained under the caption "Directors and Executive Officers of the Registrant" in Item 10 of this Annual Report on Form 10-K and is incorporated herein by reference.


The following are certain risk factors that could affect our business, financial condition and operating results. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause CTS’ actual results and condition to differ materially from those projected in forward-looking statements. Before you invest in CTS, you should know that making such an investment involves some risks, including the risks described below. The risks that are highlighted below are not the only ones that CTS faces. If any of the following risks actually occur, CTS’ business, financial condition or operating results could be negatively affected.
 
 
Because CTS currently derives a significant portion of its revenues from a small number of customers, any decrease in orders from these customers could have an adverse effect on CTS’ business, financial condition and operating results. 
 
CTS depends on a small number of customers for a large portion of its business, and changes in the level of its customers’ orders have, in the past, had a significant impact on its results of operations. CTS’ 15 largest customers represent a substantial portion of its sales, approximately 61% of net sales in 2005, 69% of net sales in 2004 and 71% of net sales in 2003. CTS’ two largest customers are Hewlett-Packard Company and Motorola, Inc., which represented approximately 28% and less than 10%, respectively, of its net sales in 2005. If a major customer significantly cancels, delays or reduces the amount of business it does with CTS, there could be an adverse effect on CTS’ business, financial condition and operating results. Such adverse effect likely would be material if one of CTS’ largest customers significantly reduced its amount of business. Significant pricing and margin pressures exerted by a key customer could also materially adversely affect CTS’ operating results. In addition, CTS generates significant accounts receivable from sales to its major customers. If one or more of CTS’ largest customers were to become insolvent or otherwise unable to pay or were to delay payment for services, CTS’ business, financial condition and operating results could be materially adversely affected.
 
 
CTS is subject to intense competition in the EMS industry. 
 
CTS competes against many providers of electronics manufacturing services. Some of its competitors have substantially greater manufacturing and financial resources and in some cases have more geographically diversified international operations than CTS. CTS’ competitors, such as Benchmark Electronics, Inc., Solectron, Inc., and Sanmina — SCI Corporation., include both large global EMS providers and smaller EMS companies that often have a regional, product, service or industry specific focus. CTS also faces competition from the manufacturing operations of its current and future OEM customers, which may elect to manufacture their own products internally rather than outsource the manufacturing to EMS providers. In addition, CTS could face competition in the future from other large global EMS providers, such as Celestica, Inc., Flextronics International Ltd. and Jabil Circuit, Inc., which currently provide services to some of CTS’ largest customers for different products, as well as competition from smaller EMS companies such as Plexus Corp., Reptron Electronics, Inc. and LaBarge, Inc. CTS may be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with significant offshore facilities located where labor and other costs are lower. Competition may intensify further if more companies enter the markets in which CTS’ operates. CTS’ failure to compete effectively could materially adversely affect its business, financial condition and operating results.
 
 
CTS may be unable to compete effectively against competitors in its Components and Sensors segment. 
 
CTS’ components and sensors segment operates in highly competitive industries that are characterized by price erosion and rapid technological change. CTS competes against many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research and development and marketing resources than CTS. Additionally, many of CTS’ customers are seeking to consolidate their business among one or more preferred or qualified suppliers. If any customer becomes dissatisfied with CTS’ prices, quality or timeliness of delivery, among other things, it could award future business or even move existing business to CTS’ competitors. Moreover, some of CTS’ customers could choose to manufacture and develop particular products themselves rather than purchase them from CTS. Increased competition could result in price reductions, reduced profit margins and loss of market share, each of which could materially adversely affect CTS’ business, financial condition and operating results. In addition, some of CTS’ competitors have engaged, and may in the future engage, in merger and acquisition transactions. Consolidations by competitors are likely to create entities with increased market share, customer bases, proprietary technology, marketing expertise and sales force size. These developments may materially adversely affect CTS’ ability to compete against these competitors. CTS cannot assure you that its products will continue to compete successfully with its competitors’ products, including OEMs, many of which are significantly larger than CTS and have greater financial and other resources than CTS.
 
 
CTS may be unable to keep pace with rapid technological changes that could make some of its products or processes obsolete before it realizes a return on its investment. 
 
The technologies relating to some of CTS’ products have undergone, and are continuing to undergo, rapid and significant changes. Specifically, end markets for electronic components and assemblies are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render CTS’ existing products obsolete and unmarketable before CTS can recover any or all of its research, development and commercialization expenses on capital investments. Furthermore, the life cycles of CTS’ products and the products CTS manufactures for others vary, may change and are difficult to estimate.
 
CTS’ future success will depend upon its ability to develop and introduce new products and product enhancements on a timely basis that keep pace with technological developments and emerging industry standards and address increasingly sophisticated requirements of CTS’ customers. CTS has incurred, and expects to continue to incur, expenses typical of the electronics industry associated with research and development activities and the introduction and promotion of new products. There can be no assurance that the expenses incurred will not exceed research and development cost estimates or that new products will achieve market acceptance and generate sales sufficient to offset development costs. CTS also cannot provide assurance that it will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products or product enhancements or that CTS’ new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. There can be no assurance that products or technologies developed by others will not render CTS’ products non-competitive or obsolete. If CTS is unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, CTS’ business, financial condition and operating results could be materially adversely affected.
 
 
CTS’ customers have canceled, and may in the future cancel, their orders, change production quantities or locations or delay production. 
 
CTS generally does not obtain firm, long-term purchase commitments from its customers, and has often experienced reduced lead times in customer orders. Customers cancel their orders, change production quantities and delay production for a number of reasons. Uncertain economic and geopolitical conditions have resulted, and may continue to result, in some of CTS’ customers delaying the delivery of some of the products CTS manufactures for them and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions or delays by a significant customer or by a group of customers have harmed, and may continue to harm, CTS’ results of operations by reducing the volumes of products manufactured by CTS, as well as by causing a delay in the recovery of its expenditures for inventory in preparation for customer orders and lower asset utilization resulting in lower gross margins.
 
In addition, customers may require that manufacturing of their products be transitioned from one facility to another to achieve cost and other objectives. Such transfers may result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and the inability to fulfill all orders at another. In addition, CTS makes significant decisions, including determining the levels of orders that it will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on its estimates of customer requirements. The short-term nature of CTS’ customers’ commitments and the changes in demand for their products reduce CTS’ ability to estimate accurately future customer requirements. This makes it difficult to schedule production and maximize utilization of CTS’ manufacturing capacity. Anticipated orders may not materialize and delivery schedules may be deferred as a result of changes in demand for CTS’ products or its customers’ products. CTS often increases staffing and capacity, and incurs other expenses to meet the anticipated demand of its customers, which cause reductions in its gross margins if customer orders are delayed or canceled. On occasion, customers require rapid increases in production, which may stress CTS’ resources and reduce margins. CTS may not have sufficient capacity at any given time to meet its customers’ demands. In addition, because many of CTS’ costs and operating expenses are relatively fixed over the short term, a reduction in customer demand harms its gross profit and operating income until such time as adjustments can be made to activity or operating levels and structural costs.
 
 
CTS sells products to customers in cyclical industries, which are subject to significant downturns that could materially adversely affect CTS’ business, financial condition and operating results. 
 
CTS sells products to customers in cyclical industries, which have experienced economic and industry downturns. These markets for CTS’ electronic components and sensors and electronics manufacturing services products have softened in the past and may again soften in the future. CTS incurred sizeable net losses in each of 2001 and 2002 of approximately $45.4 million and $17.9 million, respectively, due in part to economic and industry downturns. CTS may face reduced end-customer demand, underutilization of CTS’ manufacturing capacity, changes in CTS’ revenue mix and other factors that could adversely affect CTS’ results of operations in the near term. CTS cannot predict whether it will achieve profitability in future periods.
 
Deterioration of revenues and earnings, beyond current levels, could have a negative effect on CTS’ business, financial condition and operating results. This could also have a negative effect on the price of CTS common stock and could also make it difficult for CTS to service its debt. Violation of the covenants in CTS’ credit facility could require substantial fees to CTS’ banks until the violation is corrected. In the event the violation cannot be corrected, all of the indebtedness under CTS’ credit facility, its convertible subordinated debentures and notes, as well as certain other indebtedness, may be accelerated. If CTS’ indebtedness is accelerated, CTS cannot be certain that it will have sufficient funds to pay the accelerated indebtedness or that it will have the ability to refinance the accelerated indebtedness on terms favorable to CTS or at all.
 
 
 
Because CTS derives a substantial portion of its revenues from customers in the automotive, computer and communications industries, it is susceptible to trends and factors affecting those industries as well as the success of its customers’ products. 
 
Net sales to the automotive, computer and communications industries represent a substantial portion of CTS’ revenues. Factors negatively affecting these industries and the demand for products also negatively affect CTS’ business, financial condition and operating results. Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of CTS’ customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of CTS’ customers in these industries, could materially adversely affect CTS’ business, financial condition and operating results. For example, the trend toward consolidation in the computer and communications industries could result in a lower level of acceptance of CTS’ products, reduced product requirements, purchasing delays by combined entities or the loss of one or more customers. Also, the automotive industry is generally highly unionized and some of CTS’ customers have, in the past, experienced labor disruptions. Furthermore, the automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates.
 
CTS’ customers are primarily original equipment manufacturers, or OEMs, in the automotive, computer and communications industries. CTS’ future sales are dependent on the success of its customers. CTS’ customers may discontinue or modify their products containing products that CTS manufactures or develop products requiring new manufacturing processes. In addition, the computer and communications industries are subject to rapid technological change and changes in demand for CTS’ products. If CTS’ customers are unable to develop products that keep pace with the changing technological environment, its customers’ products could lose market acceptance, and the demand for CTS’ products could decline significantly. If CTS is unable to offer technologically advanced, easily adaptable and cost-effective products in response to changing customer requirements, demand for its products will decline.
 

Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us.

Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors or component failure. Product defects may result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. Product defects may result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. We may be required to participate in a recall involving products which are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability, however, we do not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage.

 
CTS is exposed to fluctuations in foreign currency exchange rates that have adversely affected, and may continue to adversely affect, CTS’ business, financial condition and operating results. 
 
CTS transacts business in various foreign countries. CTS presents its consolidated financial statements in U.S. dollars, but a portion of CTS’ revenues and expenditures are transacted in other currencies. As a result, CTS is exposed to fluctuations in foreign currencies. CTS has currency exposure arising from both sales and purchases denominated in currencies other than the U.S. dollar. Volatility in the exchange rates between the foreign currencies and the U.S. dollar could harm CTS’ business, financial condition and operating results. Furthermore, to the extent CTS sells its products in foreign markets, currency fluctuations may result in CTS’ products becoming too expensive for foreign customers. For example, CTS’ EMS business located in the United Kingdom sells primarily in U.S. dollars while most of the operating expenses and some material purchases are made in UK pound sterling. Accordingly, when the U.S. dollar weakens against the UK pound sterling, CTS’ EMS segment operating results generally worsen. As the U.S. dollar strengthens against the UK pound sterling and the Euro, CTS’ Components and Sensors segment operating results generally worsen. CTS also manufactures products in China, most of which CTS sells in U.S. dollars. An appreciation of the Chinese RMB against the U.S. dollar would increase CTS’ expenses when translated into U.S. dollars.
 
 
 
CTS’ operating results vary significantly from period to period. 
 
CTS experiences fluctuations in its operating results. Some of the principal factors that contribute to these fluctuations are: changes in demand for CTS’ products; CTS’ effectiveness in managing manufacturing processes, costs and timing of CTS’ component purchases so that components are available when needed for production, while mitigating the risks of purchasing inventory in excess of immediate production needs; the degree to which CTS is able to utilize its available manufacturing capacity; changes in the cost and availability of components, which often occur in the electronics manufacturing industry and which affect CTS’ margins and its ability to meet delivery schedules; general economic and served industry conditions; local conditions and events that may affect CTS’ production volumes, such as labor conditions and political instability.
 
In addition, due to the significant differences in the operating income margins in CTS’ two reporting segments, the mix of sales between CTS’ components and sensors segment and CTS’ EMS segment affect CTS’ operating results from period to period. In addition, although CTS’ restructuring activities and relocation of some of its manufacturing operations to Asia should result in improved operating income margins in CTS’ components and sensors segment, CTS can provide no assurances that this will occur.

 
CTS faces risks relating to its international operations. 
 
Because CTS has significant international operations, its operating results and financial condition could be materially adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which CTS operates. CTS’ international operations are subject to inherent risks, which may materially adversely affect CTS, including: political and economic instability in countries in which CTS’ products are manufactured; expropriation or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings expatriation restrictions; exposure to different legal standards; less favorable intellectual property laws; health conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes CTS pays; high levels of inflation or deflation; greater difficulty in collecting CTS’ accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing CTS’ international operations; limitations on insurance coverage against geopolitical risks, natural disasters and business operations; communication among and management of international operations. In addition, these same factors may also place CTS at a competitive disadvantage to some of CTS’ foreign competitors.
 
To respond to competitive pressures and customer requirements, CTS may further expand internationally at low cost locations, particularly in Asia. If CTS continues to expand in these locations, CTS may incur additional capital expenditures. CTS cannot assure you that it will realize the anticipated strategic benefits of CTS’ international operations or that its international operations will contribute positively to, and not adversely affect, CTS’ business, financial condition and operating results.
 
Furthermore, because a significant portion of CTS’ products are manufactured in Asia, including China and Taiwan, any conflict or uncertainty in these countries, including public health or safety concerns, such as Severe Acute Respiratory Syndrome (SARS), or natural disasters, such as earthquakes, could have a material adverse effect on CTS’ business, financial condition and operating results. In addition, if the government of any country in which CTS’ products are manufactured or sold sets technical standards for products made in or imported into their country that are not widely shared, some of CTS’ customers may suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards or disrupt cross-border manufacturing partnerships, which, in each case, could materially adversely affect CTS’ business, financial condition and operating results.
 
 
CTS may further restructure its operations, which may materially adversely affect CTS’ business, financial condition and operating results. 
 
In 2001, 2002 and 2003, CTS recorded restructuring and impairment charges of $40.0 million, $18.3 million and $4.6 million, respectively, relating to costs incurred to effect operational improvements and related organizational realignments, primarily in CTS’ Components and Sensors segment. CTS completed these restructuring actions, including the relocation of certain manufacturing operations, in 2003. In January 2006, CTS announced that it intends to consolidate its Berne Indiana manufacturing operations into three of its other existing facilities. The consolidation is expected to be largely completed in the second half of 2006 and is estimated to result in pre-tax restructuring charge and related costs of approximately $4.5 million - $5.0 million. CTS may incur additional restructuring and impairment charges in the future if circumstances warrant. If CTS restructures its operations in the future and is unsuccessful in implementing restructuring plans, CTS may experience disruptions in its operations and higher ongoing costs, which may materially adversely affect CTS’ business, financial condition and operating results.
 
 
 
CTS may explore acquisitions that complement or expand CTS’ business as well as divestitures of various business operations. CTS may not be able to complete these transactions and these transactions, if executed, pose significant risks and may materially adversely affect CTS’ business, financial condition and operating results. 
 
CTS intends to explore opportunities to buy other businesses or technologies that could complement, enhance or expand CTS’ current business or product lines or that might otherwise offer CTS growth opportunities. CTS may have difficulty finding these opportunities or, if CTS does identify these opportunities, CTS may not be able to complete the transactions for reasons including a failure to secure financing. Any transactions that CTS is able to identify and complete may involve a number of risks, including: the diversion of CTS’ management’s attention from CTS’ existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on CTS’ operating results during the integration process; and CTS’ possible inability to achieve the intended objectives of the transaction. In addition, CTS may not be able to successfully or profitably integrate, operate, maintain and manage CTS’ newly acquired operations or employees. CTS may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt.
 
We have in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business. Failure to timely complete a divestiture or to consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges. 
 
 
If CTS is unable to protect its intellectual property or it infringes, or is alleged to infringe, on another person’s intellectual property, CTS’ business, financial condition and operating results could be materially adversely affected. 
 
The success of CTS’ business depends, in part, upon CTS’ ability to protect trade secrets, copyrights and patents, obtain or license patents and operate without infringing on the intellectual property rights of others. CTS relies on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect CTS’ proprietary rights in its products and technology. The steps taken by CTS in this regard may not be adequate to prevent misappropriation of CTS’ technology. In addition, the laws of some foreign countries in which CTS operates do not protect CTS’ proprietary rights to the same extent as do the laws of the United States. Although CTS continues to evaluate and implement protective measures, there can be no assurance that these efforts will be successful. CTS’ inability to protect its intellectual property rights could diminish or eliminate the competitive advantages that CTS derives from its technology, cause CTS to lose sales or otherwise harm CTS’ business.
 
CTS believes that patents will continue to play an important role in its business. However, there can be no assurance that it will be successful in securing patents for claims in any pending patent application or that any issued patent will provide CTS with any competitive advantage. CTS also cannot provide assurance that the patents will not be challenged by third parties or that the patents of others will not materially adversely affect CTS’ ability to do business.
 
CTS may become involved in litigation in the future to protect its intellectual property or because others may allege that CTS infringes on their intellectual property. These claims and any resulting lawsuit could subject CTS to liability for damages and invalidate CTS’ intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, CTS may be required to cease marketing or selling certain products, pay a penalty for past infringement and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. CTS may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case CTS may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect CTS even if CTS is successful in the litigation.
 
 
CTS may experience shortages and increased costs of raw material and required electronic components. 
 
In the past, from time to time, there have been shortages in certain raw materials used in the manufacture of CTS’ components and sensors and certain electronic components purchased by CTS and incorporated into assemblies and subassemblies. Unanticipated raw material or electronic component shortages may prevent CTS from making scheduled shipments to customers. CTS’ inability to make scheduled shipments could cause CTS to experience a shortfall in revenue, increase CTS’ costs and adversely affect CTS’ relationship with affected customers and CTS’ reputation as a reliable service provider. CTS may be required to pay higher prices for raw materials or electronic components in short supply and order these raw materials or electronic components in greater quantities to compensate for variable delivery times. CTS may also be required to pay higher prices for raw materials or electronic components due to inflationary trends regardless of supply. As a result, raw material or electronic component shortages and price increases could adversely affect CTS’ operating results for a particular period due to the resulting revenue shortfall and increased costs.
 
 
Loss of CTS’ key management and other personnel, or an inability to attract key management and other personnel, could materially affect CTS’ business. 
 
CTS depends on its senior executive officers and other key personnel to run its business. CTS does not have long-term retention contracts with its key personnel. The loss of any of these officers or other key personnel could adversely affect CTS’ operations. Competition for qualified employees among companies that rely heavily on engineering and technology is at times intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of CTS’ business could hinder CTS’ ability to conduct research activities successfully and develop marketable products.
 
 
CTS is subject to a variety of environmental laws and regulations that expose CTS to potential financial liability. 
 
CTS’ operations are regulated by a number of federal, state, local and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for CTS because it uses hazardous materials in its manufacturing processes. If CTS violates environmental laws or regulations, CTS could be held liable for substantial fines, damages, and costs of remedial actions. CTS’ environmental permits could also be revoked or modified, which could require CTS to cease or limit production at one or more of its facilities, thereby materially adversely affecting CTS’ business, financial condition and operating results. Environmental laws and requirements, including environmental laws in the European Union and other foreign jurisdictions, have generally become more stringent over time and could continue to do so, imposing greater compliance costs and increasing risks and penalties associated with any violation, which also could materially affect CTS’ business, financial condition and operating results.
 
In addition, because CTS is a generator of hazardous wastes, even if CTS fully complies with applicable environmental laws and requirements, CTS may be subject to financial exposure for costs, including costs of investigation and any remediation, associated with contaminated sites at which hazardous substances from CTS’ operations have been stored, treated or disposed of. CTS may also be subject to exposure for such costs at sites that CTS currently owns or operates or formerly owned or operated. Such exposure may be joint and several, so that CTS may be held responsible for more than its share of the contamination or even for the entire contamination.
 
CTS has been notified by the Environmental Protection Agency, state environmental agencies and, in some cases, generator groups that CTS is or may be a potentially responsible party regarding hazardous substances at several sites not owned or operated by CTS, as well as several sites that CTS owns. Although CTS estimates its potential liability with respect to environmental violations or alleged violations and other environmental liabilities and reserves for such matters, CTS cannot assure you that its reserves will be sufficient to cover the actual costs that it incurs as a result of these matters. CTS also cannot assure you that additional contamination will not be found in the future, either at sites currently known to CTS or at other sites. Any liability CTS may have for such matters could materially adversely affect CTS’ business, financial condition and operating results.
 
 
CTS’ indebtedness may adversely affect its financial health. 
 
As of December 31, 2005, CTS’ debt balance was $68.5 million, consisting of $60.0 million of 2.125% convertible senior subordinated notes, $5.5 million of 6 1/2% convertible subordinated debentures, $2.1 million of borrowings under CTS’ revolving credit facility and $0.9 million of borrowings under foreign credit facilities. The level of CTS’ indebtedness could, among other things: increase CTS’ vulnerability to general economic and industry conditions, including recessions; require CTS to use cash flow from operations to service its indebtedness, thereby reducing its ability to fund working capital, capital expenditures, research and development efforts and other expenses; limit CTS’ flexibility in planning for, or reacting to, changes in its business and the industries in which it operates; place CTS at a competitive disadvantage compared to competitors that have less indebtedness; limit CTS’ ability to borrow additional funds that may be needed to operate and expand its business.
 
 
 
CTS’ credit facility and the agreements governing CTS’ convertible subordinated notes and debentures contain provisions that could materially restrict CTS’ business.
 
CTS’ credit facility contains a number of significant covenants that, among other things, limit CTS’ ability to: dispose of assets; incur additional debt (including pursuant to capital leases); guarantee third-party obligations; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; make capital expenditures; and engage in certain transactions with CTS’ subsidiaries and affiliates. In addition, under CTS’ credit facility, CTS is required to meet a number of financial ratios and tests. The agreements governing CTS’ 6 1/2% convertible subordinated debentures contain covenants that, among other things, limit CTS’ ability to pay dividends on, redeem or repurchase capital stock; make payments with respect to any indebtedness that ranks junior to CTS’ 6 1/2% convertible subordinated debentures; and engage in certain transactions with CTS’ subsidiaries and affiliates. The indenture governing CTS’ 2.125% convertible senior subordinated notes contains provisions that limit CTS’ ability to pay dividends or make other distributions on capital stock and engage in mergers or consolidations.
 
The restrictions contained in CTS’ credit facility and in the agreements governing CTS’ convertible subordinated notes and debentures could limit CTS’ ability to plan for or react to market conditions or meet capital needs or could otherwise restrict CTS’ activities or business plans. These restrictions could adversely affect CTS’ ability to finance its operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that could be in CTS’ interests.
 
CTS’ ability to comply with these covenants may be affected by events beyond its control. If CTS breaches any of these covenants or restrictions, it could result in an event of default under CTS’ credit facility, the agreements governing CTS’ convertible subordinated notes and debentures, or documents governing any other existing or future indebtedness. A default, if not cured or waived, may permit acceleration of CTS’ indebtedness. In addition, CTS’ lenders could terminate their commitments to make further extensions of credit under CTS’ credit facility. If CTS’ indebtedness is accelerated, CTS cannot be certain that it will have sufficient funds to pay the accelerated indebtedness or that it will have the ability to refinance accelerated indebtedness on terms favorable to CTS or at all.
 
 
Anti-takeover provisions could delay, deter or prevent a change in control of CTS even if the change in control would be beneficial to CTS shareholders. 
 
CTS is an Indiana corporation subject to Indiana state law. Some provisions of Indiana law could interfere with or restrict takeover bids or other change in control events affecting CTS. One statutory provision prohibits, except under specified circumstances, CTS from engaging in any mergers, sale of assets, recapitalizations and reverse stock splits with any shareholder who owns 10% or more of CTS common stock or any affiliate of the shareholder. Also, provisions in CTS’ articles of incorporation, bylaws, and other agreements to which CTS is a party could delay, deter or prevent a change in control of CTS, even if a change in control would be beneficial to shareholders. CTS has opted out of Indiana’s “control share acquisition” provisions, which restrict the voting rights of shares acquired in transactions which cause the beneficial owner of the shares to exceed specified ownership thresholds. CTS could, however, by action of its board of directors, elect to have those provisions apply.
 
In addition, CTS has a shareholder rights agreement that under certain circumstances would significantly impair the ability of third parties to acquire control of CTS without prior approval of CTS’ board of directors. In addition, CTS’ articles of incorporation allow it to issue up to an additional 21.4 million shares of common stock and 25.0 million shares of preferred stock without shareholder approval. CTS’ board of directors has the authority to determine the price and terms under which the additional common or preferred stock may be issued. Issuance of this common and preferred stock could make it more difficult for a third party to acquire control of CTS.
 


None


 

As of February 23, 2006, CTS has manufacturing facilities, administrative, research and development and sales offices in the following locations.

Manufacturing Facilities
Square
Footage
  
Owned/
Leased
Business Segment
Albuquerque, New Mexico
267,000
  
Owned
Components and Sensors
Ayutthya, Thailand
40,000
  
Owned 1
EMS
Berne, Indiana
249,000
  
Owned 2
Components and Sensors
Burbank, California
9,200
  
Owned
Components and Sensors
Burbank, California
2,900
  
Leased
Components and Sensors
Dongguan, China
39,560
  
Leased
Components and Sensors
Elkhart, Indiana
319,000
  
Owned 2
Components and Sensors
Glasgow, Scotland
75,000
  
Owned
Components and Sensors and EMS
Glasgow, Scotland
20,000
  
Leased
Components and Sensors and EMS
Glasgow, Scotland
37,000
  
Leased
Components and Sensors and EMS
Kaohsiung, Taiwan
133,000
  
Owned 3
Components and Sensors
Londonderry, New Hampshire
83,000
  
Leased
EMS
Matamoros, Mexico
51,000
  
Owned
Components and Sensors
Moorpark, California
115,000
  
Leased
EMS
Santa Clara, California
44,700
  
Leased
EMS
Singapore
159,000
  
Owned
Components and Sensors and EMS
Streetsville, Ontario, Canada
112,000
  
Owned 4
Components and Sensors
Tianjin, China
210,000
  
Owned 5
Components and Sensors and EMS
Total Manufacturing
1,966,360
 
 
 
____________________
1
The land and building are collateral for a credit facility with BANKTHAI
2
The land and buildings are collateral for the revolving credit agreement.
3
Ground lease through 2007; restrictions on use and transfer apply.
4
Ground lease through 2039; restrictions on use and transfer apply.
5
Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights.

Non-Manufacturing Facilities
Square Footage
  
Owned/ Leased
Description
Business Segment
Baldwin, Wisconsin
39,000
  
Owned
Idle facility
Components and Sensors
Bloomingdale, Illinois 
110,000
  
Leased
Administrative offices and research
Components and Sensors
Brownsville, Texas
85,000
  
Owned
Idle facility
Components and Sensors
Kowloon, Hong Kong
800
  
Leased
Sales office
Components and Sensors
Elkhart, Indiana
93,000
  
Owned 1
Administrative offices and research
Components and Sensors and EMS
Marlborough, Massachusetts
69,400
  
Leased
Idle facility
EMS
Poway, California
45,000
  
Leased
Sublet to tenant
EMS
Sandwich, Illinois
94,000
  
Owned 1
Idle facility
Components and Sensors
Shanghai, China
1,708
  
Leased
Sales office
Components and Sensors
Southfield, Michigan
1,700
  
Leased
Sales office
Components and Sensors
Taipei, Taiwan
1,420
  
Leased
Sales office
Components and Sensors
Nagoya, Japan
785
  
Leased
Sales office
Components and Sensors
West Lafayette, Indiana
102,500
  
Owned 1
Idle facility
Components and Sensors
Yokohama, Japan
1,400
  
Leased
Sales office
Components and Sensors
 
645,713
        
___________________
1
The land and buildings are collateral for the revolving credit agreement.

CTS regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor, and location to its markets and major customers. Management believes CTS’ manufacturing facilities are suitable and adequate, and have sufficient capacity to meet its current needs. The extent of utilization varies from plant to plant and with general economic conditions. CTS also reviews the operating costs of its facilities and may from time-to-time relocate or move a portion of its manufacturing activities in order to reduce operating costs and improve asset utilization and cash flow. Refer also to Note P, “Asset Impairment Charge,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).
 
 

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 accrued or the ultimate anticipated costs resulting will not materially affect CTS’ consolidated financial position, results of operations, or cash flows.


During the fourth quarter of 2005, no matter was submitted to a vote of CTS security holders.




 
PART II

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The principal market for CTS common stock is the New York Stock Exchange using the symbol “CTS.” Quarterly market high and low trading prices for CTS Common Stock for each quarter of the past two years and the amount of dividends declared during the previous two years is located in “Shareholder Information,” appearing in the 2005 Annual Report to Shareholders, portions of which are filed herewith as Exhibit (13) and are incorporated herein by reference (2005 Annual Report). On February 23, 2006, there were approximately 1,680 CTS common shareholders of record.

CTS’ current practice is to pay quarterly dividends at the rate of $0.03 per share, or an annual rate of $0.12 per share. The revolving credit agreement limits CTS’ ability to pay dividends, but it permits CTS to continue to pay quarterly dividends at the rate of $0.03 per share. The declaration of a dividend and the amount of any such dividend is subject to earnings, anticipated working capital, capital expenditures, other investment requirements, the financial condition of CTS, and any other factors considered relevant by the Board of Directors.

The following table summarizes the repurchase of CTS common stock made by the Company during the three months ended December 31, 2005:

   
(a)
Total Number of Shares Purchased
  
(b)
Average Price Paid per Share
  
(c)
Total Number
of Shares
Purchased as part of
Plans or Program
1
  
(c)
Maximum Number
of Shares
That May Yet Be Purchased Under the
Plans or Programs
  
                       
173,300
  
 
October 3, 2005 - October 30, 2005
    
155,800
    $
11.96
    
155,800
    
17,500
  
October 31, 2005 - November 27, 2005
    
25,900
    
11.91
    
25,900
    
991,600
  
November 28, 2005 - December 31, 2005
    
131,000
    
12.11
    
131,000
    
860,600
  
Total
    
312,700
    $
12.02
    
312,700
        

______________________
1  
In November 2005, CTS’ Board of Directors authorized a program to repurchase up to one million shares of stock. The authorization expires June 30, 2007. The previously authorized one million share repurchase program dated July 2004 was completed in the fourth quarter of 2005.



A summary of selected financial data for CTS for each of the previous five years is contained in the “Five-Year Summary,” included in the 2005 Annual Report and incorporated herein by reference.

Certain acquisitions, divestitures, closures of operations or product lines, and certain accounting reclassifications affect the comparability of information contained in the “Five-Year Summary.”

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information about results of operations, liquidity, and capital resources for the three previous years, is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2003-2005),” included in the 2005 Annual Report and incorporated herein by reference.



A discussion of market risk for CTS is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2003-2005),” included in the 2005 Annual Report and incorporated herein by reference and in Note A, “Summary of Significant Accounting Policies — Financial Instruments,” of the notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).


Consolidated financial statements meeting the requirements of Regulation S-X, the “Report of Independent Registered Public Accounting Firm,” and “Quarterly Results of Operations” and “Per Share Data” appear in the financial statements and supplementary financial data as noted in the Index appearing under Item 15 (a)(1) and (2), and are included in the 2005 Annual Report and incorporated herein by reference.


As reported on CTS’ Form 8-K filed on June 9, 2005, CTS dismissed PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm on June 3, 2005. The decision was recommended and unanimously approved by CTS’ Audit Committee of the Board of Directors.

The reports of PricewaterhouseCoopers LLP on the Company’s financial statements for the years ended December 31, 2004 and 2003 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle.

During the years ended December 31, 2004 and 2003, and through June 3, 2005, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused PricewaterhouseCoopers LLP to make reference thereto in its report on the Company’s financial statements for such years.

During the years ended December 31, 2004 and 2003, and through June 3, 2005, there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).

CTS appointed Grant Thornton LLP as its new independent registered public accounting firm as of June 3, 2005. During the two most recent fiscal years and through June 3, 2005, CTS has not consulted with Grant Thornton regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and Grant Thornton LLP did not provide a written report or oral advice to CTS which Grant Thornton LLP concluded was an important factor considered by CTS in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) or Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1(v) of Regulation S-K.


 
Under the direction of CTS’ Chief Executive Officer and Chief Financial Officer, management evaluated CTS’ disclosure and procedures and internal control over financial reporting and concluded that (i) CTS’ disclosure controls and procedures were effective as of December 31, 2005 and (ii) no change in internal control over financial reporting occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
 
Management’s annual report on internal control over financial reporting and the report of independent registered public accounting firm are incorporated by reference to page S-3 of this Annual Report on Form 10-K for the fiscal year ended December 31, 2005.  There were no changes in CTS’ internal control over financial reporting during the quarter ended December 31, 2005 that materially affected, or are reasonably likely to materially affect, CTS’ internal control over financial reporting.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, CTS included a report of management’s assessment of the design and effectiveness of its internal control over financial reporting as part of this Annual Report on Form 10-K for the year ended December 31, 2005. Management’s report is included in CTS’ 2005 Financial Statements under the caption entitled “Management’s Report on Internal Control Over Financial Reporting” appearing as noted in the Index to the consolidated financial statements appearing under Item 15(a)(1) and (2).


None.





Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining to directors of CTS is contained under the caption “Item 1. — Election of Directors” in the 2006 Proxy Statement for the 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission (2006 Proxy Statement), and is incorporated herein by reference.

Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 2006 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.

Information responsive to Items 401(h) and 401(i) of Regulation S-K pertaining to the Audit Committee of the Board of Directors is contained under the caption "2005 Committees of the Board, Audit Committee" in the 2006 Proxy Statement, and is incorporated herein by reference.

CTS has adopted a Code of Ethics that applies to all of its employees, including its principal executive officer, principal financial officer, and principal accounting officer or controller. CTS’ Code of Ethics is posted on its website at www.ctscorp.com/governance/code_of_ethics.htm. In the event that the Code of Ethics is amended or in the event that a waiver of the Code of Ethics is granted for a principal executive officer, principal financial officer or principal accounting officer or controller, CTS intends to disclose this information on its website at www.ctscorp.com.

The individuals in the following list were elected as executive officers of CTS at the annual meeting of the Board of Directors on May 4, 2005. They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled to be held on or about May 3, 2006, at which time the election of officers will be considered again by the Board of Directors.
 
LIST OF OFFICERS

Name
Age
Positions and Offices
Donald K. Schwanz
61
Chairman, President and Chief Executive Officer
Donald R. Schroeder
57
Executive Vice President and President of CTS Electronics Manufacturing Solutions
Vinod M. Khilnani
53
Senior Vice President and Chief Financial Officer
H. Tyler Buchanan
53
Senior Vice President
James L. Cummins
50
Senior Vice President Administration
Richard G. Cutter, III
59
Vice President, General Counsel and Secretary
Rohit Rai
43
Vice President, Strategy and Corporate Development
Thomas A. Kroll
51
Vice President and Controller
Matthew W. Long
44
Treasurer


BRIEF HISTORY OF OFFICERS

Donald K. Schwanz was elected President in January 2001 and named Chief Executive Officer effective October 1, 2001. Mr. Schwanz was appointed Chairman of the Board of Directors on January 1, 2002. From January 2001 through October 1, 2001, Mr. Schwanz served as Chief Operating Officer of CTS. Prior to joining CTS in January 2001, he was President of the Industrial Control Business at Honeywell, Inc. since 1999, and had been with Honeywell, an aerospace company, since 1979, with positions of increasing responsibility.

Donald R. Schroeder was named President of CTS Electronics Manufacturing Solutions effective February 7, 2005 and retained his title of Executive Vice President. From December 2000 to February 2005, Mr. Schroeder served as Executive Vice President and Chief Technology Officer. From February 2000 to December 2000, Mr. Schroeder served as Vice President Business Development and Chief Technology Officer. From 1995 to January 2000, Mr. Schroeder served as Vice President Sales and Marketing.

Vinod M. Khilnani was elected Senior Vice President and Chief Financial Officer, effective May 7, 2001. Prior to joining CTS, Mr. Khilnani was Vice President and Chief Financial Officer at Simpson Industries, Inc. from 1997 to December 2000, and was appointed Vice President and Corporate Controller of Metaldyne Corporation, a $2.5 billion automotive components company created through the merger of Simpson Industries and Masco Tech, in December 2000.

H. Tyler Buchanan  was elected Senior Vice President, effective December 31, 2001. Prior to this, Mr. Buchanan was Vice President since August 2000, and Vice President and General Manager, CTS Automotive Products. He has held positions of varying responsibility with CTS since 1977.

James L. Cummins  was elected Senior Vice President Administration, effective December 31, 2001. Prior to this, Mr. Cummins was Vice President Human Resources since 1994. From 1991 through 1994, he served as Director of Human Resources.

Richard G. Cutter, III  was elected Vice President, General Counsel and Secretary effective December 31, 2001. Prior to this, Mr. Cutter was Vice President and Assistant Secretary since August 2000, and General Counsel since January 2000. Prior to joining CTS, he was General Counsel with General Electric - Silicones, a global manufacturer of silicone-based raw materials.

Rohit Rai was elected Vice President, Strategy and Corporate Development effective February 3, 2006. Prior to joining CTS, Mr. Rai was Director Group Strategy and Development at Pratt & Whitney, Inc., an aerospace company, from 2003 to 2006. From 2002 to 2003, he was Vice President and General Manager of Pratt & Whitney’s Specialty Materials and Services Division. Prior to 2002, he was Vice President and General Manager of Pratt & Whitney’s Power Systems Division.

Thomas A. Kroll  was elected Vice President and Controller on October 31, 2002. Prior to this, Mr. Kroll served as Controller Group Accounting since joining CTS in November 2000. Prior to joining CTS, he served as Corporate Controller for Fedders Corporation from 1995.

Matthew W. Long  was elected Treasurer effective May 1, 2003. From December 2000 through May 2003, Mr. Long served as Assistant Treasurer. Mr. Long was Corporate Controller for Morgan Drive Away, Inc., a transportation services company, from July through December 2000. Prior to this, he served as Controller with CTS’ Electrocomponents operating unit and as Corporate External Financial Accounting Manager from 1996 through July 2000.


Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 2006 Proxy Statement under the captions “Director Compensation” and “Executive Compensation,” and is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 2006 Proxy Statement under the caption “Stock Ownership Information,” and is incorporated herein by reference.



Equity Compensation Plan Information

Information responsive to Item 201(d)(2) of Regulation S-K pertaining to equity compensation plan information is summarized in the following table:
 

 
 
  
(a)
  
(b)
  
(c)
  
 
 
 
 
Plan Category
  
Number of securities to be issued upon exercise of outstanding options, warrants and rights
  
Weighted-average exercise price of outstanding options, warrants and rights.
  
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column (a))
  
Equity compensation plans approved by security holders
    
1,567,499
  
$
15.93
    
5,677,473
  
Equity compensation plans not approved by security holders
    
56,261
  1  
—
 1
  
—
  1
Total
    
1,623,760
        
5,677,473
  

_________________
1
CTS has a stock retirement plan for nonemployee directors under which an account for each nonemployee director was annually credited with 800 common stock units. Through January 2004, CTS annually credited each deferred stock account with an additional number of common stock units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the preceding calendar year. Upon retirement, the nonemployee director is entitled to receive one share of CTS common stock for each common stock unit in his deferred stock account. CTS has issued only treasury shares for common stock units under the plan. Prior to 2002, the New York Stock Exchange has not required companies to obtain shareholder approval when issuing treasury shares or shares purchased in the open market under compensatory plans. As of December 1, 2004, this plan was amended to preclude crediting any additional units under the plan. At December 31, 2005, the deferred stock accounts contained a total of 56,261 units.



 
Information responsive to Item 404 of Regulation S-K is contained in the 2006 Proxy Statement under the caption "Certain Business Relationships," and is incorporated herein by reference.


The information contained in the 2006 Proxy Statement under the caption "Independent Registered Public Accounting Firm," is incorporated herein by reference.


PART IV


The list of financial statements and schedules required by Item 15 (a) (1) and (2) is contained on page S-1 herein.

(a) (3)
Exhibits

All references to documents filed pursuant to the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, were filed by CTS Corporation, File No. 1-4639.

(2)
Agreement and Plan of Merger dated November 16, 2004 by and among SMTEK International, Inc., Cardinal Acquisition, Inc. and CTS Corporation (incorporated by reference to the Exhibit 2.1 to the Current Report on Form 8-K dated November 17, 2004, filed with the Commission on November 17, 2004).


(3)(i)
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 5 to the Current Report on Form 8-K, filed with the Commission on September 1, 1998).


(3)(ii)
Bylaws (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K, filed with the Commission on September 1, 1998).


(10)(a)
Employment Agreement, dated as of September 7, 2001, between the Company and Donald K. Schwanz (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed with the Commission on November 5, 2001). *


(10)(b)
Prototype officers and directors indemnification agreement (incorporated by reference to Exhibit (10)(g) to the Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 21, 1996).


(10)(c)
CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, approved by the shareholders on April 28, 1989, as amended and restated on May 9, 1997 (incorporated by reference to Exhibit (10)(e) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997). *


(10)(d)
CTS Corporation 1996 Stock Option Plan, approved by the shareholders on April 26, 1996, as amended and restated on May 9, 1997 (incorporated by reference to Exhibit (10)(f) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997). *


(10)(e)
CTS Corporation 2001 Stock Option Plan, approved by the shareholders on March 9, 2001 (incorporated by reference to Exhibit (10)(c) to the Quarterly Report on Form 10-Q for the quarter ended April 1, 2001, filed with the Commission on April 27, 2001). *


(10)(f)
Rights Agreement between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.) dated August 28,1998 (incorporated by reference to Exhibit 1 to the Current Report on Form 8-K filed with the Commission on September 1, 1998).


(10)(g)
Amendment No. 1, dated as of October 15, 2001, to the Rights Agreement dated as of August 28, 1998, between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form 8-A filed with the Commission on April 29, 2002).


(10)(h)
Amendment No. 2, dated as of April 22, 2002, to the Rights Agreement, dated as of August 28, 1998, between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.), as amended on October 15, 2001 (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form 8-A filed with the Commission on April 29, 2002).


(10)(i)
CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990, as amended (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, filed with the Commission on April 23, 2003). *


(10)(j)
Amendment dated as of December 1, 2004, to the CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990, as amended (incorporated by reference to Exhibit (10)(j) to the Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 4, 2005).*


(10)(k)
Prototype Severance Agreements between CTS Corporation and its officers, general managers and managing directors (incorporated by reference to Exhibit (10)(k) to the Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on February 14, 2003). *


(10)(l)
Securities Purchase Agreement, dated April 15, 2002, among CTS Corporation, Halifax Fund, L.P., DeAm Convertible Arbitrage Fund, Ltd., Palladin Overseas Fund, Ltd., Lancer Securities (Cayman) Ltd., Palladin Partners I, L.P., Steelhead Investments, Ltd., and Ram Trading, Ltd. (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K dated April 19, 2002, filed with the Commission on April 22, 2002).


(10)(m)
Form of 6½% Convertible Subordinated Debenture (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K dated April 19, 2002, filed with the Commission on April 22, 2002).


(10)(n)
CTS Corporation Management Incentive Plan approved by the shareholders on May 1, 2002 (incorporated by reference to Appendix A to the Proxy Statement for the 2002 Annual Meeting of Shareholders, filed with the Commission on March 18, 2002). *

 
(10)(o)
CTS Corporation Pension Plan (formerly known as the CTS Corporation Salaried Employees’ Pension Plan) (incorporated by reference to Exhibit (10)(t) to the Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on February 14, 2003). *


(10)(p)
Amendments to the CTS Corporation Pension Plan (formerly known as the CTS Corporation Salaried Employees’ Pension Plan) (incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, filed with the Commission on July 25, 2003). *

Amendments to the CTS Corporation Pension Plan (formerly known as the CTS Corporation Salaried Employees Pension Plan).*


(10)(r)
Credit Agreement dated as of July 14, 2003 by and among CTS Corporation, the Lenders named therein and Harris Trust and Savings Bank as L/C Issuer and Administrative Agent (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, filed with the Commission on July 25, 2003).


(10)(s)
Amendment No. 1, dated as of June 17, 2004, to the Credit Agreement dated as of July 14, 2003 by and among CTS Corporation, the Lenders named therein and Harris Trust and Savings Bank as L/C Issuer and Administrative Agent (incorporated by reference to Exhibit 10 (1) to the Quarterly report on Form 10-Q for the quarter ended June 27, 2002, filed with the Commission on July 20, 2004).


(10)(t)
Amendment No. 2, dated as of October 12, 2004, to the Credit Agreement dated as of July 14, 2003 by and among CTS Corporation, the Lenders named therein and Harris Trust and Savings Bank as L/C Issuer and Administrative Agent (incorporated by reference to Exhibit 10(a) to the current report on Form 8-K dated October 12, 2004, filed with the Commission on October 15, 2004.

(10)(u)
Amendment No. 3, dated as of April 29, 2005, to the Credit Agreement dated as of July 14, 2003 by and among CTS Corporation, the Lenders named therein and Harris Trust and Savings Bank as L/C Issuer and Administrative Agent (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended July 3, 2005, filed with the Commission on July 29, 2005).
 

CTS Corporation 2003 Excess Benefit Retirement Plan, as adopted effective July 1, 2003 and as amended effective June 1, 2004 *


Amendment No. 1, effective June 1, 2004, to the CTS Corporation 2003 Excess Benefit Retirement Plan, as adopted effective July 1, 2003.*


(10)(x)
Purchase Agreement dated May 5, 2004 by and between CTS Corporation and Bear Stearns & Co. Inc., as Initial Purchaser (incorporated by reference to the Exhibit 1.1 to the Current Report on Form 8-K dated May 18, 2004, filed with the Commission on May 19, 2004).


(10)(y)
Indenture dated as of May 11, 2004 by and between CTS Corporation and Wells Fargo Bank, N.A. as Trustee (incorporated by reference to the Exhibit 1.1 to the Current Report on Form 8-K dated May 18, 2004, filed with the Commission on May 19, 2004).


(10)(z)
CTS Corporation 2004 Omnibus Long-term Incentive Plan and Incentive Stock Option Agreement (incorporated by reference to the Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended September 26, 2004, filed with the Commission on October 19, 2004).*

 
Prototype Non-employee Director Restricted Stock Unit Agreement.*


Director and Named Executive Officer Compensation.*


(10)(cc)
Employment Agreement dated October 4, 2005, between the Company and Vinod M. Khilnani, (incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended October 2, 2005.)*


(10)(dd)
Prototype Named Executive Officer Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10(c) to the Quarterly Report on Form 10-Q for the quarter ended July 3, 2005, filed with the Commission on July 29, 2005.)*


 
 
CTS Corporation 2001 Stock Option Plan: Employee Stock Option Agreement, dated October 1, 2001, as amended December 15, 2005.*


Prototype Executive Officer RSU Supplemental Agreement*


Portions of the 2005 Annual Report to shareholders incorporated herein.


Subsidiaries.


Consent of Grant Thornton LLP.

Consent of PricewaterhouseCoopers LLP.


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.



_________________
*
 
Management contract or compensatory plan or arrangement.





Pursuant to the requirements of Section 13 or 15(d) 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
 
 		  
 		  
 
Date: February 27, 2006 By:   /s/ Vinod M. Khilnani
 
Vinod M. Khilnani
  Senior Vice President and Chief Financial Officer 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
     
Date: February 27, 2006 By:   /s/ Donald K. Schwanz
 
Donald K. Schwanz
 
President and Chief Executive Officer  
(Principal Executive Officer)
   
 
     
Date: February 27, 2006 By:   /s/ Walter S. Catlow
 
Walter S. Catlow
  Director

     
Date: February 27, 2006 By:   /s/ Lawrence J. Ciancia
 
Lawrence J. Ciancia
  Director
 
     
Date: February 27, 2006 By:   /s/ Thomas G. Cody
 
Thomas G. Cody
  Director

     
Date: February 27, 2006 By:   /s/ Gerald H. Frieling, Jr.
 
Gerald H. Frieling, Jr.
  Director
 
     
Date: February 27, 2006 By:   /s/ Roger R. Hemminghaus
 
Roger R. Hemminghaus
  Director

     
Date: February 27, 2006 By:   /s/ Michael A. Henning
 
Michael A. Henning
  Director
 
     
Date: February 27, 2006 By:   /s/ Robert A. Profusek
 
Robert A. Profusek
  Director
 
     
Date: February 27, 2006 By:   /s/ Patricia K. Vincent
 
Patricia K. Vincent
  Director
 
     
Date: February 27, 2006 By:   /s/ Vinod M. Khilnani
 
Vinod M. Khilnani
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
     
Date: February 27, 2006 By:   /s/ Thomas A. Kroll
 
Thomas A. Kroll
 
Vice President and Controller
(Principal Accounting Officer)
 
 
 
 
 
FORM 10-K - ITEM 15 (a) (1) AND (2) AND ITEM 15 (c)

CTS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statements of CTS Corporation and subsidiaries included in the 2005 Annual Report are referenced in Part II, Item 8, filed herewith as Exhibit (13) and incorporated herein by reference:

 
Consolidated statements of earnings - Years ended December 31, 2005, December 31, 2004, and December 31, 2003.


 
Consolidated balance sheets - December 31, 2005 and December 31, 2004


 
Consolidated statements of cash flows - Years ended December 31, 2005, December 31, 2004, and December 31, 2003.


 
Consolidated statements of shareholders’ equity - Years ended December 31, 2005, December 31, 2004, and December 31, 2003.


 
Notes to consolidated financial statements


 
Supplementary Financial Data:


 
Quarterly Results of Operations (Unaudited) - Years ended December 31, 2005 and December 31, 2004


 
Per Share Data (Unaudited) - Years ended December 31, 2005 and December 31, 2004


The following consolidated financial statement schedule of CTS Corporation and subsidiaries is included in Item 15 (c):

 
Schedule II - Valuation and qualifying accounts  /  Page S-2


 
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required or the information is included in the consolidated financial statements or notes thereto.



 
 


CTS CORPORATION

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
 
 
 

 
  
 
  
Additions
  
 
  
 
 
 
(In thousands of dollars)
 
Balance at
Beginning of
Period
  
Charged to
Expense
  
Charged to
Other Accounts
  
 
 
Deductions
  
 
Balance at
End of Period
                          
Year ended December 31, 2005:
Allowance for doubtful accounts
  
$
1,450
  
$
577
  
$
426
 1
$
(80
)
$
2,373
                               
Year ended December 31, 2004:
                    
 Allowance for doubtful accounts
  
$
1,585
  
$
—
  
$
—
  
$
(135
)
$
1,450
 
                              
Year ended December 31, 2003:
                    
 Allowance for doubtful receivables
  
$
1,694
  
$
396
  
$
—
  
$
(505
)
$
1,585
 
____________________________________
1  
Amount relates to the allowance for doubtful accounts associated with the acquisition of SMTEK International, Inc. Refer also to Note B, “Acquisition,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15(1)(1) and (2).

 
 
Management’s Report on Internal Control Over Financial Reporting

CTS’ management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including CTS’ principal executive officer and principal financial officer, CTS conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
During 2005, CTS acquired SMTEK. The SMTEK business had facilities located in Moorpark and Santa Clara, California; Marlborough, Massachusetts; and Bangkok, Thailand. During the third quarter of 2005, CTS consolidated the Marlborough facility with its existing Londonderry, New Hampshire facility. Each of the remaining facilities reports financial results that are included in this report for the year ended December 31, 2005. CTS’ management has not made an assessment of the SMTEK business’ internal control over financial reporting since the date of the acquisition. The SMTEK business that was not included in CTS’ evaluation of the effectiveness of disclosure controls and procedures represented approximately 14.6% and 10.5% of CTS’ total assets and liabilities, respectively as of December 31, 2005 and approximately 16.3% of CTS’ total 2005 net sales.
 
Based on CTS’ evaluation under the framework in Internal Control-Integrated Framework, management concluded that CTS’ internal control over financial reporting was effective as of December 31, 2005, excluding the SMTEK business described above. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Grant Thornton, LLP, an independent registered public accounting firm, as stated in their report which is included herein.


CTS Corporation
Elkhart, IN
February 27, 2006
 
 
       
/s/ Donald K. Schwanz     /s/ Vinod M. Khilnani
Donald K. Schwanz		    
Vinod M. Khilnani
President and Chief Executive Officer
     Senior Vice President and Chief Financial Officer
 
S-3
 EX-10.EE 2 ex10_ee.htm EXHIBIT 10.EE Exhibit 10.ee
     

 

CTS CORPORATION 2001 STOCK OPTION PLAN:
EMPLOYEE STOCK OPTION AGREEMENT, AS AMENDED


THIS EMPLOYEE STOCK OPTION AGREEMENT (hereafter, “Agreement”) made this 1st day of October, 2001, (herein-after, "Option Date") by and between CTS Corporation, an Indiana corporation (hereinafter, "CTS"), and Donald K. Schwanz, an employee of CTS or a subsidiary or division of CTS (hereinafter, "Employee").

WHEREAS, CTS desires to create an additional incentive for the Employee to continue his or her services with CTS and to stimulate his or her interest in the growth and profitability of CTS, and

WHEREAS, CTS desires to increase the Employee's personal participation in the success of CTS through the acquisition of an equity interest in CTS;

W I T N E S S E T H

Section 1: Option Grant

CTS hereby grants to the Employee the right and option to purchase all or any part of an aggregate of 100,000 shares of CTS Common Stock, without par value, on the terms and conditions set forth below (hereinafter the ྿Option࿀).

Section 2: Purchase Price

The purchase price per share for CTS Common Stock subject to this Option shall be $14.02, the reported closing price per share on the New York Stock Exchange on the date this Option is granted.

Section 3: Option Exercise Period

Except as provided in Section 6, this Option is not exercisable until one year after the Option Date. This Option is exercisable in installments as follows; on October 1, 2005, 33,333 shares (“Installment 1”); on December 31, 2005, 33,333 shares (“Installment 2”), on December 31, 2005, 33,334 shares (“Installment 3”). In the event that Employee exercises Installment 2 prior to October 1, 2006 or Installment 3 prior to October 1, 2007, unless an installment would have otherwise become exercisable pursuant to the occurrence of an event described in Section 6, Employee agrees that he shall not sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise transfer or dispose of any shares obtained upon exercise, until the shares have been released from the foregoing Resale Restrictions (hereinafter referred to as the “Resale Restrictions”). Shares obtained upon the exercise of Installment 2 shall be released from the Resale Restrictions on October 1, 2006 and shares obtained upon the exercise of Installment 3 shall be released on October 1, 2007. The Employee understands and agrees that CTS may cause the legend set forth below or a legend substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of shares that are subject to Resale Restrictions:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.

This Option and all rights hereunder shall expire on September 30, 2011.

1
Section 4: Payment

Payment for this Option must be made at the time of exercise and may be made in cash or in previously acquired CTS Common Stock, which has been held for at least six months, or a combination thereof. If payment is made in whole or part by previously acquired CTS Common Stock, then the value per share of such stock is the reported closing price per share of CTS Common Stock on the New York Stock Exchange on the date the Option is exercised or, if not reported on such date, the next preceding date for which such a closing price is reported. Payment may be made by surrender of shares or by attestation by submission of the prescribed Attestation Form. Subsequent to the use of previously owned shares of CTS Common Stock as consideration for the exercise of all or a part of this Option, the shares so utilized may not be used again in payment for the exercise of this Option or any other option for CTS stock for a period of one year.
 
Section 5: Nontransferability of Option

This Option may not be assigned or transferred by the Employee other than by will or by the laws of descent and distribu-tion, and is exercisable, during the Employee's lifetime, only by him or her. Any attempt by the Employee to assign or transfer this Option will be null, void and without effect.

Section 6: Separation from Employment or Change of Control

In the event of the termination of employment of the Employee with CTS due to Employee’s qualified retirement (as used herein, a qualified retirement means that Employee’s date of termination occurs after completing at least five years of service and attaining age 62), he may exercise the Option only to the extent permitted by the Option terms on the date of retirement, any time before the Option expires. All shares subject to this Option which are not exercisable as of the Employee’s date of termination will be canceled.

In the event of the termination of employment of the Employee with CTS for any reason other than qualified retirement, he may exercise the Option only to the extent permitted by the Option terms on the date of termination, and only within the three month period immediately following Employee’s date of termination. All shares subject to this Option which are not exercisable as of the Employee’s date of termination will be canceled.

Upon a Change of Control of CTS Corporation, as defined herein, all unexercised and unexpired installments of this Option, vested and unvested, will immediately become exercisable in full and may be exercised anytime before the Option expires. As used herein, Change of Control means the occurrence of any of the following events: (i) the attainment by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act ) (a "Person") of aggregate beneficial ownership (within the meaning of Rule 13d-2 of the Exchange Act) of 25% or more of the combined voting power of the then outstanding securities (the "Voting Stock") of CTS entitled to vote generally in the election of directors; provided, however, that for purposes of this Subsection (i), the following will not be deemed to result in a Change in Control: (A) any acquisition directly from CTS that is approved by the Incumbent Board (defined below), (B) any acquisition by CTS and any change in the percentage ownership of Voting Stock of CTS that results from such acquisition, (C) any acquisition by any employee benefit plan or related trust sponsored or maintained by CTS or any subsidiary of CTS, or (D) any acquisition by any Person pursuant to a Business Combination (defined below) that complies with clauses (I), (II) and (III) of Subsection (iii) below; or (ii) individuals who, as of the effective date of the Plan constitute the Board of Directors of CTS (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board of Directors of CTS; provided, however, that any individual becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by CTS' shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of CTS in which such person is named as a nominee for director, without objection to such nomination) will be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual becoming a director as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of CTS; or (iii) consummation of (A) a reorganization, merger or consolidation, or (B) a sale or other disposition of all or substantially all of the assets of CTS (such reorganization, merger, consolidation or sale each , a "Business Combination"), unless, in each case, immediately following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of CTS immediately prior to such Business Combination beneficially own, directly or indirectly, more than two-thirds of the then outstanding shares of common stock and the combined voting power of the then outstanding Voting Stock of CTS entitled to vote generally in the election of directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns CTS, or all or substantially all of CTS' assets either directly or through one or more subsidiaries) in substantially the same proportions relative to each other as their ownership immediately prior to such Business Combination of the Voting Stock of CTS, (II) no individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (other than CTS, such entity resulting from such Business Combination, or any employee benefit plan or related trust sponsored or maintained by CTS, any subsidiary of CTS or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 15% or more of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least two-thirds of the members of the Board of Directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the CTS Board of Directors providing for such Business Combination; or (iv) approval by the shareholders of CTS of a complete liquidation or dissolution of CTS, except pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Subsection (iii) hereof.

2
Section 7: Adjustment for Capital Change

The number, kind and price of shares subject to this Option will be proportionately and appropriately adjusted by the Compensation Committee of CTS to reflect the effects of stock splits, stock dividends and any other change in the capital structure of CTS or to reflect any merger, consolidation or exchange or sale of assets or shares of CTS.

Section 8: Controlling Feature of Plan

Inconsistencies, if any, between this Agreement and the CTS Corporation 2001 Stock Option Plan, will be resolved according to the terms of the Plan.

Section 9: Rights of Employee as Option Holder

The Employee has no rights as a shareholder of CTS with respect to shares subject to this Option until such shares are issued upon exercise.

Section 10: Consideration for Option

In consideration for the grant of this Option, Employee acknowledges and agrees as follows:

Option gain and unexercised options will be forfeited if Employee engages in certain activities. If, at any time within one year after termination of Employee’s employment with CTS, Employee engages in any activity in competition with any activity of CTS, or contrary or harmful to the interests of CTS, including, but not limited to: (i) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of CTS, including employing or recruiting any present, former or future employee of CTS; or (ii) disclosing or misusing any confidential information or material concerning CTS or relating to any of its businesses, then (A) this Option shall terminate effective on the date on which Employee enters into such activity, unless terminated sooner by operation of another term or condition of this Option, or the Plan, and (B) any option gain realized by Employee from any exercise of this Option, during the six month period prior to the termination of Employee’s employment with CTS or after Employee’s employment with CTS ends, shall be paid by Employee to CTS.

By accepting this Agreement, Employee consents to a deduction from any amounts CTS may owe him or her from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to Employee by CTS), to the extent of the amount Employee owes CTS under this Section. Whether or not CTS elects to make any set-off in whole or in part, if CTS does not recover by means of set-off the full amount Employee owes, calculated as set forth above, Employee agrees to pay immediately the unpaid balance to CTS.

Section 11: Construction of this Agreement

This Agreement is made pursuant to and will be construed, interpreted and governed by the laws of the State of Indiana without regard to the conflict of law provisions of any jurisdiction.

Section 12: Severability

If any provision of this Agreement is held to be invalid, illegal or unenforceable, that will not affect or impair, in any way, the validity, legality or enforceability of the remainder of this Agreement.

IN WITNESS WHEREOF, Employee has signed this Employee Stock Option Agreement, and CTS has caused this Employee Stock Option Agreement to be signed by a duly authorized officer of CTS, as of the date first written above.
 
     
   
 
 		  
 		  
 
  By:   /s/ Donald K. Schwanz
 
Donald K. Schwanz
   

     
  CTS Corporation
 
 		  
 		  
 
  By:   /s/ Jeannine M. Davis
 
Jeannine M. Davis
 
Executive Vice President
Administration and Secretary

 
 EX-10.FF 3 ex10_ff.htm EXHIBIT 10.FF Exhibit 10.ff





RSU Supplemental Agreement

This SUPPLEMENTAL AGREEMENT (the “Agreement”) is made and entered into this 15th day of December, 2005, by and between ______________________ (the “Grantee”) and CTS Corporation, an Indiana corporation (the “Company”), pursuant to authorization by the CTS Corporation Compensation Committee (the “Committee”), as more specifically set forth below.

WHEREAS, the Company and the Grantee entered into those certain Restricted Stock Unit Agreements dated _____________ (the “2004 Grant Agreement”) and dated _________________ (the “2005 Grant Agreement”), whereby the Company granted to the Grantee restricted stock units pursuant to the CTS Corporation 2004 Omnibus Long-term Incentive Plan (the “Omnibus Plan”);

WHEREAS, the Company has determined that the provisions of the 2004 Grant Agreement concerning an election to defer distributions should be amended to comply with Section 409A of the Internal Revenue Code of 1986, as amended;

WHEREAS, the Company has determined that the provisions of the 2004 and 2005 Grant Agreements which allow the Grantee to make an election upon vesting to either pay income and employment taxes in cash or to allow the Company to net shares for this purpose should be amended to comply with Financial Accounting Standard 123R;

WHEREAS, Section 10 of the Omnibus Plan authorizes the Committee to determine the terms and conditions of restricted stock awards granted under the Omnibus Plan;

WHEREAS, pursuant to resolutions adopted on November 2, 2005, the Committee has made the determinations and designations authorizing the amendments set forth in this Agreement.

NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows:

1. Section 2, 3 and 4 of the 2004 Grant Agreement shall be deleted and the following substituted therefor:

“2. Section 409A of the Code. It is intended that this Agreement and its administration comply with the provisions of Section 409A of the Code. Accordingly, notwithstanding any provision in this Agreement or in the Plan to the contrary, this Agreement and the Plan will be interpreted applied and, to the minimum extent necessary to comply with Section 409A of the Code, amended, so that the Agreement does not fail to meet, and is operated in accordance with, the requirements of paragraphs (2), (3) and (4) of Section 409A(a) of the Code. As used herein, “Code” means the Internal Revenue Code of 1986 as amended from time to time, and any interpretations thereof issued by the U.S. Treasury Department on which the Company is permitted to rely.
 
3. Vesting and Settlement of Restricted Stock Units. The Award shall vest and become non-forfeitable in installments equal to twenty percent (20%) multiplied by the initial number of Restricted Stock Units specified in Section 1 of this Agreement on each of the following dates; __________________________________________________________, (each such date, a "Vesting Date"), provided that the Grantee remains in the continuous employ of the Company and is an employee of the Company on the Vesting Date.

Restricted Stock Units shall be settled on the basis of one Share for each vested Restricted Stock Unit. The Company shall distribute to the Grantee Shares equal to twenty percent (20%) multiplied by the number of initial Restricted Stock Units specified in Section 1 above, on the following dates, or as soon thereafter as is reasonably practicable; ___________________________________________________________ (each such date of distribution, a "Settlement Date"). The Company’s obligations to the Grantee with respect to vested Restricted Stock Units will be satisfied in full upon the distribution of one Share for each Restricted Stock Unit. On the Settlement Date(s), the Company may, at its election, either (i) credit the number of Shares to be distributed to the Grantee as of that Settlement Date to a book-entry account in the name of the Grantee held by the Company’s transfer agent; or (ii) credit the number of Shares to be distributed to the Grantee as of that Settlement Date to a brokerage account designated by the Grantee. In no event may any Settlement Date be accelerated except in accordance with Section 409A of the Code.

1
Notwithstanding anything to the contrary in this Agreement, upon the first to occur of the following events, all Restricted Stock Units granted hereunder shall vest and become nonforfeitable and Shares shall be distributed to the Grantee, estate, guardian or beneficiary of the Grantee as the case may be, in the settlement of Restricted Stock Units as soon as reasonably practicable, and such date(s) of distribution shall be deemed to be the Settlement Date(s):

(a) Grantee’s becoming disabled, as defined by Section 409A of the Code;

(b) Grantee’s death;

(c) To the extent permitted by Section 409A of the Code, a change in ownership or effective control of the Company; or in the ownership of a substantial portion of the assets of the Company; or

(d) Grantee’s unforeseeable emergency, as defined and not in excess of the amount permitted by Section 409A of the Code.

Unless the Committee determines otherwise in its sole discretion, if the Grantee’s employment with the Company terminates for any reason not specified above, all Restricted Stock Units granted hereunder which have not vested as of the date of such termination of employment shall be permanently forfeited on such termination date.

4. Tax Withholding. The Company shall have the right to deduct from any compensation due the Grantee from the Company any federal, state, local or foreign taxes required by law to be withheld in connection with the issuance of Shares or vesting of any Restricted Stock Unit pursuant to this Agreement. To the extent that the amounts payable to the Grantee are insufficient for such withholding, it shall be a condition to the issuance of Shares or vesting of the Restricted Stock Units, as the case may be, that the Grantee shall pay such taxes or make provisions that are satisfactory to the Company for the payment thereof.

The Company shall retain Shares otherwise deliverable on the Settlement Date in an amount sufficient to satisfy the amount of tax required to be withheld, provided that such amounts shall not exceed the statutorily required minimum withholding. The determination of the number of Shares retained for this purpose shall be based on the Fair Market Value of the Shares on the Settlement Date. In the event that the retention of Shares to satisfy withholding taxes would otherwise result in the delivery of a fractional Share, the Company will round down to the next whole Share and apply the value of the fractional Share to the recipient's tax obligations or, in the alternative, the Company may make such other arrangements to avoid the issuance of a fractional Share as may be permitted by law. No Shares shall be transferred to the Grantee hereunder until such time as all applicable withholding taxes have been satisfied. Employment tax withholding shall be calculated based on the Fair Market Value of the Shares on the applicable Vesting Date and income tax withholding shall be calculated based on the Fair Market Value of the Shares on the Settlement Date.”

         2.
Section 9 of the 2004 Grant Agreement shall be amended to delete reference to Deferral Date(s).

3.  
The Restricted Stock Unit Award Deferral Elections forms attached to the 2004 Grant Agreement shall be deleted in their entirety.

4.  
Section 4 of the 2005 Grant Agreement shall be amended in its entirety to read as follows:

“The Company shall have the right to deduct from any compensation due the Grantee from the Company any federal, state, local or foreign taxes required by law to be withheld in connection with the issuance of Shares or vesting of any Restricted Stock Unit pursuant to this Agreement. To the extent that the amounts payable to the Grantee are insufficient for such withholding, it shall be a condition to the issuance of Shares or vesting of the Restricted Stock Units, as the case may be, that the Grantee shall pay such taxes or make provisions that are satisfactory to the Company for the payment thereof.
 
The Company shall retain Shares otherwise deliverable on the Settlement Date in an amount sufficient to satisfy the amount of tax required to be withheld, provided that such amount shall not exceed the statutorily required minimum withholding. The determination of the number of Shares retained for this purpose shall be based on the Fair Market Value of the Shares on the Settlement Date. In the event that the retention of Shares to satisfy withholding taxes would otherwise result in the delivery of a fractional Share, the Company will round down to the next whole Share and apply the value of the fractional Share to the recipient's tax obligations or, in the alternative, the Company may make such other arrangements to avoid the issuance of a fractional Share as may be permitted by law. No Shares shall be transferred to the Grantee hereunder until such time as all applicable withholding taxes have been satisfied. Employment tax withholding shall be calculated based on the Fair Market Value of the Shares on the applicable Vesting Date and income tax withholding shall be calculated based on the Fair Market Value of the Shares on the Settlement Date.”

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first written above.
 
     
  CTS Corporation, an Indiana corporation
 
 		  
 		  
 
  By:   /s/ Richard G. Cutter
 
Richard G. Cutter
  Vice President, Secretary and General Counsel





 
 
 EX-10.Q 4 ex10_q.htm EXHIBIT 10.Q Exhibit 10.q
Form 10-K 2005     

 
AMENDMENTS TO THE CTS CORPORATION PENSION PLAN

 
1.  
Effective May 1, 2004, Section 1.2 of the CTS Corporation Pension Plan is amended in its entirety to read as follows:

1.2  
Plan Fiduciaries. The Fiduciary responsibilities under the Plan are assigned and allocated as follows:

A.  
Administrator. The CTS Corporation Benefit Plan Administration Committee, 905 N. West Boulevard, Elkhart, Indiana, 46514, is the Plan Administrator of the Plan. The Plan Administrator has responsibility for the general administration of the Plan.
B.  
Investment Committee. The CTS Corporation Benefit Plan Investment Committee, 905 N. West Boulevard, Elkhart, Indiana, 46514, has responsibility for the investment of Plan assets.
C.  
Trustee. Northern Trust, 50 South LaSalle Street, Chicago, Illinois 60675 is the Trustee of the Plan.
D.  
Investment Managers. Certain investment managers may be designated Trustee to invest and manage assets of the Plan from time to time by the Investment Committee or

2.  
Effective March 1, 2005, Section 6.9, 6.10 and 12.5(c)(ii) of the CTS Corporation Pension Plan is amended to delete reference to “$5,000” and substitute “$1,000” therefore in each instance.

3.  
Effective July 1, 2002, Subsection 7.5(b)(2) of the CTS Corporation Pension Plan (“Maximum Permissible benefit”) is amended by adding the following paragraph (iv) to the end thereof::
 
(iv) If the benefit of the Employee is payable in a form that is not subject to Code Section 417(e)(3), the equivalent annual benefit is the greater of the equivalent annual benefit computed using the interest rate and mortality rate or tabular factor specified in the Plan for actuarial equivalence for the particular form of benefit payable, and the equivalent benefit computed using a five percent interest rate assumption and the Applicable Mortality Table as defined in Section 6.12 of the Plan. If the benefit of the Employee is payable in a form that is subject to Code Section 417(e)(3), the equivalent annual benefit is the greater of the equivalent annual benefit computed using the interest rate and mortality rate or tabular factor specified in the Plan for actuarial equivalence for the particular form of benefit payable, and the equivalent benefit computed using the Applicable Interest Rate and the Applicable Mortality Table, both as defined in Section 6.12 of the Plan.

4.  
Effective July 1, 2002, Subsection 7.5(b)(2) of the CTS Corporation Pension Plan is further amended by replacing the phrase “in (ii) or (iii) below” contained in the parenthetical in the first paragraph thereof with the phrase “in (ii), (iii), or (iv) below”.
 
5.  
Effective July 1, 2002, Subsection 7.5(b)(3) of the CTS Corporation Pension Plan is amended in its entirety to read as follows:

(3) “Compensation” means the sum of (a) and (b) as follows:

(a)  
the amount reported by the Employer in the “Wages, Tips, Other Compensation” box of the Employee’s Form W-2 (Wage and Tax Statement) or any successor thereto. Such amount is described in more detail as follows: the sum of (i) an Employee’s wages within the meaning of Code Section 3401(a), plus (ii) all other payments to the Employee by the Employer (in the course of the Employer’s trade or business), in both cases for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3), or 6052. An Employee’s compensation for purposes of this limitation shall be determined without regard to any rules under Code Section 3401 that limit the remuneration included in wages based on the nature or location of the employment or the services performed; and

(b)  
elective amounts deferred by thc Employee and excluded from the Employee’s gross income under a salary reduction agreement that meets the requirements of Code Section 401(k) or Code Section 125, and elective amounts that are not includible in the gross income of the Employee by reason of Code Section 132(f)(4).
 
6.  
Effective May 1, 2004, the first sentence of Section 11.1 of the CTS Corporation Pension Plan is amended to read as follows:

“The Plan Administrator shall be responsible for the general administration of the Plan and shall exercise such powers as may be necessary to carry out the provisions thereof. “




 EX-10.V 5 ex10_v.htm EXHIBIT 10.V Exhibit 10.v

 

CTS CORPORATION

2003 EXCESS BENEFIT RETIREMENT PLAN
As Adopted Effective July 1, 2003, and As Amended Effective June 1, 2004


CTS CORPORATION

2003 EXCESS BENEFIT RETIREMENT PLAN

ARTICLE I

Purpose

1.01
Purpose. It is the intention of CTS Corporation (the “Company”) to maintain appropriate levels of retirement benefits for employees of the Company or any of its subsidiaries who are entitled to benefits under the CTS Corporation Pension Plan (the “Pension Plan”). Accordingly, the Company hereby establishes the CTS Corporation 2003 Excess Benefit Retirement Plan (the “Plan”). This Plan is intended to provide benefits to eligible persons in order to maintain the level of total retirement benefits which, but for the limitations on annual benefits and compensation which may be taken into account under the Internal Revenue Code of 1986, as amended, (the “Code”) would otherwise be payable under, or as a consequence of, the provisions of the Pension Plan and to provide a competitive level of retirement benefits to the Company’s executives.

1.02
Effective Date. This Plan is effective as of July 1, 2003. However, in calculating the amounts described in Sections 3.01(a) and 3.01(b) amounts which accrued (or would have accrued) but for the Code limitations referred to in Section 3.01 prior to the effective date shall be taken into account.

ARTICLE II

Eligibility

2.01  
Persons Eligible to Receive Benefits. Every individual who is listed on Appendix A shall be eligible to receive a “Benefit” as described in Section 3.01. Each such individual shall be known as a “Member”.

2.02  
Beneficiary. Every individual who is eligible to receive a Benefit under the Pension Plan by reason of being the Beneficiary of another individual who was a Member under this Plan, shall be known as a “Beneficiary”. The term “Beneficiary” shall include joint pensioners, heirs-at-law, legal representatives, fiduciaries, and every other person (other than a Member) to whom Benefits may be distributed, as determined under the Pension Plan. A Beneficiary’s right to receive Benefits under this Plan shall be subject to the same conditions which apply to the Beneficiary’s right to receive benefits under the Pension Plan.



1
 

ARTICLE III

Benefits

3.01
Amount of Benefit. The amount of the Benefit which a Member (or Beneficiary, if applicable) is eligible to receive under this Plan shall be equal to the excess of (a) over (b):

(a)  
The amount of benefit which such Member would be entitled to receive under the Pension Plan, if

 
(i)
the definition of "Pay" used in determining the Member's benefit under the Pension Plan included 50% of the Fair Market Value of Shares due to the Member (prior to withholding) in settlement of Restricted Stock Units which were awarded under the CTS Corporation 2004 Omnibus Long-Term Incentive Plan, determined as of the applicable vesting date of such Restricted Stock Units;

 
(ii)
the percentage of "Compensation" (as defined in the Pension Plan) used in determining the Member’s benefit under the applicable provision of Section 6 of the Pension Plan was,

1.25% if the date of determination occurs during the Member's first year of participation in this Plan;

1.35% if the date of determination occurs during the Member’s second year of participation in this Plan;

1.45% if the date of determination occurs during the Member’s third year of participation in this Plan;

1.55% if the date of determination occurs during the Member’s fourth year of participation in this Plan;

1.65% if the date of determination occurs during the Member’s fifth year of participation in this Plan;

1.75% if the date of determination occurs during any subsequent year of participation in this Plan; and 

 
(iii)
such benefit were computed without giving effect to the limitations then currently imposed by Code Section 401(a)(17) and Code Section 415(b) and regulations thereunder and without regard to the benefit accrual determined under Section 6.13 of the Pension Plan. For purposes of this Section 3.01, a Member’s date of participation in this Plan shall be the later of July 1, 2003, or the effective date that the Member is first eligible to participate in the Plan in accordance with Article V. A Member’s “years of participation” will begin on the Members’ date of participation and each subsequent anniversary thereof.

 
(b)
The amount of benefit which such Member actually receives under the Pension Plan. 

 
3.02
Payment of Benefits. Payment of benefits shall be accomplished by means of unfunded payments directly from the Company. Except as provided in Section 3.03 and Article V, distribution of any such benefits, whether to a Beneficiary or a Member, shall be made at the same time and in the same manner and form and subject to the same conditions as the benefit provided by the Pension Plan.

3.03
Immediate Cashout. Notwithstanding the provisions of Section 3.02, if the Plan benefit is immediately payable to a Member or Beneficiary and the amount of the monthly benefit payable from the Plan to a Member or Beneficiary does not exceed $50, the actuarial present value of the immediate Plan benefit shall be paid in an immediate single lump sum cash payment in lieu of any other form of payment. Actuarial present values shall be determined using the actuarial assumptions employed under the Pension Plan for lump sum cashouts.

2

ARTICLE IV

Authority of Committee

4.01
Committee. The Plan shall be approved and administered by the Compensation Committee of the CTS Corporation Board of Directors (the “Committee”);

4.02
Authority of Committee. The Committee shall have authority to control, delegate and manage the operation and administration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functions hereunder, whether or not such rights and powers are specifically enumerated herein.

 
Without limiting the foregoing, and in addition to the other powers set forth in this Article IV, the Committee shall have the following express authorities:

(a)  
To construe and interpret the Plan and determine the amount, manner and time of payment of any Benefits hereunder;

(b)  
To prescribe procedures to be followed by Members or Beneficiaries filing any requests or applications in connection with Benefits hereunder;

(c)  
To prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan;

(d)  
To receive from the Company and from Members and Beneficiaries such information as shall be necessary for the proper administration of the Plan;

(e)  
To furnish the Company, upon request, such annual and other reports with respect to the administration of the Plan as are reasonable and appropriate;

(f)  
To resolve all questions and make all factual determinations relating to any matter for which it has administrative responsibility; and

(g)  
To delegate to the CTS Corporation Employee Benefit Committee such administrative powers and duties as it deems appropriate.

4.03
Disqualification of Committee Member. No member of the Committee or delegate of the Committee shall vote upon any question or exercise any discretion under the Plan relating specifically to himself or his Beneficiaries.

 
4.04
Records and Reports. The Committee shall take all such action as it deems necessary or appropriate to comply with any laws or regulations now or hereafter in existence relating to the maintenance of records, notifications or registrations.


3
ARTICLE V

Amendment or Termination

The Company intends the Plan to be permanent, but reserves the right, at any time, to modify, amend or terminate the Plan, provided, however, that no termination, amendment or modification of or to the Plan may, without written approval of a Member, reduce the total benefit payable under this Plan or the Pension Plan, assuming the Member retired, died or otherwise terminated employment as of the date of such termination, amendment or modification. Such amount shall constitute an irrevocable obligation of the Company. The Committee hereby delegates to the Chief Executive Officer of the Company the authority to add, in the Officer’s sole discretion, individuals to Appendix A who become members of the Company’s senior management after the Effective Date of the Plan, and to remove those individuals from Appendix A of the CTS Corporation 1996 Excess Benefit Retirement Plan, if they are members of that plan.

Notwithstanding any other provision of the Plan, if (i) a Member’s employment with the Company terminates following a Change in Control (as defined in Appendix B to the Plan) and (ii) as a result of such termination of employment the Member becomes entitled to change in control severance benefits under any severance agreement between the Company and the Member, the actuarial present value of the Member’s benefit under this Plan shall be paid immediately in a single lump sum cash payment in lieu of any other form of benefit. For purposes of calculating the lump sum payment, the Member shall be considered to be fully vested in both his or her benefit under this Plan and his or her benefit under the Pension Plan. If the Plan benefit would otherwise be payable immediately to the Member or Beneficiary, the actuarial present value shall be the present value of the immediate Plan benefit. If the Plan benefit is not otherwise payable immediately to the Member or Beneficiary, the actuarial present value shall be the present value of the deferred Plan benefit payable at the normal retirement benefit commencement date under the Pension Plan. Actuarial present values shall be determined using the actuarial assumptions employed under the Pension Plan for lump sum cashouts.


ARTICLE VI

Miscellaneous

6.01
No Guarantee of Employment. Neither the creation of this Plan nor anything contained herein shall be construed (a) to give any Member the right to remain in the employ of the Company or any of its subsidiaries, (b) to give any Member or Beneficiary any benefits not specifically provided by the Plan, or (c) to modify, in any manner, the right of the Company or any of its subsidiaries to modify, amend, or terminate any of its employee benefit plans.

6.02
Rights of Participants and Beneficiaries. Payment of Benefits to which any Member or Beneficiary is entitled shall be made only to such Member or Beneficiary. The expectation of such Benefits shall not be assignable by Member or Beneficiaries or by operation of law, or be subject to reduction for the debts or defaults of such Members or Beneficiaries whether to the Company or to others, or be subject to execution or attachment. The preceding sentence shall not apply to portions of Benefits applied at the direction of the person eligible to receive such Benefits to the payment of premiums on life or health insurance provided under any Company program, or to the withholding of federal income taxes.

6.03
Payments in Event of Final Determination. Notwithstanding any other provision of the Plan to the contrary, if any amounts accrued under the Plan by a Member or Beneficiary are found in a final determination to have been includible in the gross income of the Member or Beneficiary prior to the payment of such amounts to the Member or Beneficiary, the Company will, as soon as practicable, pay such amounts to or on behalf of the Member or Beneficiary. For purposes of the Plan, a “final determination” means (i) an assessment of tax by the Internal Revenue Service addressed to the Member or Beneficiary which is not timely appealed to the courts, (ii) a final determination by the United States Tax Court or any other federal court, the time for an appeal thereof having expired or been waived, or (iii) an opinion of counsel to the Company with respect to a change in any applicable law, regulation or ruling, in each case to the effect that amounts accrued under the Plan are subject to federal income tax to the Member or Beneficiary prior to payment. No final determination will be deemed to have occurred until the Committee has actually received a copy of the assessment, court order or opinion which forms the basis thereof and such other documents as it may reasonably request.
 
6.04 Claims Procedure.

 
(a)
If a Member or Beneficiary does not receive the benefits which the Member or Beneficiary believes he or she is entitled to receive under the Plan, the Member or Beneficiary may file a claim for benefits with the Committee. All claims must be made in writing and be signed by the claimant. If the claimant does not furnish sufficient information to enable the Committee to process the claim, the Committee will indicate to the claimant any additional information which is required.

 
(b)
Each claim will be approved or disapproved by the Committee within 90 days following the receipt of the information necessary to process the claim, or within 180 days if the Committee determines that special circumstances require an extension of the 90-day period and the claimant is notified of the extension within the-original 90-day period. In the event the Committee denies a claim for benefits in whole or in part, the Committee will notify the claimant in writing of the adverse determination. Such notice by the Committee will also set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the adverse determination, reference to the specific Plan provisions on which the determination is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information is necessary and an explanation of the Plan’s claim review procedure as set forth in Section 6.04(c).

(c)  
A claimant may appeal an adverse benefit determination by requesting a review of the decision by the Committee or a person designated by the Committee. An appeal must be submitted in writing within 60 days after receiving notification of the adverse determination and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all of the grounds upon which the claimant’s request for review is based and any facts in support thereof, and (iii) set forth any issues or comments which the claimant deems pertinent to the appeal. The claimant will be given the opportunity to submit written comments, documents, records and other information relating to the claim for benefits and will be provided, upon written request and free of charge, reasonable access to and copies of all documents, records and other information relevant to the claim for benefits, provided the Committee finds the requested documents or materials are relevant to the appeal. The Committee or the person designated by the Committee will make a full and fair review of each appeal and any materials submitted by the claimant relating to the claim, without regard to whether the information was submitted or considered in the initial determination. On the basis of its review, the Committee or person designated by the Committee will make an independent determination of the claimant’s eligibility for benefits under the Plan. The Committee or the person designated by the Committee will act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case the Committee will notify the claimant within the initial 60-day period of such special circumstances and will render a decision as soon as possible but not later than 120 days after the appeal is received. The decision of the Committee or person designated by the Committee on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Committee or person designated by the Committee denies an appeal in whole or in part, it will give written notice of the determination to the claimant. Such notice will set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the adverse determination, reference to the specific Plan provisions on which the determination is based, a statement that the claimant is entitled to receive, upon request and free of charge, access to and copies of all documents, records and other information relevant to the claim and a statement of the claimant’s right to bring an action under section 502(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), if applicable.
 
6.05
Expenses and Indemnity. All expenses and fees incurred in connection with the administration of the Plan will be paid by the Company. To the fullest extent permitted by applicable law, the Company will indemnify and save harmless the Committee, the Board and any delegate of the Committee who is an employee of the Company and any officers and employees of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims, arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. Without limiting the generality of the foregoing, the Company will, promptly upon request, advance funds to persons entitled to indemnification hereunder to the extent necessary to defray legal and other expenses incurred in the defense of such liabilities and claims, as and when incurred. This indemnity will not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise.

6.06
Withholding. There will be deducted from each payment made under the Plan all taxes which are required to be withheld by the Company in respect to such payment.

6.07
Receipt or Release. Any payment to a Member or the Member’s Beneficiary in accordance with the provisions of the Plan will, to the extent thereof, be in full satisfaction of all claims against the Committee and the Company with respect to the amount paid. The Committee may require such Member or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.

6.08
Payments on Behalf of Persons Under Incapacity. In the event that any amount or distribution becomes payable under the Plan to a person who, in the sole judgment of the Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefor, the Committee may direct that such distribution or payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any distribution or payment made pursuant to such determination will, to the extent thereof, constitute a full release and discharge of the Committee and the Company with respect to the distribution or amount paid.

6.09
Successors and Assigns. The Company may not assign its obligations under this Plan, whether by contract, merger, operation of law or otherwise, unless the assignment is to an assignee or successor entity (in either case, hereafter called a “Successor”) that has stockholders’ equity or the closest equivalent thereto (as measured by the most recent audited financial statements of such Successor) equal to or greater than the stockholders’ equity of the Company (as measured immediately prior to the event that causes such entity to become a Successor to the Company). The provisions of this Section 6.09 will be binding upon each and every Successor to the Company.

6.10
No Requirement to Fund. No provisions in the Plan, either directly or indirectly, shall be construed to require the Company to reserve, or otherwise set aside, funds for the payment of benefits hereunder, and Members and Beneficiaries shall have the status of general unsecured creditors with respect to the obligation of the Company to make payments under the Plan. The Plan is intended to provide benefits for “management or highly compensated employees” within the meaning of ERISA and therefore to be exempt from the provisions of Parts 2, 3 and 4 of the Title I of ERISA.

6.11
Controlling Law. To the extent not preempted by the laws of the United States of America, the laws of the State of Indiana shall be the controlling state law in all matters relating to the Plan and shall apply.

6.12
Severability. If any provisions of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan; and the Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein.

6.13
Provisions of Pension Plan Unchanged. Any benefit payable under the Pension Plan shall be paid solely in accordance with the terms and provisions of the Pension Plan; and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan.
 
6.14
Nature of Payments. Any benefits provided hereunder shall constitute nonqualified deferred compensation payments to the Member and shall not be taken into account in computing the amount of salary or compensation of the Member for the purposes of determining any pension, retirement, death or other benefits under (a) any pension, retirement, profit-sharing, bonus, life insurance or other employee benefit plan of the Company or any of its subsidiaries or (b) any agreement between the Company or any subsidiary and the Member except as such plan or agreement shall otherwise expressly provide.

6.15
Gender and Number. Masculine gender shall include the feminine; and the singular shall include the plural, unless the context clearly indicated otherwise.

 
IN WITNESS WHEREOF, CTS Corporation has caused the CTS Corporation 2003 Excess Benefit Retirement Plan to be executed by its proper officer duly authorized by its Board of Directors.
 
     
  COMPANY NAME CORPORATION
 
 		  
 		  
 
  By:   /s/ James L. Cummins
 
James L. Cummins
 
Senior Vice President
Administration

5


 
APPENDIX B

“Change in Control” means the occurrence of any of the following events:

(i)    the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of aggregate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of 25% or more of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors (the “Voting Stock”) of the Company (including, for this purpose, any Voting Stock of the Company acquired prior to July 1, 2003); provided, however, that for purposes of this Section (i), the following will not be deemed to result in a Change in Control: (A) any acquisition of Voting Stock of the Company directly from the Company that is approved by the Incumbent Board (as defined below), (B) any acquisition of Voting Stock of the Company by the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock (a “Subsidiary”) and any change in the percentage ownership of Voting Stock of the Company that results from such acquisition, (C) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (D) any acquisition of Voting Stock of the Company by any Person pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section (iii); or
 
(ii)     individuals who are members of the Board of Directors of CTS Corporation (the “Board” collectively “Directors” and as individuals “Director”) and who, and who, as of July 1, 2003, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to July 1, 2003 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) will be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual becoming a Director as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Securities Exchange Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (collectively, an "Election Contest"); or

(iii)    consummation of (A) a reorganization, merger or consolidation of the Company, or (B) a sale or other disposition of all or substantially all of the assets of the Company, (such reorganization, merger, consolidation or sale each, a "Business Combination"), unless, in each case, immediately following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of the then outstanding shares of common stock and the combined voting power of the then outstanding Voting Stock of the Company entitled to vote generally in the election of Directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries), (II) no Person (other than the Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 15% or more of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv)    approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section (iii).


 EX-10.W 6 ex10_w.htm EXHIBIT 10.W Exhibit 10.w

 

CTS CORPORATION

1996 EXCESS BENEFIT RETIREMENT PLAN
As Adopted Effective July 1, 1996
and Amended and Restated Effective July 1, 2003 and
As Amended Effective June 1, 2004

CTS CORPORATION

1996 EXCESS BENEFIT RETIREMENT PLAN

ARTICLE I

Purpose

1.01
Purpose. It is the intention of CTS Corporation (the “Company”) to maintain appropriate levels of retirement benefits for employees of the Company or any of its subsidiaries who are entitled to benefits under the CTS Corporation Pension Plan (the “Pension Plan”). Accordingly, the Company established the CTS Corporation Excess Benefit Retirement Plan (the “Plan”). This Plan is intended to provide benefits to eligible persons in order to maintain the level of total retirement benefits which, but for the limitations on annual benefits and compensation which may be taken into account under the Internal Revenue Code of 1986, as amended, (the “Code”) would otherwise be payable under, or as a consequence of, the provisions of the Pension Plan.

1.02
Effective Date. This Plan was originally effective as of July 1, 1996 and is hereby amended and restated as of July 1, 2003, and is renamed the CTS Corporation 1996 Excess Benefit Retirement Plan. However, in calculating the amounts described in Sections 3.01(a) and 3.01(b), amounts which accrued (or would have accrued) but for the Code limitations referred to in Section 3.01 prior to the effective dates shall be taken into account.

ARTICLE II

Eligibility

2.01
Persons Eligible to Receive Benefits. Every individual who is listed on Appendix A shall be eligible to receive a “Benefit” as described in Section 3.01. Each such individual shall be known as a “Member”.

2.02
Beneficiary. Every individual who is eligible to receive a Benefit under the Pension Plan by reason of being the Beneficiary of another individual who was a Member under this Plan, shall be known as a “Beneficiary”. The term “Beneficiary” shall include joint pensioners, heirs-at-law, legal representatives, fiduciaries, and every other person (other than a Member) to whom Benefits may be distributed, as determined under the Pension Plan. A Beneficiary’s right to receive benefits under this Plan shall be subject to the same conditions which apply to the Beneficiary’s right to receive benefits under the Pension Plan.

1

ARTICLE III

Benefits

3.01
Amount of Benefit. The amount of the Benefit which a Member (or Beneficiary, if applicable) is eligible to receive under this Plan shall be equal to the excess of (a) over (b):

(a)  
The amount of benefit which such Member would be entitled to receive under the Pension Plan, if
 
(i) the definition of "Pay" used in determining the Member's benefit under the Pension Plan included 50% of the Fair Market Value of Shares due to the Member (prior to withholding) in settlement of Restricted Stock Units which were awarded under the CTS Corporation 2004 Omnibus Long-Term Incentive Plan, determined as of the applicable vesting date of such Restricted Stock Units; and

(ii)   such benefit were computed without giving effect to the limitations then currently imposed by Code Section 401(a)(17) and Code Section 415(b) and regulations thereunder and without regard to the benefit accrual determined under Section 6.13 of the Pension Plan.
 
(b) The amount of benefit which such Member actually receives under the Pension Plan.
 
3.02
Payment of Benefits. Payment of benefits shall be accomplished by means of unfunded payments directly from the Company. Except as provided in Section 3.03 and Article V, distribution of any such benefits, whether to a Beneficiary or a Member, shall be made at the same time and in the same manner and form and subject to the same conditions as the benefit provided by the Pension Plan.

3.03
Immediate Cashout. Notwithstanding the provisions of Section 3.02, if the Plan benefit is immediately payable to a Member or Beneficiary and the amount of the monthly benefit payable from the Plan to the Member or Beneficiary does not exceed $50, the actuarial present value of the immediate Plan benefit shall be paid in an immediate single lump sum cash payment in lieu of any other form of payment. Actuarial present values shall be determined using the actuarial assumptions employed under the Pension Plan for lump sum cashouts.


2
ARTICLE IV

Authority of Committee

4.01
Committee. The Plan, as approved by the Board of Directors of CTS Corporation (the “Board”), shall be administered by the Compensation Committee of the Board (the “Committee”);

4.02
Authority of Committee. The Committee shall have authority to control, delegate and manage the operation and administration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functions hereunder, whether or not such rights and powers are specifically enumerated herein.

 
Without limiting the foregoing, and in addition to the other powers set forth in this Article IV, the Committee shall have the following express authorities:

 
 (a)
To construe and interpret the Plan and determine the amount, manner and time of payment of any Benefits hereunder;

 
 (b)
To prescribe procedures to be followed by Members or Beneficiaries filing any requests or applications in connection with Benefits hereunder;

 
 (c)
To prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan;

(d)  
To receive from the Company and from Members and Beneficiaries such information as shall be necessary for the proper administration of the Plan;

(e)  
To furnish the Company, upon request, such annual and other reports with respect to the administration of the Plan as are reasonable and appropriate; and

(f)  
To resolve all questions and make all factual determinations relating to any matter for which it has administrative responsibility; and

(g)  
To delegate to the CTS Corporation Employee Benefit Committee such administrative powers and duties as it deems appropriate.
 
4.03
Disqualification of Committee Member. No member of the Committee or delegate of the Committee shall vote upon any question or upon the exercise of any discretion under the Plan relating specifically to himself or his Beneficiaries.

4.04
Records and Reports. The Committee shall take all such action as it deems necessary or appropriate to comply with any laws or regulations now or hereafter in existence relating to the maintenance of records, notifications or registrations.

3

ARTICLE V

Amendment or Termination

The Company intends the Plan to be permanent, but reserves the right, at any time, to modify, amend or terminate the Plan, provided, however, that no termination, amendment or modification of or to the Plan may, without written approval of a Member, reduce the total benefit payable under this Plan or the Pension Plan, assuming the Member retired, died or otherwise terminated employment as of the date of such termination, amendment or modification. Such amount shall constitute an irrevocable obligation of the Company. The Committee hereby delegates to the Chief Executive Officer of the Company the authority to add, in the Officer’s sole discretion, individuals to Appendix A who become members of the Company’s senior management after the Effective Date of the Plan.

Notwithstanding any other provision of the Plan, if (i) a Member’s employment with the Company terminates following a Change in Control (as defined in Appendix B to the Plan) and (ii) as a result of such termination of employment the Member becomes entitled to change in control severance benefits under any severance agreement between the Company and the Member, the actuarial present value of the Member’s benefit under this Plan shall be paid immediately in a single lump sum cash payment in lieu of any other form of benefit. For purposes of calculating the lump sum payment, the Member shall be considered to be fully vested in both his or her benefit under this Plan and his or her benefit under the Pension Plan. If the Plan benefit would otherwise be payable immediately to the Member or Beneficiary, the actuarial present value shall be the present value of the immediate Plan benefit. If the Plan benefit is not otherwise payable immediately to the Member or Beneficiary, the actuarial present value shall be the present value of the deferred Plan benefit payable at the normal retirement benefit commencement date under the Pension Plan. Actuarial present values shall be determined using the actuarial assumptions employed under the Pension Plan for lump sum cashouts.

 
ARTICLE VI

Miscellaneous

6.01
No Guarantee of Employment. Neither the creation of this Plan nor anything contained herein shall be construed (a) to give any Member the right to remain in the employ of the Company or any of its subsidiaries, (b) to give any Member or Beneficiary any benefits not specifically provided by the Plan, or (c) to modify, in any manner, the right of the Company or any of its subsidiaries to modify, amend, or terminate any of its employee benefit plans.

6.02
Rights of Participants and Beneficiaries. Payment of Benefits to which any Member or Beneficiary is entitled shall be made only to such Member or Beneficiary. The expectation of such Benefits shall not be assignable by Member or Beneficiaries or by operation of law, or be subject to reduction for the debts or defaults of such Members or Beneficiaries whether to the Company or to others, or be subject to execution or attachment. The preceding sentence shall not apply to portions of Benefits applied at the direction of the person eligible to receive such Benefits to the payment of premiums on life or health insurance provided under any Company program, or to the withholding of federal income taxes.

6.03
Payments in Event of Final Determination. Notwithstanding any other provision of the Plan to the contrary, if any amounts accrued under the Plan by a Member or Beneficiary are found in a final determination to have been includible in the gross income of the Member or Beneficiary prior to the payment of such amounts to the Member or Beneficiary, the Company will, as soon as practicable, pay such amounts to or on behalf of the Member or Beneficiary. For purposes of the Plan, a “final determination” means (i) an assessment of tax by the Internal Revenue Service addressed to the Member or Beneficiary which is not timely appealed to the courts, (ii) a final determination by the United States Tax Court or any other federal court, the time for an appeal thereof having expired or been waived, or (iii) an opinion of counsel to the Company with respect to a change in any applicable law, regulation or ruling, in each case to the effect that amounts accrued under the Plan are subject to federal income tax to the Member or Beneficiary prior to payment. No final determination will be deemed to have occurred until the Committee has actually received a copy of the assessment, court order or opinion which forms the basis thereof and such other documents as it may reasonably request.

4
6.04 Claims Procedure.

 
(a)
If a Member or Beneficiary does not receive the benefits which the Member or Beneficiary believes he or she is entitled to receive under the Plan, the Member or Beneficiary may file a claim for benefits with the Committee. All claims must be made in writing and be signed by the claimant. If the claimant does not furnish sufficient information to enable the Committee to process the claim, the Committee will indicate to the claimant any additional information which is required.

 
(b)
Each claim will be approved or disapproved by the Committee within 90 days following the receipt of the information necessary to process the claim, or within 180 days if the Committee determines that special circumstances require an extension of the 90-day period and the claimant is notified of the extension within the-original 90-day period. In the event the Committee denies a claim for benefits in whole or in part, the Committee will notify the claimant in writing of the adverse determination. Such notice by the Committee will also set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the adverse determination, reference to the specific Plan provisions on which the determination is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information is necessary and an explanation of the Plan’s claim review procedure as set forth in Section 6.04(c).

 
(c)
A claimant may appeal an adverse benefit determination by requesting a review of the decision by the Committee or a person designated by the Committee. An appeal must be submitted in writing within 60 days after receiving notification of the adverse determination and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all of the grounds upon which the claimant’s request for review is based and any facts in support thereof, and (iii) set forth any issues or comments which the claimant deems pertinent to the appeal. The claimant will be given the opportunity to submit written comments, documents, records and other information relating to the claim for benefits and will be provided, upon written request and free of charge, reasonable access to and copies of all documents, records and other information relevant to the claim for benefits, provided the Committee finds the requested documents or materials are relevant to the appeal. The Committee or the person designated by the Committee will make a full and fair review of each appeal and any materials submitted by the claimant relating to the claim, without regard to whether the information was submitted or considered in the initial determination. On the basis of its review, the Committee or person designated by the Committee will make an independent determination of the claimant’s eligibility for benefits under the Plan. The Committee or the person designated by the Committee will act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case the Committee will notify the claimant within the initial 60-day period of such special circumstances and will render a decision as soon as possible but not later than 120 days after the appeal is received. The decision of the Committee or person designated by the Committee on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Committee or person designated by the Committee denies an appeal in whole or in part, it will give written notice of the determination to the claimant. Such notice will set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the adverse determination, reference to the specific Plan provisions on which the determination is based, a statement that the claimant is entitled to receive, upon request and free of charge, access to and copies of all documents, records and other information relevant to the claim and a statement of the claimant’s right to bring an action under section 502(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), if applicable.

6.05 Expenses and Indemnity. All expenses and fees incurred in connection with the administration of the Plan will be paid by the Company. To the fullest extent permitted by applicable law, the Company will indemnify and save harmless the Committee, the Board and any delegate of the Committee who is an employee of the Company and any officers and employees of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims, arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. Without limiting the generality of the foregoing, the Company will, promptly upon request, advance funds to persons entitled to indemnification hereunder to the extent necessary to defray legal and other expenses incurred in the defense of such liabilities and claims, as and when incurred. This indemnity will not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise.
 
6.06 Withholding. There will be deducted from each payment made under the Plan all taxes which are required to be withheld by the Company in respect to such payment.

6.07 Receipt or Release. Any payment to a Member or the Member’s Beneficiary in accordance with the provisions of the Plan will, to the extent thereof, be in full satisfaction of all claims against the Committee and the Company with respect to the amount paid. The Committee may require such Member or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.

5
6.08 Payments on Behalf of Persons Under Incapacity. In the event that any amount or distribution becomes payable under the Plan to a person who, in the sole judgment of the Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefor, the Committee may direct that such distribution or payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any distribution or payment made pursuant to such determination will, to the extent thereof, constitute a full release and discharge of the Committee and the Company with respect to the distribution or amount paid.

6.09  
Successors and Assigns. The Company may not assign its obligations under this Plan, whether by contract, merger, operation of law or otherwise, unless the assignment is to an assignee or successor entity (in either case, hereafter called a “Successor”) that has stockholders’ equity or the closest equivalent thereto (as measured by the most recent audited financial statements of such Successor) equal to or greater than the stockholders’ equity of the Company (as measured immediately prior to the event that causes such entity to become a Successor to the Company). The provisions of this Section 6.09 will be binding upon each and every Successor to the Company.

6.10
No Requirement to Fund. No provisions in the Plan, either directly or indirectly, shall be construed to require the Company to reserve, or otherwise set aside, funds for the payment of benefits hereunder, and Members and Beneficiaries shall have the status of general unsecured creditors with respect to the obligation of the Company to make payments under the Plan. The Plan is intended to provide benefits for “management or highly compensated employees” within the meaning of ERISA and therefore to be exempt from the provisions of Parts 2, 3 and 4 of the Title I of ERISA.

6.11
Controlling Law. To the extent not preempted by the laws of the United States of America, the laws of the State of Indiana shall be the controlling state law in all matters relating to the Plan and shall apply.

6.12
Severability. If any provisions of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan; and the Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein.

6.13
Provisions of Pension Plan Unchanged. Any benefit payable under the Pension Plan shall be paid solely in accordance with the terms and provisions of the Pension Plan; and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan.

6.14
Nature of Payments. Any benefits provided hereunder shall constitute nonqualified deferred compensation payments to the Member and shall not be taken into account in computing the amount of salary or compensation of the Member for the purposes of determining any pension, retirement, death or other benefits under (a) any pension, retirement, profit-sharing, bonus, life insurance or other employee benefit plan of the Company or any of its subsidiaries or (b) any agreement between the Company or any subsidiary and the Member except as such plan or agreement shall otherwise expressly provide.

6.15
Gender and Number. Masculine gender shall include the feminine; and the singular shall include the plural, unless the context clearly indicated otherwise.

IN WITNESS WHEREOF, CTS Corporation has caused the 1996 CTS Corporation Excess Benefit Retirement Plan to be executed by its proper officer duly authorized by its Board of Directors.
 

     
  CTS Corporation
 
 		  
 		  
 
  By:   /s/ James L. Cummins
 
James L. Cummins
 
Senior Vice President
Administration


 

6

 
APPENDIX B



“Change in Control” means the occurrence of any of the following events:

 
(i)
the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of aggregate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of 25% or more of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors (the “Voting Stock”) of the Company (including, for this purpose, any Voting Stock of the Company acquired prior to July 1, 2003); provided, however, that for purposes of this Section (i), the following will not be deemed to result in a Change in Control: (A) any acquisition of Voting Stock of the Company directly from the Company that is approved by the Incumbent Board (as defined below), (B) any acquisition of Voting Stock of the Company by the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock (a “Subsidiary”) and any change in the percentage ownership of Voting Stock of the Company that results from such acquisition, (C) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (D) any acquisition of Voting Stock of the Company by any Person pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section (iii); or

(ii) individuals who are members of the Board of Directors of CTS Corporation (the “Board” collectively “Directors” and as to an individual “Director”) and who, as of July 1, 2003, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to July 1, 2003 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) will be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual becoming a Director as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Securities Exchange Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (collectively, an "Election Contest"); or

(iii) consummation of (A) a reorganization, merger or consolidation of the Company, or (B) a sale or other disposition of all or substantially all of the assets of the Company, (such reorganization, merger, consolidation or sale each, a "Business Combination"), unless, in each case, immediately following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of the then outstanding shares of common stock and the combined voting power of the then outstanding Voting Stock of the Company entitled to vote generally in the election of Directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries), (II) no Person (other than the Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 15% or more of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section (iii).


 EX-10.AA 7 ex10_aa.htm EXHIBIT 10.AA Exhibit 10.aa



CTS CORPORATION
RESTRICTED STOCK UNIT AGREEMENT
 
 
THIS AGREEMENT is made as of the 7th day of December, 2005 (the "Grant Date") between CTS CORPORATION, an Indiana corporation (the "Company"), and «Director» (the "Grantee").


1.
Grant. Subject to the terms set forth in this Agreement and in the Company's 2004 Omnibus Long-Term Incentive Plan (the "Plan"), the Company hereby grants to the Grantee 2,500 Restricted Stock Units. This grant is made to the Grantee in consideration for services to be performed by Grantee for the Company as a non-employee director in the 2006 calendar year. In the event, that the Grantee is not a non-employee director of the Company as of January 10, 2006, this grant shall be forfeited in its entirety. Termination of services by the Grantee during the 2006 calendar year shall not affect this grant except as expressly provided herein. Except as expressly provided herein, capitalized terms used herein shall have the meaning ascribed to such terms under the Plan.
 
It is intended that this Agreement and its administration comply with the provisions of Section 409A of the Code. Accordingly, notwithstanding any provision in this Agreement or in the Plan to the contrary, this Agreement and the Plan will be interpreted and applied so that the Agreement does not fail to meet, and is operated in accordance with, the requirements of paragraphs (2), (3) and (4) of Section 409A(a) of the Code. As used herein, “Code” means the Internal Revenue Code of 1986 as amended from time to time, and any interpretations thereof issued by the U.S. Treasury Department on which the Company is permitted to rely.
 
2.
Settlement of Restricted Stock Units. Each Restricted Stock Unit shall entitle the Grantee to one Share which shall be distributed to the Grantee (or to the estate, guardian or beneficiary of the Grantee, as the case may be) on the Settlement Date(s) as defined herein. The Settlement Date(s) shall be the date(s) specified by the Grantee in the Settlement Date Election Form attached hereto as Exhibit A. In the event that the Grantee does not complete and return a Settlement Date Election Form to the Company on or before December 31, 2005, January 10, 2006 shall be deemed to be the Settlement Date for all Restricted Stock Units awarded under this Agreement. Notwithstanding anything to the contrary in this Agreement or the Settlement Date Election Form, upon the first to occur of the following events, Shares shall be distributed in the settlement of Restricted Stock Units as soon as reasonably practicable, and such date(s) of distribution shall be deemed to be the Settlement Date(s);

 
(a)
Grantee’s separation from service as defined by Section 409A of the Code; provided, however that if Grantee is or becomes a specified employee as defined by Section 409A of the Code, such date shall be delayed by six months;

 
(b)
Grantee’s becoming disabled, as defined by Section 409A of the Code;

(c)     Grantee’s death;

 
(d)
To the extent permitted by Section 409A of the Code, a change in ownership or effective control of the Company; or in the ownership of a substantial portion of the assets of the Company; or

 
(e)
Grantee’s unforeseeable emergency, as defined and not in excess of the amount permitted by Section 409A of the Code;

The Company’s obligations to the Grantee with respect to the Restricted Stock Units will be satisfied in full upon the distribution of Shares corresponding to such Restricted Stock Units. On the Settlement Date(s), the Company may, at its election, either (i) deliver to the Grantee a certificate representing the number of Shares to be distributed to the Grantee as of that Settlement Date; (ii) credit the number of Shares to be distributed to the Grantee as of that Settlement Date to a book-entry account in the name of the Grantee held by the Company’s transfer agent; or (iii) credit the number of Shares to be distributed to the Grantee as of that Settlement Date to a brokerage account designated by the Grantee. In no event may any Settlement Date be accelerated except in accordance with Section 409A of the Code.

1
3.
Selection of Settlement Dates. The Grantee’s selection of a Settlement Date may have important tax consequences. The Grantee is advised to consult an independent tax professional before making this selection.

The Grantee may elect to defer a Settlement Date which is a specific calendar date previously selected by the Grantee (the “Original Settlement Date”) on a form provided by the Company and pursuant to procedures established by the Company from time to time. Any such election may be made for less than all of the Shares due to be distributed on a Settlement Date, and different elections may be made with respect to Shares to be distributed on a Settlement Date. The Grantee’s election to defer an Original Settlement Date must be made at least twelve (12) months in advance of the Original Settlement Date and must defer distribution for a period of at least five (5) years after the Original Settlement Date. No election to defer an Original Settlement Date shall be effective for at least twelve (12) months after such election has been made. If the Grantee has selected separation from service as a Settlement Date that Settlement Date may not be deferred.

4.
Taxes. The Grantee shall be solely responsible for the payment of any taxes, including without limitation, any income or employment taxes, which are due or may become due as a result of this grant or the distribution of Shares.

5.
Rights Not Conferred. The Grantee shall have none of the rights of a shareholder with respect to the Restricted Stock Units, including the right to receive dividends or vote stock, until such time, if any, that Shares are distributed to the Grantee in settlement thereof. The Grantee is further advised that until distribution, the Company’s obligation will be merely that of an unfunded and unsecured promise of the Company to deliver Shares in the future, and the rights of the Grantee will be no greater than that of an unsecured general creditor. No assets of the Company will be held as collateral security for the obligations of the Company hereunder, and all assets of the Company will be subject to the claims of the Company’s creditors.

6.
Agreement Not Assignable. This Agreement and the Restricted Stock Units awarded hereunder are not transferable or assignable by the Grantee; provided that no provision herein shall prevent the transfer of such Restricted Stock Units or the Shares related thereto by will or by the laws of descent or distribution in the event of the Grantee’s death.

7.
Adjustments. If and to the extent that the number of Shares shall be increased or reduced in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, or similar corporate transaction, the number and kinds of shares subject to the Restricted Stock Units awarded hereunder may be adjusted by the Committee, in its sole discretion. In the event of any such transaction, the Committee may provide in substitution for the Restricted Stock Units granted hereunder such alternative consideration as it may determine to be equitable.

8.
Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Indiana.
 
9.
Amendments. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment to the Plan or the Agreement shall adversely affect the value or number of the Grantee’s Restricted Stock Units without the Grantee’s written consent, except to the extent necessary to comply with the provisions of Section 409A of the Code.
 
10.
Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

2
11.
Severability. If any provision of the Plan or this Agreement is, becomes, or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or award hereunder under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or award, such provision shall be stricken as to such jurisdiction or award, and the remainder of the Plan or Agreement shall be in full force and effect.

12.
Construction. The Restricted Stock Units granted hereunder are being issued pursuant to Section 10 of the Plan (“Restricted Stock Award”) and are subject to the terms of the Plan. A copy of the Plan has been given to the Grantee, and additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.

13.
Binding Effect. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.




__________________________________________
«Director» 



CTS CORPORATION


     
  CTS Corporation
 
 		  
 		  
 
  By:   /s/ Richard G. Cutter III
 
Richard G. Cutter III
  Vice President, General Counsel and Secretary


3

EXHIBIT A
CTS CORPORATION
RESTRICTED STOCK UNIT AWARD
SETTLEMENT DATE ELECTION FORM

THIS FORM MUST BE COMPLETED AND RETURNED TO THE COMPANY NO LATER THAN DECEMBER 31, 2005. IF YOU FAIL TO RETURN THIS FORM TO THE COMPANY BY THAT DATE, YOUR AWARD WILL BE DISTRIBUTED ON JANUARY 10, 2006.


Name:  «Director» 

Address: «Address», «City», «State» «Zip» 

Date of Award:  «Date»



Instructions:

You were awarded Restricted Stock Units under the CTS Corporation 2004 Omnibus Long-Term Incentive Plan (the “Plan”). Each Restricted Stock Unit entitles you to a share of CTS Common Stock on the Settlement Date you select, subject to the terms of the Plan and your Restricted Stock Unit Agreement. Your Settlement Date may not be earlier than January 10, 2006. Please select one of the following three alternatives:

1.
You may elect to receive a distribution of all Restricted Stock Units granted under this award upon your separation from service by initialing the following statement:

_____ I hereby elect to receive a distribution of all of the Shares to which I am entitled under this award upon my separation from service as defined by Section 409A of the Code, provided however that if I am or become a specified employee as defined by Section 409A of the Code, such date shall be delayed by six months (the “Settlement Date”).

Note: You may not make a subsequent deferral of this Settlement Date.

2.
You may elect to receive a distribution of all Restricted Stock Units granted under this award on a specific calendar date by initialing and completing the following statement:

_____ I hereby elect to receive a distribution of all of the Shares to which I am entitled under this award on _______________ ___, 20____ (the “Settlement Date”).

 
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3.
You may elect to receive a distribution of Restricted Stock Units in installments on a fixed schedule of calendar dates by initialing and completing the following statement:

_____ I hereby elect to have installments of the Shares to which I am entitled under this Award distributed to me on the dates specified below:

No. of Shares _____  _______________ ___, 20____ (“Settlement Date”)

No. of Shares _____  _______________ ___, 20____ (“Settlement Date”)

No. of Shares _____  _______________ ___, 20____ (“Settlement Date”)

No. of Shares _____  _______________ ___, 20____ (“Settlement Date”)
 
No. of Shares _____  _______________ ___, 20____ (“Settlement Date”)


Acknowledgment:

I hereby acknowledge that, (i) I have been provided copies of the Plan and the Restricted Stock Unit Agreement, (ii) this election shall be subject to the terms of the Plan and the Restricted Stock Unit Agreement, and (iii) I have been advised to consult an independent tax advisor regarding the effects of this election. I understand that (i) the Company’s obligation is merely that of an unfunded and unsecured promise of the Company to deliver shares of CTS Common Stock in the future, (ii) no assets of the Company will be held as collateral security for this obligation, and (iii) my rights will be no greater than those of a general unsecured creditor. I acknowledge that I will be responsible for the payment of any income and employment taxes due on this award.



______________________________  ___________________________
«Director»      Date
 EX-10.BB 8 ex10_bb.htm EXHIBIT 10.BB Exhibit 10.bb
 
 
DIRECTOR AND NAMED EXECUTIVE OFFICER COMPENSATION 
 
Director Compensation

Employee directors receive no additional compensation for serving on the Board of Directors or Board Committees. The non-employee director fees established by the Board for 2005 are as follows: annual board retainer — $25,000; annual retainer for each Audit Committee member — $5,000; annual retainer for each Compensation Committee member — $4,000: annual retainer for each Finance and Nominating and Governance Committee member — $3,000; annual retainer for each Leadership Continuity Committee member — $4,000; additional annual retainer for Audit Committee Chairman — $5,000; additional annual retainer for Compensation Committee Chairman — $4,000; additional annual retainer for Finance and Nominating and Governance Chairman — $3,000; additional annual retainer for Leadership Continuity Committee Chairman — $4,000; meeting fee for each Board or Committee Meeting — $1,500. All committee meetings, including special meetings called by the committee chairman, are compensated at the regular meeting fee rate. Special activity by the committee chairman, as well as any special activity by another committee member that is requested or approved by the committee chairman, is also compensated at the regular meeting fee rate. Non-employee directors are reimbursed by the corporation for reasonable travel expenses related to their performance of services and for director education programs.

In 1990, CTS adopted the Stock Retirement Plan for Non-Employee Directors. Under that plan, a deferred stock unit account was established for each non-employee director. Through January 2004, 800 common stock units and additional units representing dividends on CTS common stock paid were credited annually to each non-employee director’s account. When a non-employee director retires from the Board, he or she receives one share of CTS common stock for each deferred stock unit credited to his or her account. On December 1, 2004, the Board of Directors amended the plan to preclude crediting any additional units to the deferred stock unit accounts. On December 1, 2004, each non-employee director received a grant of restricted stock units under the CTS Corporation 2004 Omnibus Long-term Incentive Plan equivalent to the number of deferred stock units which would have been credited to the director for 2004 service under the Stock Retirement Plan for Non-Employee Directors. Under the terms of this award, each non-employee director will receive one share of CTS common stock for each restricted stock unit upon retirement from the Board.

In 2002, the Board established a $30,000 annual stock-based compensation target for each non-employee director. For 2006, the stock-based compensation target was achieved by awarding each non-employee director 2,500 restricted stock units under the CTS Corporation 2004 Omnibus Long-term Incentive Plan. The awards were granted on December 7, 2005 and became distributable on January 10, 2006 absent a deferral election by the non-employee director. Upon distribution, one share of CTS common stock for each restricted stock unit is transferred to the non-employee director. A prototype non-employee director restricted stock unit agreement is filed herewith.

Named Executive Officer Compensation

CTS has an employment agreement with Donald K. Schwanz which has been previously filed with the Commission as an exhibit to the corporation’s Annual Report on Form 10-K and an employment agreement with Vinod M. Khilnani which has been previously filed as an exhibit to the corporation’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2005. CTS does not have written employment agreements with the other named executive officers. Annual salary for each named executive officer is determined by the Compensation Committee of the Board of Directors. The annual salaries for named executive officers set in 2005 were as follows: Donald K. Schwanz — $749,280; Vinod M. Khilnani — $350,000; Donald R. Schroeder — $309,800; James L. Cummins — $238,300; Richard G. Cutter — $233,700.

Each named executive officer participates in the CTS Corporation Management Incentive Plan which has been previously filed with the Commission as an exhibit to CTS’ Annual Report on Form 10-K. The plan provides cash bonuses determined by the Compensation Committee, based on achievement of annual performance goals established by the Committee.

The Compensation Committee has historically awarded stock-based compensation to named executive officers on an annual basis. In 2005, the Compensation Committee awarded the named executive officers restricted stock units and incentive stock options under the CTS Corporation 2005 Omnibus Long-term Incentive Plan. Restricted stock unit agreements are filed herewith. Prototype incentive stock option agreements have been previously filed with the Commission as an exhibit to the corporation’s Annual Report on Form 10-K.

Mr. Schwanz receives a quarterly perquisite allowance of $4,300. Each other named executive officer receives a quarterly perquisite allowance of $4,000. Mr. Schroeder receives an additional $6,700 per month cost-of-living allowance related to his relocation to Southern California as a result of his appointment as President of CTS Electronics Manufacturing Solutions, a strategic business unit of the corporation, during his first thirty-six months in this position.

Each named executive officer has executed a change-in-control severance agreement which provides severance benefits only upon a change-in-control of CTS. Prototype change-in-control severance agreements have been previously filed with the Commission as an exhibit to the corporation’s Annual Report on Form 10-K. On September 30, 2005, CTS issued a notice of non-renewal of these agreements. As a result, these agreements will expire on December 31, 2007.


 EX-13 9 ex13.htm EXHIBIT 13 Exhibit 13
 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (2003-2005)

Overview
 
CTS is a global manufacturer of components and sensors used in the automotive, communications and computer markets. The Company also provides electronic manufacturing solutions, including design and supply chain management functions, primarily serving the automotive, communications, computer, industrial, and medical markets under contract arrangements with the original equipment manufacturers (OEMs). Sales and marketing are accomplished through CTS sales engineers, independent manufacturer’s representatives and distributors. Sales are reported through two business segments, Electronics Manufacturing Services (EMS) and Components and Sensors.
 
On January 31, 2005, CTS acquired all of the outstanding stock of SMTEK International Inc., (SMTEK), an EMS provider serving OEM’s in the medical, industrial, instrumentation, telecommunications, security, financial services, automation, aerospace, and defense industries. CTS expects this acquisition to accelerate its expansion into new markets, reduce customer concentrations, and increase its global footprint. Under the purchase method of accounting, the assets acquired and liabilities assumed from SMTEK were recorded as of the date of acquisition, at their respective fair values. CTS obtained third-party valuations of certain intangible assets. The results of SMTEK’s operations have been included in the consolidated financial statements since January 31, 2005. Please refer to Note B - “Acquisition” for more information related to this transaction. SMTEK is included in the EMS business segment.
 
Total sales in 2005 of $617.5 million were reported through two business segments, Electronics Manufacturing Services (EMS) and Components and Sensors, which represented 59.0% and 41.0% of CTS’ total sales in 2005, respectively. In 2004, EMS was 50.9% of total sales while Components and Sensors was 49.1% of total sales. The EMS sales percentage increased year-over-year due primarily to the acquisition of SMTEK.
 
In 2005, the Company experienced a strong year-over-year sales increase and improved net earnings from 2004. During this period, the Company continued to focus on three key priorities: (1) improving profitability concurrently with growing sales; (2) strengthening the balance sheet; and (3) developing new sources of revenue to drive future growth. During 2005, CTS continued to see growth in certain of its existing served markets, as well as new business awards from existing and new customers.

As discussed in more detail throughout the MD&A:

·  
CTS’ revenues increased 16.2% during 2005 compared to 2004, following 14.8% sales growth in 2004 compared to 2003. Most of the increase came in the EMS segment, which was up 34.8% compared to 2004, while the Components and Sensors segment experienced a 3.0% decline due to lower sales into mobile handset applications as CTS continues to de-emphasize these products.

·  
Gross margins in 2005 increased $12.7 million from 2004, primarily due to sales growth. Gross margins, as a percent of sales, were 19.8% in 2005 and 20.7% in 2004. Despite the overall decrease, gross margins within each segment increased from the prior year. However, the EMS segment, which inherently generates a lower gross margin, increased to 59.0% of total sales in 2005 compared to 50.9% of total sales in 2004.

·  
The Company continued to leverage selling, general and administrative and research and development expenses. As a result, these expenses decreased to 13.8% of sales in 2005 from 15.5% in 2004.

·  
The operating earnings increased to $40.3 million in 2005 from $31.1 million in 2004. The 2005 operating earnings included a $3.1 million gain on asset sales, while 2004 included $2.7 million from the gain on sale of excess land in Canada and $1.2 million of gain on other asset sales.

·  
In 2005, income tax expense included a net impact of $4.3 million, or $0.10 per share, consisting of $6.0 million of expense relating to the repatriation of foreign cash to the United States under the provisions of the American Jobs Creation Act of 2004 and a $1.7 million benefit relating to the reversal of income tax reserves due to the successful resolution of tax issues in certain foreign jurisdictions.

·  
Adjusted earnings per share of $0.65 in 2005 increased $0.17 from adjusted earnings per share of $0.48 in 2004. (See reconciliation below).


1
 
The following table provides a reconciliation of Earnings Per Share to Adjusted Earnings Per Share

 
   
 Year Ending December 31,
  
   
 2005
  
 2004
  
Earnings per share - diluted
  
$
0.57
  
$
0.53
  
Tax affected charges (credits) to reported Earnings per share:
              
Gain on sale of excess Canadian land
        
(0.05
)
 Gain on sale of excess equipment less LTCC severance
    
(0.02
)
      
Impact of tax repatriation & reversal of tax reserves
    
0.10
        
Total tax affected adjustments to reported Earnings per share
    
0.08
    
(0.05
)
Adjusted earnings per share
  
$
0.65
  
$
0.48
  


Adjusted earnings per share is a non-GAAP financial measure. The most comparable GAAP measure is earnings per share. CTS calculates adjusted earnings per share for 2005 by excluding the tax expense related to cash repatriation, the reversal of tax reserves, and the gain on sale of excess equipment less LTCC severance. CTS calculates adjusted earnings per share for 2004 by excluding the gain on sale of excess land in Canada. Management believes adjusted earnings per share allows investors to make more accurate comparisons of performance between periods by eliminating the effect of unusual items. Because CTS’ method of calculating adjusted earnings per share is based on the elimination of these specific items, CTS’ adjusted earnings per share may not be comparable to other similarly titled measures of other companies.
 

 



2

 
Critical Accounting Policies
 
CTS management’s discussion and analysis is based on its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. CTS evaluates its estimates on an ongoing basis, based on historical experience and other assumptions believed to be relevant under the circumstances. Actual results may differ, perhaps materially, from the estimates under different assumptions or conditions.

CTS’ served markets are characterized by rapid technological change and frequent new product introductions and enhancements. These characteristics, along with global economic conditions, are risks that require management judgment when determining appropriate accounting decisions. 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 doubtful accounts and other accrued liabilities

CTS management makes estimates of the carrying value of its inventory based upon historical usage, new product introductions and projected customer purchase levels. The ever-changing technology environment of the served markets affects these estimates. Similarly, management makes estimates of the collectability of its accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Finally, CTS is involved in litigation in the normal course of business and is regulated under a number of environmental and safety laws. Accruals for known exposures are established based on management’s best estimate after considering the advice of legal counsel.

Valuation of long-lived and intangible assets, goodwill and depreciation/amortization periods

CTS assesses the carrying value of long-lived and intangible assets and the remaining useful lives whenever events or changes in circumstances indicate the carrying value may not be recoverable or the estimated useful life may no longer be appropriate. Factors considered important which could trigger this review include significant decreases in operating results, significant changes in its use of the assets, competitive factors and the strategy of its business, and significant negative industry or economic trends. The Company cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on the reported asset values. Such events may include strategic decisions made in response to the economic conditions relative to product lines, operations and the impact of the economic environment on our customer base.

When the Company determines that the carrying value of long-lived and intangible assets may not be recoverable based on an assessment of future undiscounted cash flows from the use of those assets, an impairment charge to record the assets at fair value may be recorded. Impairment is measured based on fair values utilizing estimated discounted cash flows, published third-party sources, third-party offers and information furnished by third-party brokers/dealers.

Goodwill is measured as the excess of cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible asset acquired less liabilities assumed. CTS performs goodwill impairment tests at least on an annual basis. The goodwill recorded in the Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004 was $24.6 million and $0.5 million, respectively.

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Income Taxes

Deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities and carryforwards using currently enacted tax rates. CTS must also estimate its current tax exposure for situations where taxing authorities would assert tax positions different than those taken by the Company. Such reserves are routinely reviewed and adjusted when required to reflect changes in estimates based on factors such as changes in tax laws, results of tax authority reviews and statutory limitations. CTS estimates its income tax valuation allowance by assessing which deferred tax assets are more likely than not to be recovered in the future. The valuation allowance is based on CTS’ estimates of taxable income in each jurisdiction in which it operates and the period over which the deferred tax assets will be recoverable.

CTS believes it will more likely than not realize the benefits of its $173.9 million U.S. net operating loss carryforwards, which expire in 2021 through 2024. The Company assessed the future realization of these deferred tax assets utilizing taxable income projections for years 2006 through 2014. The projections were based on taxable income estimates consistent with historical earnings patterns of its traditional automotive and electronic component product lines and a return to levels of profitability in its communications components product lines consistent with management and independent consensus views of the moderate recovery expected in the markets served by CTS. In the event that actual results differ from these estimates in future periods, CTS may need to establish an additional valuation allowance or reduce the valuation allowance, which could materially impact the results of operations and financial position.

The annual effective income tax rate is based on CTS’ current legal organization and forecasted earnings in the various taxing jurisdictions in which the Company operates. Changes in CTS’ legal organization, the amount or the location of global earnings could impact its future effective income tax rate. In 2005, CTS’ tax rate before the benefit of reversal of reserves and expense of HIA dividend increased from 23% to 25% primarily as a result of increased profits being reported in higher taxed jurisdictions.
 
Retirement Plans
 
Actuarial assumptions are used in determining pension income and expense and the pension benefit obligation. CTS, after considering the recommendations of its actuaries, assumes a discount rate, expected rate of return on plan assets and a rate of compensation increase in determining its annual pension income and expense and the projected benefit obligation. Experience gains/losses arising from any variance between the expected rate of return of plan assets and the actual results are amortized over periods ranging from 5 to 14 years. During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Changes in the actuarial assumptions could have a material affect on CTS' results of operations in future years.

For 2005, CTS had a weighted-average discount rate of 6.13% for pension income and expense. The discount rate on its domestic plans was 6.0% at January 1, 2006. The range of discount rates utilized by its foreign plans was decreased from 3.5% - 5.6% in 2005 to 3.5% - 5.2% in 2006.  Additionally, CTS moved to a more conservative mortality table that is more reflective of the longer lives the assets will be required to support.

The expected return on domestic plan assets at January 1, 2006 remained at 8.50% and the range of expected returns on foreign plan assets stayed the same, at 3.50% - 7.00%.

CTS expects these changes in actuarial assumptions, combined with the pension asset balance at the end of 2005, will reduce 2006 consolidated pension income by approximately $3 million.
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Results of Operations
 
Business Segment Discussion
 
CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS). 

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 cellular handsets, 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.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer. Additionally for some customers CTS provides full turnkey manufacturing and completion including design, bill-of-material, management, logistics, and repair.

The following table summarizes net sales and operating earnings by business segment:

($ in thousands)
  
Components & Sensors
  
EMS
  
Total
  
2005
              
Net sales to external customers
  
$
253,026
  
$
364,458
  
$
617,484
  
Segment operating earnings
  
$
30,227
  ¹
$
10,112
  
$
40,339
  
% of segment sales
    
11.9
%
  
2.8
%
  
6.5
%
                     
2004
                    
Net sales to external customers
  
$
260,982
  
$
270,334
  
$
531,316
  
Segment operating earnings
  
$
23,311
  ²
$
7,817
  
$
31,128
  
% of segment sales
    
8.9
%
  
2.9
%
  
5.9
%
                     
2003
                    
Net sales to external customers
  
$
252,911
  
$
210,076
  
$
462.987
  
Segment operating earnings (loss)
  
$
7,394
  
$
10,985
  
$
18,379
  
% of segment sales
    
2.9
%
  
5.2
%
  
4.0
%
______________________
1 Includes $3.1 million of gain on sale of excess equipment and disposition of LTCC assets.
2 Includes a $3.9 million of gain on asset sales, of which, $2.7 million relates to the sale of excess land in Canada.
 
Sales in the 2005 Components and Sensors business segment decreased $8.0 million, or 3.0%, from 2004. The decrease was primarily due to lower sales into mobile handset applications of $20.8 million, as CTS continues to de-emphasize sales of these products.  This decrease was partially offset by increased demand for automotive sensor products of $11.8 million and communication infrastructure products of $3.7 million.

Despite the sales decrease in 2005, segment operating earnings improved by $6.9 million, or 29.7%, from the prior year. The primary driver in the year-over-year improvement was the impact of favorable product mix of approximately $4.9 million, as sales volume shifted from the less profitable handset market into the more profitable communication infrastructure products and automotive markets. Gross margin improvement also reflects savings related to personnel reductions and lower depreciation expenses due to a lower level of capital expenditures in recent years versus high levels of capital expenditures in the preceding years. The segment operating earnings also included a $3.1 million of gain on sale of excess equipment and disposition of LTCC assets. Selling, general and administrative expenses decreased by $2.2 million in 2005 compared to 2004, mainly as a result of savings related to personnel reductions and professional services. Research and development expenses decreased $2.0 million in 2005 compared to 2004, as a result of a decrease in product launch costs and lower professional services related to consultation on new product development. These favorable factors were partially offset by the unfavorable volume impact of $2.7 million and a reduction to pension income of $2.4 million.

5
The 2004 Components and Sensors business segment sales increased $8.1 million, or 3.2%, from 2003. The increase was primarily due to increased demand for the automotive sensor products, communication infrastructure products and favorable foreign exchange, due to the weakening of the U.S. dollar against the British Pound and the Euro.

Despite a small sales increase in 2004, segment operating earnings more than tripled from 2003, primarily due to favorable impact from the contribution of incremental sales and product mix of approximately $3.8 million. Lower depreciation expenses of $7.9 million, due to a lower level of capital expenditures in recent years versus high levels of capital expenditures in the preceding years, and an intersegment cost allocation to EMS Singapore operation of $1.7 million also helped to improve segment operating earnings in 2004. The segment operating earnings also included $3.9 million of gain on asset sales, including $2.7 million gain from sale of excess land in Canada, and a favorable impact of foreign exchange rate movements. Research and development expenses decreased $2.7 million in 2004 compared to 2003, as a result of streamlining research and development activities. These favorable factors were partially offset by product launch costs of $2.8 million and higher operating expenses of $4.9 million related to incentive compensation and professional services.

EMS 2005 business segment sales increased $94.1 million, or 34.8%, from the prior year. The revenue increase included sales from the acquired SMTEK business of $100.4 million and a $14.5 million increase in new customer sales, partially offset by a $20.5 million decrease in communications infrastructure systems.

The segment operating earnings of $10.1 million increased $2.3 million, or 29.4%, from the prior year. The increase in earnings was primarily driven by the favorable volume and mix impact resulting from the addition of the SMTEK business. The operating earnings was partially offset by the increase of $7.6 million in selling, general and administrative expenses, which includes an increase in amortization expense of $1.2 million.

CTS earnings are subject to fluctuations of foreign currency exchange rates. For 2005, the impact of foreign exchange rates was negative on Components and Sensors segment operating earnings, while positive on EMS segment operating earnings, primarily due to the strengthening of the U.S. Dollar against the Euro and British Pound. To a large extent, the favorable impact was offset by the unfavorable impact. For 2004, the impact of foreign exchange rates was positive on Components and Sensors segment operating earnings, while negative on EMS segment operating earnings, primarily due to the weakening of the U.S. Dollar against the Euro and British Pound. To a large extent, the unfavorable impact was offset by the favorable impact.

EMS 2004 business segment sales increased $60.2 million, or 28.7%, from 2003. The revenue increase was primarily due to $24.9 million increase in data storage systems, $20.8 million increase in communications infrastructure systems and $9.3 million increase in networking equipment from both existing customers and new customers.

The operating earnings of $7.8 million decreased $3.2 million from 2003. The decrease in earnings was primarily driven by price reductions in connection with the product transfer to Singapore and an unfavorable impact of foreign exchange rate movements. These price reductions were partially offset by cost reductions. CTS realized additional cost reductions after a full year of EMS Singapore operations. Also, EMS incurred an intersegment cost allocation of $1.7 million from the Components and Sensors segment. Additionally, in 2004, some start-up costs were incurred to support the new operation in Singapore. These unfavorable factors were partially offset by the favorable impact of $6.9 million from higher sales and product mix.

Sales in Geographic Regions

CTS has increased sales in the Americas to 53% from 45% due mainly to the impact of the SMTEK acquisition. Despite the Asia-Pacific percent decrease, driven by the addition of SMTEK to the Americas region, CTS has continued its expansion into the Asia-Pacific markets as total net sales to this region increased by $17.8 million, or 9.1%, compared to 2004. However, as a percent of total CTS, sales into the Asia-Pacific region have decreased to 34% versus 36% in 2004 due to the impact of the SMTEK acquisition on American sales. Sales in Europe decreased to 13% from 19%.  Within the EMS segment, sales in Europe decreased from 20% to 7% due to a shift of customer demand to the Asia-Pacific region. The Asia-Pacific region within the EMS segment is flat as a percent of sales due to the impact of the SMTEK acquisition in the Americas region. The following table presents the percentage of net sales into each geographic region within each segment and consolidated:
 
   
Components & Sensors
  
EMS
  
Consolidated Total
  
Geographic Region
  
2005
  
2004
  
2003
  
2005
  
2004
  
2003
  
2005
  
2004
  
2003
  
Americas
    
61
%
  
56
%
  
55
%
  
47
%
  
34
%
  
41
%
  
53
%
  
45
%
  
48
%
Europe
    
20
%
  
17
%
  
15
%
  
7
%
  
20
%
  
32
%
  
13
%
  
19
%
  
23
%
Asia-Pacific
    
19
%
  
27
%
  
30
%
  
46
%
  
46
%
  
27
%
  
34
%
  
36
%
  
29
%
Total
    
100
%
  
100
%
  
100
%
  
100
%
  
100
%
  
100
%
  
100
%
  
100
%
  
100
%

 
6
Discussion - Most Recent Three Years

The following table highlights significant information from CTS’ consolidated results of operations during the past three years:

   
Year ended December 31,
  
(In thousands of dollars)
  
2005
  
2004
  
2003
  
Net sales
  
$
617,484
  
$
531,316
  
$
462,987
  
Cost of goods sold
    
495,069
    
421,560
    
366,275
  
Gross margin
    
122,415
    
109,756
    
96,712
  
% of net sales
    
19.8
%
  
20.7
%
  
20.9
%
Selling, general and administrative expenses
    
68,049
    
63,485
    
56,857
  
% of net sales
    
11.0
%
  
11.9
%
  
12.3
%
Research and development expenses
    
17,092
    
19,063
    
21,476
  
% of net sales
    
2.8
%
  
3.6
%
  
4.6
%
Gain on asset sales
    
(3,065
)
  
(3,920
)
  
—
  
Restructuring and impairment charges
    
—
    
—
    
4,563
  
Operating earnings
   
40,339
    
31,128
    
13,816
  
% of net sales
    
6.5
%
  
5.9
%
  
3.0
%
Interest expense
    
5,902
    
5,535
    
7,688
  
Other income
    
966
    
324
    
120
  
Earnings before income taxes
    
35,403
    
25,917
    
6,248
  
Income tax expense
   
13,169
 ¹  
5,961
    
(6,327
)²
Net earnings
 
$
22,234
  
$
19,956
  
$
12,575
  
% of net sales
    
3.6
%
  
3.8
%
  
2.7
%
Diluted earnings per share
  
$
0.57
  ¹
$
0.53
  
$
0.36
  ²
_________________
1 Income tax expense and diluted earnings per share include a net impact of $4.3 million, or $0.10 per diluted share, respectively, consisting of $6.0 million of expense relating to the repatriation of foreign cash to the United States under the provisions of the American Jobs Creation Act of 2004 and a $1.7 million benefit relating to the reversal of income
tax reserves due to the successful resolution of tax issues in certain foreign jurisdictions.

2 Includes a $7.9 million benefit resulting from the reversal of reserves that were no longer required following the expiration of statutory deadlines.

Net sales increased $86.2 million in 2005, or 16.2%, from prior year, primarily due to the EMS increase of $94.1 million. The EMS sales increase related to the acquired SMTEK business of $100.4 million and other new EMS customer sales, partially offset by the decrease in communications infrastructure systems and data storage systems. In addition, Components and Sensors sales decreased $8.0 million, due to lower sales into the mobile handset applications as CTS continues to de-emphasize these products, partially offset by increased demand for the automotive sensor products and communication infrastructure products.
 
The 2004 net sales increased $68.3 million, or 14.8%, from prior year, primarily due to the EMS increase of $60.2 million related to increased demand for communications infrastructure systems, networking equipment, and data storage systems. In addition, Components and Sensors sales increased $8.1 million, primarily related to increased demand for automotive products, and communications infrastructure components.

The Company’s 15 largest customers represented 61% of net sales in 2005. This is a decrease from 69% and 71% in 2004 and 2003, respectively. This percentage is decreasing as the Company continues efforts to broaden its business base with the SMTEK business acquisition and the diversification of automotive and wireless infrastructure product offerings. Sales to Hewlett-Packard Company represented 28% of net sales in 2005 and 33% of net sales in 2004 and 2003. Sales to Motorola, Inc. were less than 10% of net sales in 2005 and 13% of net sales in 2004 and 2003.

7
CTS’ products are usually priced with consideration to expected or required profit margins, customer expectations and market competition. Pricing for most of CTS’ Components and Sensors and EMS products generally decrease over time and also fluctuate in accordance with total industry utilization of manufacturing capacity. In both CTS segments, nominal annual price reductions are in the single-digit range, which is typical of the industry. CTS continues to work on cost reduction to offset the negative price impact on profit margin.

Gross margin increased $12.7 million, or 11.5%, in 2005 from 2004, primarily due to higher sales of $86.2 million. Gross margin as a percent of sales were favorable within each business segment, however, total CTS gross margin as a percentage of sales decreased to 19.8% in 2005 from 20.7% in 2004. The decrease was driven by the higher percentage of lower margin EMS segment sales at 59.0% in 2005 compared to 50.9% of total sales in 2004. The EMS business segment inherently has a lower gross margin percentage than Components and Sensors segment.

In 2004, gross margin increased $13.0 million, or 13.5%, from 2003, primarily due to higher sales of $68.3 million and lower depreciation expense, as mentioned in the Business Segment Discussion. However, gross margin as a percentage of sales declined because of the higher percent of EMS segment sales, which inherently have a lower gross margin percentage than Components and Sensors segment sales.

Selling, general and administrative expenses as a percentage of sales decreased to 11.0% in 2005 from 11.9% in the prior year, as the Company was able to effectively control spending in this area and leverage the higher sales. The total CTS selling, general and administrative expense increased only $4.6 million, despite the $7.2 million incremental increase related to the SMTEK business acquisition. CTS was able to offset a portion of the SMTEK increase with savings related to personnel reductions and lower spending on professional services, as discussed in the Components and Sensor Business Segment discussion.

Selling, general and administrative expenses as a percentage of sales decreased 0.4 percentage points to 11.9% in 2004 from prior year, as the Company was able to leverage existing resources with higher sales. The total dollar amount increased $6.6 million, primarily due to the increased expenses for incentive compensation, professional services and normal cost of living adjustments.

Research and development expenses were $17.1 million in 2005 versus $19.1 million in 2004 and $21.5 million in 2003. The reductions in research and development spending reflect savings due to organizational consolidation, changing business mix, decrease in product launch costs and lower professional services related to consultation on new product development. Significant ongoing research and development activities continue in the Components and Sensors business segment, particularly for automotive products in support of growth initiatives. CTS’ research and development investment is primarily focused on expanded applications and new product development, as well as current product and process enhancements. Research and development expenditures in the EMS business segment are typically very low.

Operating earnings in 2005 increased to $40.3 million, or 6.5% of sales, from $31.1 million, or 5.9% of sales, in 2004. Favorable changes contributing to the margin improvement were the gross margin increase and favorable operating expense reductions, as discussed above, partially offset by the incremental impact on spending related to the SMTEK business acquisition. Operating earnings in 2005 included a gain on asset sales of $3.1 million compared to a $3.9 million gain on asset sales in 2004. 

Operating earnings in 2004 increased to $31.1 million, or 5.9% of sales, from $13.8 million, or 3.0% of sales, in 2003. Favorable changes contributing to the margin improvement were gross margin increase and gain on asset sales offset by an increase of operating expenses, as discussed above. Operating earnings in 2004 included gain on asset sales of $3.9 million. As discussed in the Restructuring and Asset Impairment Charges section below, operating earnings in 2003 included an asset impairment charge of $4.6 million.

Interest expense in 2005 was $5.9 million, or 6.6% higher than 2004 interest expense of $5.5 million. In 2005, CTS carried a higher average outstanding debt balance than in 2004, resulting in additional interest expense of $1.4 million. Additionally, increases in the short-term borrowing rate, driven by the Federal Reserve’s increase in the target rate, resulted in a $0.4 million negative impact. These increases were partially offset by a $1.4 million decrease in interest expense due to the on-going savings from the May 2004 issuance of a $60.0 million, 2.125% debenture. The proceeds of the issuance were used to pay the down remaining $40.0 million balance of the Industrial Revenue Bond which carried an interest rate of 7.5%.

In 2005, CTS changed its estimate of its 2005 tax rate before the benefit of reversal of reserves and expense of HIA dividend from 23% to 25%. The higher effective tax rate reflects the lower than planned revenue and profitability in certain jurisdictions with lower statutory tax rates partially offset by increased profitability in certain jurisdictions with higher statutory tax rates.

Net earnings in 2005 included a net tax impact of $4.3 million, or $0.10 per diluted share, consisting of $6.0 million of expense relating to the repatriation of foreign cash to the United States under the provisions of the American Jobs Creation Act of 2004 and a $1.7 million benefit relating to the reversal of income tax reserves due to the successful resolution of tax issues in certain foreign jurisdictions. Net earnings increased $2.3 million, or 11.4%, to $22.2 million in 2005 from $20.0 million in 2004.

Net earnings per share of $0.57 in 2005 were $0.04 higher than the earnings per share in 2004. However, excluding the impact of the 2005 income tax expense related to the cash repatriation, reversal of tax reserves and net impact of gain on sale of excess equipment and severance related to the sale of the LTCC business, as noted above, adjusted earnings per share for 2005 was $0.65, a $0.17 per share increase from adjusted earnings per share in 2004 (see reconciliation of adjusted earnings per share). 
 
Subsequent Event
 
In January 2006, CTS announced that it intends to consolidate its Berne Indiana manufacturing operations into three of its other existing facilities. The consolidation is expected to be largely completed in the second half of 2006 and is estimated to result in pre-tax restructuring charge and related costs of approximately $4.5 million - $5.0 million.  CTS expects the annualized pre-tax savings to be in the range of $4.5 million to $5.5 million.  Pre-tax savings are expected to begin in the third quarter of 2006 and to be in the range of $1.5 million to $2.0 million for the second half of the year.

8
 
Liquidity and Capital Resources
 
Overview
 
Significant events impacting liquidity for 2005 were as follows:
  • During the first quarter, CTS completed the acquisition of SMTEK.  The total purchase price of $61.1 million consisted of $37.2 million of cash consideration, CTS common stock valued at $10.9 million and $13.0 million of SMTEK debt assumed by CTS.
  • During the second quarter, CTS repatriated $50.0 million cash from its foreign locations.
  • During the fourth quarter, CTS repatriated $26.5 million cash from its foreign locations.
  • During 2005 fiscal year, CTS repurchased 956,400 shares at a total cost of $11.3 million.
At December 31, 2005, cash and cash equivalents balance decreased to $12.0 million from $61.0 million in 2004. Total debt decreased to $81.8 million from $97.5 million in 2004. Total debt as a percentage of total capitalization was 20% at the end of 2005, compared with 24% in 2004.
 
Working capital decreased by $40.4 million in 2005. Within working capital, the cash and cash equivalents decrease of $49.0 million was impacted by the following:
 
Cash Used:
  • Payment for purchase of SMTEK of $35.6 million net of cash acquired.
  • Repayment of debt assumed in connection with the purchase of SMTEK of $13.0 million
  • Net debt repayment of $17.1 million related mainly to reductions to the subordinated debenture balance
  • Capital spending of $15.0 million
  • Purchase of treasury stock of $11.3 million
  • Dividends paid of $4.3 million
Cash Provided:
  • Cash provided by operations of $44.5 million
  • Proceeds from the sale of assets of $6.1 million
Other significant impacts to working capital included an accounts payable increase of $11.6 million, short-term notes payable increase of $10.0 million partially offset by the inventory increase of $17.8 million, the accounts receivable increase of $7.2 million and the increase of $0.6 million in other current assets. The increase in the accounts receivable balance was due to the fourth quarter of 2005 sales increase of 8.5% driven primarily by the acquisition of SMTEK.
 


 
9
Free Cash Flow

The following table summarizes free cash flow for the Company:

 
  
Year ended December 31,
  
($ in millions)
    
2005
    
2004
    
2003
  
Net cash provided by operations
  
$
44.5
  
$
14.0
  
$
25.7
  
Capital expenditures
    
(15.0
)
  
(12.7
)
  
(9.0
)
Free cash flow
  
$
29.5
  
$
1.3
  
$
16.7
  

Free cash flow is a non-GAAP financial measure which CTS defines as the sum of net cash provided by operations and cash used for capital expenditures. The most directly comparable GAAP financial measure is net cash provided by operations. Management believes that free cash flow provides useful information to investors regarding the Company’s ability to generate cash from business operations that was used and/or is available for internal growth, service of debt principal, dividends, share repurchase, acquisitions, and other investments. Management uses free cash flow as one measure to monitor and evaluate the performance of the Company. 

In 2005, net cash provided by operations was $44.5 million, after funding the working capital required for business growth. Net cash provided by operations in 2005 was $30.5 million higher than net cash provided by operations in 2004 due to higher earnings in 2005, favorable impact of deferred taxes and positive working capital change. Changes in assets and liabilities are net of the effect of the purchase on SMTEK because these balances are included in the purchase price of the business.

In 2004, net cash provided by operations was $14.0 million, after funding the working capital required for business growth. Net cash provided by operations in 2004 was $11.7 million lower than net cash provided by operations in 2003 due to higher earnings in 2004 that are more than offset by non-cash adjustments and negative working capital change. Increased working capital was required to support a higher level of sales in 2004. Net cash provided by investing activities was $7.1 million after $19.8 million proceeds from the sale of assets offset capital expenditures of $12.7 million.
 
Operating Activities

Cash flows provided by operations were $44.5 million in 2005. Components of cash flows from operations include earnings of $22.2 million, depreciation and amortization of $27.1 million and a favorable impact of $9.1 million in deferred taxes. There were $8.3 million of favorable changes in accounts receivable partially offset by a $3.6 million increase in inventory and a $6.2 million decrease in accounts payable and accrued liabilities. Also, the pension asset increase of $8.7 million was an unfavorable impact. Changes in assets and liabilities are net of the effect of the purchase on SMTEK because these balances are included in the purchase price of the business.

Cash flows provided by operations were $14.0 million in 2004. Components of cash flows from operations include earnings of $20.0 million and depreciation and amortization of $26.1 million, partially offset by gains of $3.9 million on sales of assets. There were $22.6 million of unfavorable changes in accounts receivable and inventory to support a 14.8% annual increase in sales. This was partially offset by a $3.9 million increase in accounts payable. Also, the pension asset increase of $10.9 million was an unfavorable impact.

Net cash provided by operating activities in 2003 was $25.7 million, as CTS’ net income of $12.6 million, adjusted for non-cash items, primarily depreciation and amortization, and restructuring and impairment charges provided $50.8 million. Working capital and other changes utilized cash totaling $25.1 million.

 
10
Investing Activities

Cash flows used by investing activities totaled $44.5 million in 2005, including the payment for the purchase of SMTEK of $35.6 million and capital expenditures of $15.0 million partially offset by proceeds from sales of assets of $6.1 million, which includes the disposition of the LTCC assets, as previously discussed.

Cash flows provided by investing activities totaled $7.1 million in 2004, including $16.4 million of net proceeds from the sale of the Longtan, Taiwan facility and $2.1 million from the sale of excess land in Canada, partially offset by $12.7 million of capital expenditures for normal, recurring asset replacements and new automotive products, including occupant classification system, pedal assemblies, and belt tension sensor programs.

The 2003 use of $5.1 million for investing activities consisted primarily of $9.0 million of capital expenditures, partially offset by $4.1 million of proceeds from the sale of assets, primarily assets held for sale. Included in capital expenditures is approximately $6.1 million primarily for new products and technologies. Spending for new products included belt tension sensor and pedal sensor programs for the automotive market.
 
Financing Activities

Cash flows used by financing activities in 2005 were $45.9 million, consisting of $13.0 million from the repayment of debt related to the SMTEK purchase, $11.3 million purchase of treasury stock and $4.3 million in dividend payments. Additionally, the repayment of $17.1 million related mainly to the reductions in the subordinated debenture balance was an unfavorable impact.

Cash flows provided by financing activities in 2004 were $12.7 million, consisting primarily of $57.6 million proceeds from the $60 million Debentures due 2024, $42.0 million repayment of the 7.5% industrial revenue bonds, $3.3 million from short-term notes payable, $2.0 million purchase of treasury stock, and $4.5 million in dividend payments.

In 2003, CTS’ net cash used by financing activities totaled $5.9 million, consisting primarily of net repayment of debt of $19.5 million and dividend payments of $4.1 million. These uses were partially offset by the net proceeds from the issuance of stock of $15.6 million and $2.6 million from proceeds of stock option exercises.

In October 2004, the American Jobs Creation Act of 2004 (Jobs Act) was signed into law. The Jobs Act provided certain domestic companies a temporary incentive to repatriate, during 2005, previously undistributed earnings abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. To qualify, the repatriated earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by the company’s chief executive officer and subsequently approved by the company’s board of directors. In 2005, CTS' Board of Directors approved two domestic reinvestment plans (the Plans), authorizing the company to receive cash dividends of up to $84 million during the current taxable year. The Company did receive dividends of $77 million from certain foreign subsidiaries during 2005 and, accordingly, the Company recorded a related tax expense increase of $6 million.



11
 
Capital Resources
 

In 2005, the net long term debt balance decreased by $25.7 million. In accordance with the provisions of the 6.5% Debentures, two debenture holders exercised their put option and accelerated the maturity of their debenture, resulting in a reduction of $19.5 million, during 2005. The following table shows the long-term borrowings and related average interest rates as of December 31, 2005 and December 31, 2004:

 
   
 
December 31, 2005
  
December 31, 2004
  
($ in millions)
  
Balance
($)
  
Average
interest rate
(%)
  
Balance
($)
  
 Average
Interest rate
(%)
  
$75 million revolving credit agreement
  
$
2.1
    
6.1
%
$
9.2
    
4.2
%
Industrial revenue bonds
    
—
    
—
    
—
    
—
  
Convertible debentures due 2007
    
5.5
    
6.5
    
25.0
    
6.5
  
Convertible debentures due 2024
    
60.0
    
2.1
    
60.0
    
2.1
  
Term loan, due 2011
    
0.9
    
5.8
    
—
    
—
  
     
68.5
          
94.2
        
Less current maturities
   
0.2
    
—
    
—
    
—
  
Total long-term debt
  
$
68.3
    
2.6
%
$
94.2
    
3.5
%

In November 2005, CTS’ Board of Directors authorized a program to repurchase up to one million shares of stock. The authorization expires June 30, 2007. The previously authorized one million share repurchase program dated July 2004 was completed in the fourth quarter of 2005. Reacquired shares will be used to support equity-based compensation programs and for other corporate purposes. During 2005, CTS repurchased 956,400 shares at a total cost of $11.3 million. At December 31, 2005, CTS was authorized to repurchase approximately 860,600 additional shares.

On October 12, 2004, CTS amended its revolving credit agreement to expand the borrowing capacity from $55 million to $75 million. The outstanding balance under the revolving credit agreement at December 31, 2005 was $2.1 million. Any outstanding balance would be senior to CTS’ convertible debentures. The revolving credit agreement is collateralized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on the agreement fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the revolving credit agreement. The commitment fee varies based on performance under certain financial covenants and was 0.38 percent per annum as of December 31, 2005. The revolving credit agreement requires, among other things, that CTS comply with a minimum fixed charge coverage and a minimum tangible net worth covenants. Failure of CTS to comply with these covenants could reduce the borrowing availability under the revolving credit agreement. Additionally, the revolving credit agreement limits the amounts allowed for dividends, capital expenditures and acquisitions. The revolving credit agreement expires in July 2007.

In May 2004, CTS issued the $60 million Debentures due 2024. The debt is an unsecured senior subordinated obligation of CTS. The debentures bear interest at a rate of 2.125% per year and will be convertible, under certain circumstances, into CTS common stock, at the option of the holder, at a 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 debentures. The conversion price represents a 36.24% premium over the closing price of CTS common stock on May 5, 2004. The offering was closed on May 11, 2004. With the proceeds, CTS repaid outstanding debt, including its industrial revenue bonds outstanding balance of $40 million due in 2013 at a weighted average interest rate of 7.5% and reduced the amount outstanding under its revolving credit agreement. The other $2 million of industrial revenue bonds were repaid in the first quarter of 2004 with the cash generated from operations. As of December 31, 2005, no conversion condition for the $60 million debentures was met.
12



In April 2002, the Company issued $25 million in aggregate principal amount of five-year, 6.5% convertible subordinated debentures due 2007. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. In accordance with the provisions of the 6.5% Debentures, two debenture holders exercised its put option and accelerated the maturity of its debenture, totaling $19.5 million, during 2005. The Company has $5.5 million of 6.5% convertible, subordinated debentures outstanding at December 31, 2005. At any time after April 2005, the purchasers may accelerate the maturity of the debentures. CTS also has the right at any time after April 2005 and under certain circumstances, to force conversion of the debentures into common stock.

In November 2001, CTS’ Form S-3 registration statement registering two million shares of CTS common stock to be issued under CTS’ Direct Stock Purchase Plan was declared effective by the Securities and Exchange Commission. In November 2005, CTS terminated this Direct Stock Purchase Plan under this registration statement. 

In December 1999, CTS’ shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission. CTS could initially offer up to $500.0 million in any combination of debt securities, common stock, preferred stock or warrants under the registration statement. During 2005, CTS did not issue any securities under this registration statement. As of December 31, 2005, CTS could offer up to $435.1 million of additional debt and/or equity securities under this registration statement.

Capital Requirements

The following table sets forth the impact that contractual obligations, as of December 31, 2005, are expected to have on the Company's liquidity and cash flow in future periods:
 

   
 
Payments Due by Period
  
($ in millions)
  
Total
  
2006
  
2007 - 2008
  
2009 - 2010
  
2011 - beyond
  
Long-term debt 1
  
$
92.6
  
$
1.8
  
$
10.6
  2 
$
2.9
  
$
77.3
  3
Operating leases
    
18.5
    
3.4
    
5.7
    
4.2
    
5.2
  
Purchase obligations
    
—
    
—
    
—
    
—
    
—
  
Retirement obligations
    
15.9
    
1.5
    
3.1
    
3.2
    
8.1
  
   
$
127.0
  
$
6.7
  
$
19.4
  
$
10.3
  
$
90.6
  
 
_______________________
1
Including principal and coupon payments of the $5.5 million debentures issued in 2002, principal and coupon payments of $60 million Debentures issued in 2004, and principal payment of the revolving credit agreement.
 
2
Including $5.5 million in debentures issued in 2002 and $2.1 million outstanding under the revolving credit agreement. For the 6.5% Debentures, the investors may accelerate the maturity of the debentures at any time after the three-year anniversary of the issue date. These debentures convert into CTS common stock at a conversion price of $20.05 per share.

3
Debentures issued in May 2004. Investor may convert the debentures, under certain circumstances, at any time to CTS common stock. The conversion price is $15.00 per common share.

Purchase obligations are defined as agreements that are enforceable and legally binding on CTS and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. CTS purchases direct materials, generally related to customer orders, for production occurring at its manufacturing facilities around the world. These goods are secured using purchase orders, either blanket or discrete. Purchase orders commit CTS to take delivery of the quantities ordered generally over a specified delivery schedule. CTS’ standard purchase order terms and conditions state that, should CTS cancel an order, CTS will reimburse its supplier only for the costs incurred at the time of cancellation. CTS’ purchase order cancellations generally occur due to order cancellation by a customer. If a customer cancels its order, CTS’ standard terms of sale provide for reimbursement of costs, including those related to CTS’ purchase orders. Therefore, these commitments are not included in purchase obligations.

13
Retirement obligations include defined benefit and other post-retirement benefits. Please refer to “Note H —Retirement Plans” and “Critical Accounting Policies - Retirement Plans” for additional information related to the retirement plans, including the important assumptions.

CTS utilizes a market- related approach in deriving fair value of plan assets. CTS does not expect any significant change in the approach in 2006. For plan asset allocation detail, please refer to Note H. CTS does not expect any significant change on asset allocation in 2006 based on its current knowledge. However, CTS may change the asset allocation based on the performance of different asset categories after conducting investment portfolio reviews, annual liability measurements and asset/liability studies on a regular basis.

Based on CTS’ experience, the actual return on plan assets can deviate from the expected return on plan assets. This deviation is taken into account in the market value related approach in deriving fair value of plan assets. The deviation between the expected return and the actual return was primarily due to market conditions. CTS performs a sensitivity analysis to assess the potential impact on the results of operations by the change in the expected long-term rates of return. A 25 basis-point change in the long-term rate of return would have changed the pension income in 2005 by $800,000.

CTS plans to invest in capital projects that maintain current capacity and result in future revenue opportunities. The 2006 capital spending is expected to be approximately $21 million. 

CTS has historically been able to fund its capital and operating needs through its cash flows from operations and available credit under its bank credit agreements. CTS believes that cash flows from operations and available borrowings under its current revolving credit agreement will be adequate to fund its working capital, capital expenditures, and debt service requirements through December 31, 2006 and until July 2007, when the credit agreement expires. However, CTS may choose to pursue additional equity and/or debt financing to fund acquisition and/or to improve capital structure.
 
Off-Balance Sheet Arrangements
 
CTS has off balance sheet arrangements associated with operating leases. CTS incurred approximately $8.1 million of rent expense in 2005, $7.1 million in 2004, and $6.8 million in 2003. The future minimum lease payments under the Company’s operating leases are $3.4 million in 2006, $3.2 million in 2007, $2.5 million in 2008, $2.5 million in 2009, $1.7 million in 2010, and $5.3 million thereafter.
 
Effect of Recent Accounting Pronouncements
 
In December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.” FAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). FAS No. 123R eliminates the alternative to use APB Opinion No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. CTS had followed the provisions of APB Opinion No. 25 to account for stock options. FAS No. 123R is effective for CTS on January 1, 2006. CTS intends to apply the modified prospective transition method upon adoption of FAS No. 123R. Accordingly, the provisions of FAS No. 123R will reduce earnings upon adoption.

In November 2004, the FASB finalized FAS No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4.” FAS No. 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. FAS No. 151 is effective for CTS on January 1, 2006. CTS believes FAS No. 151 will have no significant effect on its consolidated operating results and financial condition.
 
14
Market Risk
 
CTS is exposed to market risk, including changes in foreign currency exchange rates and interest rates. As discussed in Note A, “Summary of Significant Accounting Policies” to the consolidated financial statements, the financial statements of all CTS’ non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency. The Company does not have any significant net trade asset or liability exposure in a currency other than that of the reporting unit’s functional currency. The market risk associated with foreign currency exchange rates comes primarily from revenue and expense transactions in currencies other than the reporting unit's functional currency. CTS monitors the effects of foreign currency fluctuations impacting its foreign subsidiaries and attempts, where possible, to mitigate the impact by matching the expenses in the same currencies in which revenues are generated.

As part of CTS’ risk management program, CTS performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 39 basis-point increase in interest rates (approximately 10% of CTS’ weighted-average interest rate) on variable-rate debt instruments would have increased CTS’ 2005 and 2004 interest expense by $0.2 million and $0.1 million, respectively, and would have an immaterial effect on the fair value of the debt instruments as of the end of such fiscal years.

Statements about the Company’s earnings outlook and its plans, estimates and beliefs concerning the future are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s expectations, certain assumptions and currently available information. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of geopolitical, economic, health, industry and other factors which could affect the Company’s operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statement. Examples of factors which may affect future results include, but are not limited to: rapid technological change, general market conditions in the automotive, communications and computer industries; 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.

15
 
Consolidated Statements of Earnings
(In thousands of dollars except per share amounts)

 
  
Year Ended December 31,
  
 
  
2005
  
2004
  
2003
  
Net sales
  
$
617,484
  
$
531,316
  
$
462,987
  
Costs and expenses:
                    
Cost of goods sold
    
495,069
    
421,560
    
366,275
  
Selling, general and administrative expenses
    
68,049
    
63,485
    
56,857
  
Research and development expenses
    
17,092
    
19,063
    
21,476
  
Gain on asset sales
    
(3,065
)
  
(3,920
)
  
—
  
Asset impairment charge — Note P
    
—
    
—
    
4,563
  
Operating earnings
   
40,339
    
31,128
    
13,816
  
Other (expense) income:
                    
Interest expense
    
(5,902
)
  
(5,535
)
  
(7,688
)
Interest income
    
1,300
    
922
    
357
  
Other
    
(334
)
  
(598
)
  
(237
)
Total other expense
    
(4,936
)
  
(5,211
)
  
(7,568
)
Earnings before income taxes
    
35,403
    
25,917
    
6,248
  
Income tax expense (benefit) — Note J
    
13,169
    
5,961
    
(6,327
)
Net earnings
 
$
22,234
  
$
19,956
  
$
12,575
  
Earnings per share — Note D
Basic
  
$
0.61
  
$
0.56
  
$
0.36
  
Diluted
  
$
0.57
  
$
0.53
  
$
0.36
  

The accompanying notes are an integral part of the consolidated financial statements.

 
16
Consolidated Balance Sheets
(In thousands of dollars)
 
 
  
December 31,
  
 
  
2005
  
2004
  
ASSETS
            
Current Assets
              
Cash and cash equivalents
  
$
12,029
  
$
61,005
  
Accounts receivable, less allowances (2005 — $2,373; 2004 — $1,450)
    
91,265
    
84,112
  
Inventories
              
Finished goods
    
11,771
    
10,815
  
Work-in-process
    
16,039
    
8,058
  
Raw materials
    
32,754
    
23,861
  
Total inventories
    
60,564
    
42,734
  
Other current assets - Note J
    
16,816
    
16,295
  
Total current assets
    
180,674
    
204,146
  
Property, Plant and Equipment
              
Buildings and land
    
113,873
    
113,478
  
Machinery and equipment
    
248,348
    
271,497
  
Total property, plant and equipment
    
362,221
    
384,975
  
Accumulated depreciation
    
(252,545
)
  
(272,480
)
Net property, plant and equipment
    
109,676
    
112,495
  
Other Assets
              
Prepaid pension asset — Note H
    
152,483
    
143,918
  
Goodwill - Notes B and E
    
24,657
    
513
  
Other intangible assets, net — Notes B and E
    
42,347
    
34,632
  
Deferred income taxes — Note J
    
22,011
    
23,221
  
Other assets
   
2,088
    
3,252
  
Total other assets
    
243,586
    
205,536
  
Total Assets
  
$
533,936
  
$
522,177
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
Current Liabilities
              
Notes payable — Note F
  
$
13,299
  
$
3,311
  
Current portion of long-term debt — Note G
    
164
    
—
  
Accounts payable
    
67,196
    
55,614
  
Accrued salaries, wages and vacation
    
10,496
    
13,198
  
Income taxes payable
    
6,127
    
9,109
  
Other accrued liabilities
    
22,651
    
21,729
  
Total current liabilities
    
119,933
    
102,961
  
Long-term debt — Note G
    
68,293
    
94,150
  
Other long-term obligations — Notes H and J
    
16,139
    
14,362
  
Contingencies — Note N
    
—
    
—
  
Shareholders’ Equity
              
Preferred stock — authorized 25,000,000 shares without par value; none issued — Note K
    
—
    
—
  
Common stock — authorized 75,000,000 shares without par value; 53,576,243 shares issued at December 31, 2005 and 52,666,798 shares issued at December 31,2004 — Note K
    
275,211
    
263,297
  
Additional contributed capital
    
24,743
    
22,761
  
Retained earnings
    
296,956
    
279,064
  
Accumulated other comprehensive earnings (loss)
    
(244
)
  
1,348
  
 
    
596,666
    
566,470
  
Cost of common stock held in treasury (2005 — 17,717,657 shares; 2004 —16,757,907 shares) — Note L
    
(267,095
)
  
(255,766
)
Total shareholders’ equity
    
329,571
    
310,704
  
Total Liabilities and Shareholders’ Equity
  
$
533,936
  
$
522,177
  
 
The accompanying notes are an integral part of the consolidated financial statements.
17



Consolidated Statements of Cash Flows
(In thousands of dollars)
 

 
  
Year Ended December 31,
  
Cash flows from operating activities:
  
2005
  
2004
  
2003
  
Net earnings
 
$
22,234
  
$
19,956
  
$
12,575
  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                    
Depreciation and amortization
    
27,059
    
26,082
    
33,605
  
Asset impairment charge
    
—
    
—
    
4,563
  
Gain on asset sales
    
(3,065
)
  
(3,920
)
  
—
  
Deferred income taxes
    
9,139
    
153
    
313
  
Equity-based compensation - Note I
    
2,704
    
1,668
    
624
  
Prepaid pension asset
    
(8,741
)
  
(10,864
)
  
(12,053
)
Changes in assets and liabilities, net of effects from purchase of SMTEK
                    
Accounts receivable
    
8,348
    
(11,822
)
  
(8,488
)
Inventories
    
(3,579
)
  
(10,809
)
  
4,336
  
Accounts payable and accrued liabilities
    
(6,170
)
  
3,855
    
2,452
  
Income taxes payable
    
(3,027
)
  
150
    
(13,736
)
Other
    
(383
)
  
(482
)
  
1,477
  
Total adjustments
    
22,285
    
(5,989
)
  
13,093
  
Net cash provided by operations
    
44,519
    
13,967
    
25,668
  
Cash flows from investing activities:
                    
Payment for purchase of SMTEK, net of cash acquired - Note B
    
(35,561
)
  
—
    
—
  
Proceeds from sale of assets
    
6,093
    
19,813
    
4,126
  
Capital expenditures
    
(15,009
)
  
(12,711
)
  
(9,044
)
Other
    
—
    
—
    
(136
)
Net cash provided by (used in) investing activities
    
(44,477
)
  
7,102
    
(5,054
)
Cash flows from financing activities:
                    
Repayment of debt assumed in connection with purchase of SMTEK
    
(13,013
)
  
—
    
—
  
Borrowings of long-term debt
    
161,160
    
172,185
    
104,159
  
Payments of long-term debt
    
(188,285
)
  
(153,915
)
  
(123,629
)
Increase in short-term notes payable
    
9,988
    
3,311
    
—
  
Debt issue costs
    
—
    
(2,406
)
  
(570
)
Issuance of common stock
    
—
    
—
    
15,620
  
Purchase of treasury stock
    
(11,283
)
  
(2,005
)
  
—
  
Dividends paid
    
(4,343
)
  
(4,537
)
  
(4,087
)
Exercise of stock options and other
    
(113
)
  
87
    
2,563
  
Net cash provided by (used in) financing activities
    
(45,889
)
  
12,720
    
(5,944
)
Effect of exchange rate changes on cash
    
(3,129
)
  
1,870
    
1,451
  
Net increase (decrease) in cash and cash equivalents
    
(48,976
)
  
35,659
    
16,121
  
Cash and cash equivalents at beginning of year
    
61,005
    
25,346
    
9,225
  
Cash and cash equivalents at end of year
  
$
12,029
  
$
61,005
  
$
25,346
  
Supplemental cash flow information
                    
Cash paid during the year for:
                    
Interest
  
$
5,360
  
$
4,857
  
$
6,443
  
Income taxes — net
    
5,114
    
6,901
    
7,573
  
Noncash investing and financing activities
                    
Common stock issued in connection with DCA acquisition
  
$
113
  
$
104
  
$
1,417
  
 
Supplemental schedule of non-cash investing and financing activities:
Refer to Note C, “Supplemental Schedule of Non-cash Investing and Financing Activities”

The accompanying notes are an integral part of the consolidated financial statements.

18

Consolidated Statements of Shareholders’ Equity
($ in thousands)

 
  
 
  
 
  
 
  
Accumulated
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Other
  
 
  
 
  
 
  
 
  
 
  
Additional
  
 
  
Comprehensive
      
 
  
 
  
 
  
Common
  
Contributed
  
Retained
  
Earnings
  
Comprehensive
  
Treasury
  
 
  
 
  
Stock
  
Capital
  
Earnings
  
(Loss)
  
Earnings
  
Stock
  
Total
  
Balances at December 31, 2002
  
$
241,393
  
$
23,514
  
$
255,085
  
$
(835
)
      
$
(254,137
)
$
265,020
  
Net earnings
                
12,575
        
$
12,575
          
12,575
  
Cumulative translation adjustment
                     
1,476
    
1,476
          
1,476
  
Minimum pension liability adjustment (net of tax of $214)
                      
(490
)
  
(490
)
        
(490
)
Comprehensive earnings
                            
13,561
              
Cash dividends of $0.12 per share
                
(4,230
)
                    
(4,230
)
Issued 52,140 shares on restricted stock and cash bonus plan — net
    
(93
)
  
(375
)
                    
468
        
Issued 244,114 shares on exercise of stock option — net
    
4,164
    
(1,939
)
                    
11
    
2,236
  
Issued 546,358 shares under Direct Stock Purchase Plan
    
4,930
                                  
4,930
  
Issued 1,000,000 shares under shelf registration
    
10,690
                                  
10,690
  
Stock compensation
    
247
    
320
                            
567
  
Issued 123,384 shares to former DCA shareholders
    
1,417
                                  
1,417
  
Balances at December 31, 2003
    
262,748
    
21,520
   
263,430
    
151
          
(253,658
)
  
294,191
  
Net earnings
                
19,956
         
19,956
         
19,956
 
Cumulative translation adjustment
                     
2,074
   
2,074
         
2,074
 
Minimum pension liability adjustment (net of tax of $580)
                      
(877
)
  
(877
)
        
(877
)
Comprehensive earnings
                            
21,153
              
Cash dividends of $0.12 per share
                
(4,322
)
                    
(4,322
)
Returned 7,600 shares on restricted stock and cash bonus plan — net
    
(40
)
  
119
                     
(79
)
      
Issued 19,246 shares on exercise of stock option — net
    
171
   
13
                     
(24
)
  
160
 
Issued 603 shares under Direct Stock Purchase Plan
    
6
                                 
6
 
Issued 9,018 shares to former DCA shareholders
    
104
                                 
104
 
Acquired 183,000 shares for treasury stock
                                  
(2,005
)
  
(2,005
)
Stock compensation
    
308
   
1,109
                           
1,417
 
Balances at December 31, 2004
    
263,297
    
22,761
    
279,064
    
1,348
          
(255,766
)
  
310,704
  
Net earnings
                
22,234
          
22,234
          
22,234
  
Cumulative translation adjustment
                     
(786
)
  
(786
)
        
(786
)
Minimum pension liability adjustment (net of tax of $455)
                      
(806
)
  
(806
)
        
(806
)
Comprehensive earnings
                          
$
20,642
              
Cash dividends of $0.12 per share
                
(4,342
)
                    
(4,342
)
Issued 812,315 shares in connection with acquisition of SMTEK
    
10,932
                                  
10,932
  
Returned 2,150 shares on restricted stock and cash bonus plan - net
   
11
    
21
                      
(32
)
      
Issued 35,651 shares on exercise of stock option - net
    
250
    
41
                      
(14
)
  
277
  
Issued 41,084 shares on vesting of restricted stock units
    
473
    
(656
)
                          
(183
)
Issued 643 shares under Direct Stock Purchase Plan
    
7
                                  
7
  
Issued 18,552 shares to former DCA shareholders
    
113
                                  
113
  
Acquired 956,400 shares for treasury stock
                                  
(11,283
)
  
(11,283
)
Stock compensation
    
128
    
2,576
                            
2,704
  
Balances at December 31, 2005
  
$
275,211
  
$
24,743
  
$
296,956
  
$
(244
)
      
$
(267,095
)
$
329,571
  
 
The accompanying notes are an integral part of the consolidated financial statements.


19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A—Summary of Significant Accounting Policies

Principles of Consolidation:  The consolidated financial statements include the accounts of CTS and its wholly owned subsidiaries. Refer to Note B, “Acquisition,” for a discussion of the acquisition made by CTS in 2005. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates:  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 reporting period. Actual results could differ materially from those estimates.

Translation of Foreign Currencies:  The financial statements of CTS’ non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings. CTS’ Consolidated Statements of Earnings includes $0.5 million, $0.7 million, and $0.3 million of foreign currency translation expense for the years ended December 31, 2005, 2004, and 2003, respectively.

The assets and liabilities of CTS’ United Kingdom subsidiary are translated into U.S. dollars at the current exchange rate at period end, with resulting translation adjustments made directly to the “accumulated other comprehensive earnings (loss)” component of shareholders’ equity. Statement of earnings accounts are translated at the average rates during the period.

Comprehensive Earnings:  CTS reports comprehensive earnings in accordance with the Financial Accounting Standards Board’s (FASB) Financial Accounting Standard (FAS) No. 130, “Reporting Comprehensive Income (Loss).” The components of comprehensive earnings for CTS include foreign currency translation adjustments, minimum pension liability adjustments, and net earnings and are reported within the Consolidated Statements of Shareholders’ Equity in the columns titled “Comprehensive Earnings” and “Accumulated Other Comprehensive Earnings (Loss).”
 
The table below shows the components of accumulated other comprehensive earnings at December 31:
 

($ in thousands)
  
2005
  
2004
  
Accumulated translation
  
$
2,392
  
$
3,177
  
Minimum pension liability
    
(2,636
)
  
(1,829
)
Accumulated other comprehensive earnings
  
$
(244
)
$
1,348
  

20
Revenue Recognition:  Substantially all of CTS’ revenue is from product sales. CTS recognizes revenue from product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the sales price is fixed and determinable, and collection of the related receivable is probable, which is generally at the time of shipment. The Company has agreements with its distributors that provide limited rights of return within a limited time and protection against price reductions initiated by the Company. The effect of these programs is estimated based on historical experience and current economic conditions and provisions are recorded at the time of shipment. CTS customers typically have a right to return products that they consider to be defective. Revenue is recorded net of estimated returns of products, based on management’s analysis of historical returns, current economic trends, and changes in customer demands. Provisions for returns and other adjustments are provided for in the same period the related sales are recorded based on experience and other relevant factors.

Concentration of Credit Risk:  The majority of cash and cash equivalents is maintained in U.S. dollar demand deposits, AA money market mutual funds, and in U.S. government securities, with the remainder maintained with several major financial institutions. Deposits with these banks exceed the amount of insurance provided on such deposits; however, the deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

Trade receivables subject CTS to the potential for credit risk with major customers. CTS sells its products to customers principally in the automotive, communications, computer, medical, and industrial markets, primarily in North America, Europe, and Asia. CTS performs ongoing credit evaluations of its customers to minimize credit risk. CTS does not require collateral. Management makes estimates of the collectability of its accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Sales to Hewlett-Packard Company (Hewlett-Packard) were 28% of net sales for the year ended December 31, 2005 and, 33% of net sales for each of the years ended December 31, 2004 and 2003. Sales to Motorola, Inc. (Motorola) were less than 10% of net sales for the year ended December 31, 2005 and 13% of net sales for each of the years ended December 31, 2004 and 2003. Amounts due from Hewlett-Packard and Motorola aggregated $33 million and $41 million at December 31, 2005 and 2004, respectively. Significant sales to a single customer expose CTS to a concentration of credit risk. Management, however, believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Research and Development:  Research and development costs include expenditures for planned search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes. It also includes the implementation of the new knowledge through design, testing of product alternatives, or construction of prototypes. CTS expenses all research and development costs as incurred.

Earnings Per Share:  Basic and diluted earnings per common share are reported in conformity with the FAS No. 128, “Earnings per Share.” Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock that shared in the earnings of CTS. Diluted earnings per share is computed by dividing net earnings adjusted for the after-tax effect of interest on dilutive convertible debt by the weighted-average number of common shares outstanding during the period plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive securities. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share. Refer also to Note D, “Earnings Per Share.”
21


Stock-Based Employee Compensation:   CTS accounts for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related Interpretations. For stock-based employee awards with graded vesting, CTS recognizes expense under the accelerated attribution methodology of FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”. Refer also to Note I, “Stock Plans,” for more details about CTS’ stock-based compensation plans. Had employee compensation cost for CTS’ fixed, stock-based compensation plans been determined based on the fair value method, as defined by FAS No. 123, “Accounting for Stock-Based Compensation,” CTS’ net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below:
 
 
  
Year ended December 31,
  
($ in thousands, except per share amounts)
   
2005
    
2004
    
2003
  
Net earnings as reported
  
$
22,234
  
$
19,956
  
$
12,575
  
Deduct:  Stock-based employee compensation cost, net of tax, if fair value based method were used
    
(888
)
  
(1,254
)
  
(1,911
)
Pro forma net earnings
 
$
21,346
  
$
18,702
  
$
10,664
  
Net earnings per share — basic, as reported
  
$
0.61
  
$
0.56
  
$
0.36
  
Pro forma net earnings per share — basic
    
0.59
    
0.52
    
0.31
  
Net earnings  per share — diluted, as reported
    
0.57
    
0.53
    
0.36
  
Pro forma net earnings  per share — diluted
  
$
0.54
  
$
0.50
  
$
0.30
  
 
In December 2005, CTS’ Board of Directors approved the accelerated vesting of approximately 70,000 unvested and “out-of-the-money” stock options with exercise prices ranging from $14.02 - $16.24 that were previously granted under an employee stock option plan. These options became immediately exercisable on December 31, 2005. The pro forma net income disclosed in this note includes approximately $310,000 of expense, or $0.01 per diluted share, related to this accelerated vesting. Accordingly, the 2005 pro forma amounts are not necessarily indicative of future annual expense to be recognized by CTS under FAS No. 123R.

The weighted-average fair value of each option grant (which is amortized over the option vesting period for purposes of determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
 
  
2005
  
2004
  
2003
  
 
  
Grants
  
Grants
  
Grants
  
Dividend yield
    
1.08
%
  
1.09
%
  
1.23
%
Expected volatility
    
52.41
%
  
64.81
%
  
67.87
%
Risk-free interest rate
    
4.14
%
  
2.89
%
  
1.81
%
Expected life
    
10 years
    
4.5 years
    
4.4 years
  
 
The increase in the expected life assumption reflects a greater proportion of stock options being awarded to officers who have historically held stock options for their full term.

Cash Equivalents:  CTS considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents.

Inventories:  Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Income Taxes:  CTS provides deferred income taxes pursuant to the requirements of FAS No. 109, “Accounting for Income Taxes.” Under FAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities and carryforwards using currently enacted tax rates. CTS estimates its income tax valuation allowance by assessing which deferred tax assets are more likely than not to be recovered in the future. Refer also to Note J, “Income Taxes.”

22
Property, Plant and Equipment:  Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years. Machinery and equipment useful lives range from three to eight years. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, any related gains or losses are included in operating earnings.

CTS assesses the carrying value of long-lived assets and the remaining useful lives whenever events or changes in circumstances indicate an impairment may have occurred. If the future cash flows (undiscounted and without interest) expected to result from the use of the related assets are less than the carrying value of such assets, an impairment charge may be required to reduce the carrying value of the long-lived assets to fair value.

Retirement Plans:  CTS has various defined benefit and defined contribution retirement plans covering a majority of its employees. CTS’ policy is to annually fund the defined benefit pension plans at or above the minimum required by law. Refer also to Note H, “Retirement Plans.”

Intangible Assets:  CTS does not amortize goodwill, but tests it annually for impairment using a fair value approach at the “reporting unit” level. A reporting unit is the operating segment, or a business one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. CTS would recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds its fair value. CTS uses discounted cash flows to establish fair values.

CTS amortizes the cost of other intangibles over a straight-line basis using their estimated useful lives. CTS assesses useful lives based on the period over which the asset is expected to contributed to CTS’ cash flows. CTS reviews the carrying value of its intangible assets whenever events or changes in circumstances indicate an impairment may have occurred. If impaired, the asset is written down to fair value based on either discounted cash flows or appraised values. Refer also to Note E, “Intangible Assets.”

Financial Instruments:  CTS’ financial instruments consist primarily of cash, cash equivalents, trade receivables and payables, and obligations under short-term notes payable and long-term debt. The carrying value for cash and cash equivalents, and trade receivables and payables and short-term notes payable approximates fair value based on the short-term maturities of these instruments. CTS has estimated the fair value of its long-term debt to be $63.1 million, or $5.4 million less than the carrying value of $68.5 million. The estimated fair value of long-term debt was based on quoted dealer prices for the same or similar issues.

Amortization of Debt Issue Costs:  CTS has debt issue costs that relate to the Company’s long-term debt and are being amortized over the life of the debt or, for convertible debt, the period until the debt is first convertible into common stock. Amortization expense totaled $0.8 million in 2005, $0.7 million in 2004, and $1.2 million in 2003 and is included in interest expense in the accompanying Consolidated Statements of Earnings.

Reclassifications:  Certain reclassifications have been made for the periods presented in the consolidated financial statements to conform to the classifications adopted in 2005.

New Accounting Pronouncements:  In December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.” FAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). FAS No. 123R eliminates the alternative to use APB Opinion No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. FAS No. 123R is effective for CTS on January 1, 2006. CTS currently follows the provisions of APB Opinion No. 25 to account for stock options. CTS intends to apply the modified prospective transition method upon adoption of FAS No. 123R. Accordingly, the provisions of FAS No. 123R will reduce earnings upon adoption.

In November 2004, the FASB finalized FAS No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4.” FAS No. 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. FAS No. 151 is effective for CTS on January 1, 2006. CTS believes FAS No. 151 will have no significant effect on its consolidated operating results and financial condition.
23

 
NOTE B—Acquisition 
 
Effective January 31, 2005, CTS acquired 100% of the outstanding capital stock of SMTEK International Inc. (SMTEK). The results of SMTEK’s operations have been included in the consolidated financial statements since that date. SMTEK is an EMS provider serving original equipment manufacturers in the medical, industrial, instrumentation, telecommunications, security, financial services, automation, aerospace, and defense industries. As a result of the acquisition, CTS expects to expand into new EMS markets, reduce customer concentrations, and increase its global footprint. SMTEK had four facilities located in Moorpark and Santa Clara, California; Marlborough, Massachusetts; and Bangkok, Thailand. Subsequent to the acquisition, CTS consolidated the Marlborough, Massachusetts facility into its Londonderry, New Hampshire facility.
 
In conjunction with the purchase, CTS acquired net assets valued at $48.1 million. The purchase price was comprised of $34.7 million of cash consideration, CTS common stock valued at $10.9 million, and $2.5 million of estimated transaction cost. In addition, CTS immediately repaid $13.0 million of the SMTEK debt which was assumed. CTS issued 812,315 shares of common stock in connection with the acquisition. The value assigned to the common stock was determined based on the average market price of CTS’ common stock over the two-day period before and after the terms of the acquisition were agreed to and announced.
 
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition.

 
($ in thousands) 
  
 At January 31, 2005
Current assets
  
$
34,867
Property, plant and equipment
    
6,108
Amortizable intangible assets
    
11,158
Goodwill
    
24,144
Other long-term assets
    
4,627
Total assets acquired
    
80,904
 
    
Current liabilities
    
16,702
Long-term liabilities
    
3,098
Debt assumed and repaid by CTS
    
13,013
Total liabilities acquired
    
32,813
Net assets acquired
  
$
48,091

 
Of the $11.2 million of amortizable intangible assets, $10.7 million was assigned to customer relationships (13 year useful life), $0.4 million to customer order backlog (90 days useful life), and $0.1 million to employment agreements (2 year useful life). The $24.1 million of goodwill was assigned to the EMS business segment. None of these amounts are deductible for tax purposes.
 
The following table presents CTS’ unaudited pro forma consolidated results of operations for the twelve months ended December 31, 2005 and 2004 as if the acquisition had been completed at the beginning of each period. The pro forma information is presented for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition actually been made at such date, nor is it necessarily indicative of future operating results.
 
   
 
Pro forma
Twelve Months Ended
($ in thousands, except per share amounts)
  
December 31, 2005
  
December 31, 2004
         
Revenues
  
$
627,531
  
$
645,948
             
Net income
  
$
22,408
  
$
21,923
             
Earnings per share:
            
Basic
  
$
0.62
  
$
0.60
Diluted
  
$
0.57
  
$
0.57
 

24
 
 
NOTE C—Supplemental Schedule of Noncash Investing and Financing Activities 
 
In 2005, the Company purchased 100% of the capital stock of SMTEK. In conjunction with the acquisition, CTS issued common stock and assumed liabilities as follows (refer also to Note B, “Acquisition”):
 
($ in millions) 
  
 
Cash paid
  
$
37.2
Fair value of stock issued
    
10.9
Liabilities assumed
    
32.8
Fair value of assets acquired
  
$
80.9

 
NOTE D—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 calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the years ended December 31, 2005, 2004, and 2003.
 
 
($ in thousands, except per share amounts)
  
 
Net Earnings (Numerator)
  
Shares
(In thousands) (Denominator)
  
 
Per Share Amount
  
2005
                    
Basic EPS
  
$
22,234
    
36,307
 
$
0.61
  
Effect of dilutive securities:
                    
Equity-based compensation plans
          
653
       
Convertible debt
    
966
    
4,000
        
Diluted EPS
  
$
23,200
    
40,960
  
$
0.57
  
                     
2004
                    
Basic EPS
  
$
19,956
    
35,910
  
$
0.56
  
Effect of dilutive securities:
                    
Equity-based compensation plans
          
382
        
Convertible debt
    
632
    
2,575
        
Other
          
26
 1      
Diluted EPS
  
$
20,588
    
38,893
  
$
0.53
  
                     
2003
                    
Basic EPS
  
$
12,575
    
34,723
  
$
0.36
  
Effect of dilutive securities:
                    
Equity-based compensation plans
          
146
        
Other
          
120
  1      
Diluted EPS
  
$
12,575
    
34,989
  
$
0.36
  
 
_______________________________
1 Represents shares of CTS common stock to be issued to the former DCA shareholders, a company which was acquired by CTS in 1997.


25
 
The following table shows the potentially dilutive securities which have been excluded from the 2005, 2004, and 2003 diluted earnings per share calculations because they are either anti-dilutive or the exercise price exceeds the average market price.

 
  
Year ended December 31,
  
(Number of shares in thousands)
  
2005
  
2004
  
2003
  
Stock options where the exercise price exceeds the average market price of common shares during the period
    
659
    
737
    
1,139
  
Securities related to subordinated convertible debt
    
1,060
    
1,247
    
1,247
  

 
Note E—Intangible Assets

CTS has the following intangible assets as of December 31:

 
  
2005
  
2004
  
($ in thousands)
  
Gross Carrying Amount
  
Accumulated Amortization
  
Gross Carrying Amount
  
Accumulated Amortization
  
Amortized intangible assets:
                  
Customer lists/relationships
  
$
47,075
    
(8,451
)
$
36,405
    
(6,490
)
Patents
    
10,319
    
(6,673
)
  
10,319
    
(5,602
)
Employment agreements
    
142
    
(65
)
  
—
    
—
  
Customer order backlog
    
346
    
(346
)
  
—
    
—
  
Total
    
57,882
    
(15,535
)
  
46,724
    
(12,092
)
Goodwill
    
24,657
    
—
    
513
    
—
  
Total intangible assets
  
$
82,539
    
(15,535
)
$
47,237
    
(12,092
)

 
Of the net intangible assets at December 31, 2005, $34.2 million relates to the EMS business segment and $32.8 million relates to the Components and Sensors business segment. Of the $24.7 million of goodwill, $24.2 million relates to the EMS business segment and $0.5 million relates to the Components and Sensors business segment. CTS recorded amortization expense of $3.4 million, $2.3 million and $2.5 million for the years ended December 31, 2005, 2004, and 2003, respectively. CTS estimates annual amortization expense of $3.2 million in 2006, $3.1 million in 2007 and 2008, $2.5 million in 2009, $2.0 million in 2010, and $28.4 million thereafter.

NOTE F—Notes Payable

CTS had line of credit arrangements of $23.0 million and $13.3 million at December 31, 2005 and 2004, respectively. These arrangements are generally subject to annual renewal and renegotiation, and may be withdrawn at the banks' option. The majority of the line of credit arrangements at December 31, 2005 are unsecured. However, one line of credit for $0.5 million is secured by building and equipment in Thailand. The weighted-average interest rate, computed by relating interest expense to average daily short-term borrowings, was 4.2% in 2005 and 3.4% in 2004.

26
NOTE G—Debt

Long-term debt was comprised of the following at December 31:

($ in thousands)
  
2005
  
2004
  
Revolving credit agreement, average interest rate of 6.1% (2005) and 4.2% (2004) due in 2007
  
$
2,080
  
$
9,150
  
Convertible, senior subordinated debentures at a weighted-average rate of 2.1%, due in 2024
    
60,000
    
60,000
  
Convertible, subordinated debentures at a weighted-averaged rate of 6.5%, due in 2007
    
5,500
    
25,000
  
Term loan, interest 5.8%, due in 2011
    
875
    
—
  
Other debt, weighted-average rate of 10.1%, due 2006
    
2
    
—
  
 
    
68,457
    
94,150
  
Less current maturities
    
164
    
—
  
Total long-term debt
  
$
68,293
  
$
94,150
  

The debt matures as follows:  2006 - $0.2 million; 2007 - $7.7 million, 2008 - $0.2 million, 2009 - $0.2 million, 2010 - $0.2 million, thereafter - $60.0 million.
 
CTS has a $75 million senior, secured revolving credit agreement that had an outstanding balance of $2.1 million at December 31, 2005. Any outstanding balances under the revolving credit agreement are senior to CTS’ convertible debentures. The revolving credit agreement is collateralized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on the revolving credit agreement fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the revolving credit agreement. The commitment fee varies based on performance under certain financial covenants and was 0.38 percent per annum at December 31, 2005. The revolving credit agreement requires, among other things, that CTS comply with minimum fixed charge coverage, maximum leverage ratio, and minimum tangible net worth covenants. Failure of CTS to comply with these covenants could reduce the borrowing availability under the revolving credit agreement. Additionally, the revolving credit agreement limits the amounts allowed for dividends, capital expenditures, and acquisitions. The revolving credit agreement expires in July 2007.
 
CTS has issued $60 million convertible senior subordinated debentures ($60 million 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 $60 million 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 $60 million Debentures, in lieu of delivering common stock, the Company may, at its discretion, deliver cash or a combination of cash and common stock.
 
Holders may convert the $60 million 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 December 31, 2005, none of the conditions for conversion of the $60 million Debentures were satisfied.
 
CTS may, at its option, redeem all or a portion of the $60 million 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.
 
The Company has $5.5 million of 6.5% convertible, subordinated debentures (6.5% Debentures) outstanding at December 31, 2005. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. At any time after April 2005, the purchasers may accelerate the maturity of the debentures. CTS also has the right at any time after April 2005, and under certain circumstances, to force conversion of the debentures into common stock. Interest on the debentures is payable semi-annually. In accordance with the provisions of the 6.5% Debentures, two debenture holders exercised their put options and accelerated the maturity of their debentures, totaling $19.5 million, during 2005.
 
In connection with the acquisition of SMTEK, CTS assumed a term loan, which has a balance of $0.9 million at December 31, 2005. The term loan is secured by machinery and equipment of the Thailand manufacturing facility and requires monthly payments through May 2011.
 
27
NOTE H—Retirement Plans

Defined Benefit and Other Postretirement Benefit Plans

CTS has a number of noncontributory defined benefit pension plans (Pension Plans) covering approximately 23% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees´ compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service.

CTS provides postretirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain domestic union employees are eligible for life insurance benefits upon retirement. CTS funds life insurance benefits through term life insurance policies and intends to continue funding all of the premiums on a pay-as-you-go basis.

The measurement date for the majority of the Pension Plans and other postretirement plan assets and benefit obligations was December 31, 2005 and 2004. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the Pension Plans and other postretirement benefit plan at that measurement date.
 
 
  
Pension Plans
  
Other Postretirement Benefit Plan
  
($ in thousands)
  
2005
  
2004
  
2005
  
2004
  
Accumulated benefit obligation
  
$
197,411
  
$
185,302
  
$
5,145
  
$
5,433
  
Change in projected benefit obligation:
                          
Projected benefit obligation at January 1
  
$
196,492
  
$
186,950
  
$
5,433
  
$
5,100
  
Service cost
    
5,236
    
5,292
    
29
    
31
  
Interest cost
    
11,338
    
11,265
    
318
    
309
  
Plan amendment and other
    
(850
)
  
954
    
—
    
—
  
Actuarial (gain) loss
    
6,616
    
1,231
    
(485
)
  
140
  
Benefits paid
    
(9,754
)
  
(9,200
)
  
(150
)
  
(147
)
Curtailment
   
(499
)
  
—
    
—
    
—
  
Projected benefit obligation at December 31
  
$
208,579
  
$
196,492
  
$
5,145
  
$
5,433
  
Change in plan assets:
                          
Assets at fair value at January 1
  
$
276,991
  
$
259,764
  
$
—
  
$
—
  
Actual return on assets
    
8,688
    
24,364
    
—
    
—
  
Company contributions
    
1,713
    
1,550
    
149
    
147
  
Benefits paid
    
(9,754
)
  
(9,200
)
  
(149
)
  
(147
)
Other
    
(603
)
  
513
    
—
    
—
  
Assets at fair value at December 31
  
$
277,035
  
$
276,991
  
$
—
  
$
—
  
Reconciliation of prepaid (accrued) cost:
                          
Funded status (plan assets less projected benefit obligations)
  
$
68,456
  
$
80,499
  
$
(5,145
)
$
(5,433
)
Amounts not recognized:
                          
    Actuarial (gains) losses
    
75,468
    
53,689
    
(62
)
  
423
  
    Prior service cost
    
3,857
    
5,157
    
3
    
5
  
    Transition asset
    
—
    
(304
)
  
—
    
—
  
Prepaid (accrued) cost, net
  
$
147,781
  
$
139,041
  
$
(5,204
)
$
(5,005
)

 
The components of the prepaid (accrued) cost, net are classified in the following lines in the Consolidated Balance Sheets:

 
  
Pension Plans
  
Other Postretirement Benefit Plan
  
($ in thousands)
  
2005
  
2004
  
2005
  
2004
  
Prepaid pension asset
  
$
152,483
  
$
143,918
  
$
—
  
$
—
  
Other accrued liabilities
    
(1,156
)
  
(1,645
)
  
(150
)
  
(150
)
Other long-term obligations
    
(7,648
)
  
(6,073
)
  
(5,054
)
  
(4,855
)
Accumulated other comprehensive loss
    
4,102
    
2,841
    
—
    
—
  
 
  
$
147,781
  
$
139,041
  
$
(5,204
)
$
(5,005
)
 
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with accumulated benefit obligation in excess of fair value of plan assets at December 31, 2005 and 2004 is shown below:
 

($ in thousands)
  
2005
  
2004
Projected benefit obligation
  
$
17,830
  
$
15,639
Accumulated benefit obligation
    
16,502
    
14,123
Fair value of plan assets
    
7,698
    
6,405
28


Net pension (income)/postretirement expense in 2005, 2004, and 2003 includes the following components:

 
Pension Plans
  
Other Postretirement Benefit Plan
  
($ in thousands)
  
2005
  
2004
  
2003
  
2005
  
2004
  
2003
  
Service cost
  
$
5,236
  
$
5,292
  
$
4,916
  
$
29
  
$
31
  
$
39
  
Interest cost
    
11,338
    
11,265
    
10,910
    
318
    
310
    
317
  
Expected return on plan assets 1
    
(25,661
)
  
(27,051
)
  
(26,924
)
  
—
    
—
    
—
  
Amortization of unrecognized:
                                      
Transition obligation
    
(304
)
  
(492
)
  
(564
)
  
—
    
—
    
—
  
Prior service cost
    
799
    
901
    
883
    
—
    
1
    
1
  
Recognized (gain) loss
    
1,125
    
658
    
(936
)
  
—
    
—
    
—
  
Curtailment loss
   
475
    
—
    
—
    
—
    
—
    
—
  
Net (income) expense
  
$
(6,992
)
$
(9,427
)
$
(11,715
)
$
347
  
$
342
  
$
357
  
Weighted-average actuarial assumptions 2
                                      
Benefit obligation assumptions:
                                      
Discount rate
    
5.93
%
  
5.94
%
  
6.17
%
  
6.00
%
  
6.00
%
  
6.25
%
Rate of compensation increase
    
4.70
%
  
4.83
%
  
4.84
%
  
—
    
—
    
—
  
Pension income/postretirement
                                      
expense assumptions:
                                      
Discount rate
    
5.94
%
  
6.17
%
  
6.67
%
  
6.00
%
  
6.25
%
  
6.75
%
Expected return on plan assets 1 
    
8.45
%
  
8.70
%
  
8.94
%
  
—
    
—
    
—
  
Rate of compensation increase
   
4.83
%
  
4.83
%
  
4.84
%
  
—
    
—
    
—
  
    
__________________
1
Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

2
During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to
determine if the assumptions need to be adjusted.

CTS utilizes a building block approach in determining the long-term rate of return for plan assets. Historical markets are reviewed and long-term relationships between equities and fixed-income are preserved consistent with the generally accepted capital market principle that assets with higher volatility generate a greater return over the long term. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to ensure for reasonableness and appropriateness.
29


CTS´ pension plan asset allocation at December 31, 2005 and 2004, and target allocation for 2006 by asset category are as follows:
 

   
Target Allocations
  
Percentage of Plan
Assets at December 31,
  
 Asset Category
  
2006
  
2005
  
2004
  
Equity securities ¹
    
65
%
  
66
%
  
58
%
Debt securities
    
33
%
  
32
%
  
28
%
Real estate
    
—
%
  
—
%
  
—
%
Other
    
2
%
  
2
%
  
14
% ²
Total
    
100
%
  
100
%
  
100
%
_____________________
1
Equity securities include CTS common stock in the amounts of approximately $16 million (6% of total plan assets) at December 31, 2005 and approximately $19 million (7% of total plan assets) at December 31, 2004.

2
Included in the December 31, 2004 "Other" asset category is approximately $25 million of cash. This short-term increase in cash arose as CTS liquidated assets held by a few fund managers and transferred the cash to new fund managers at year end. This change in fund managers was made to further diversify the pension asset portfolio, and improve overall return on assets by reducing administrative expenses. After December 31, 2004, the cash was re-invested by the new fund managers and the percentage of assets by category was as follows: Equity securities - 65%, Debt securities - 33%, and Other - 2%.
 
CTS employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. The investment portfolio primarily contains a diversified mix of equity and fixed-income investments. The equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small, and large capitalizations. Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.

The expected contributions to be made by CTS to the Pension Plans and the other postretirement benefit plan during 2006 are $1.2 million and $0.2 million, respectively.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

($ in thousands)
  
Pension Plans
  
Other Postretirement Benefit Plans
  
2006
  
$
9,799
  
$
362
  
2007
    
10,479
    
371
  
2008
    
11,691
    
378
  
2009
    
11,676
    
382
  
2010
    
12,402
    
385
  
Years 2011 - 2015
    
76,188
    
1,921
  


Defined Contribution Plans

CTS sponsors a 401(k) plan that covers substantially all of its U.S. employees. Contributions and costs are generally determined as a percentage of the covered employee’s annual salary. Amounts expensed for the 401(k) plan and the other plans totaled $3.3 million in 2005, and $3.0 million in each of 2004 and 2003.

30

NOTE I—Stock Plans

At December 31, 2005, CTS had five stock-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 applies the provisions of APB Opinion No. 25 in determining compensation costs for stock-based employee compensation. Stock-based compensation expense for nonemployee directors is determined in accordance with FAS No. 123, “Accounting for Stock-based Compensation,” and was approximately $0.1 million in each of 2005 and 2004, and $0.2 million in 2003.

In December 2005, CTS’ Board of Directors approved the accelerated vesting of approximately 70,000 unvested and “out-of-the-money” stock options with exercise prices ranging from $14.02 - $16.24 that were previously granted under an employee stock option plan in light of the new accounting requirements of FAS No. 123R. These options became immediately exercisable on December 31, 2005. In order to prevent unintended personal benefits to the option holders, restrictions have been imposed on any sale of any shares received from the exercise of an accelerated option prior to the original vesting date. Options held by an executive officer of CTS were included in the vesting acceleration.

CTS’ Board of Directors approved the accelerated vesting based on the belief that it was in the best interest of stockholders as it will reduce reported compensation expense in future periods. As a result of the vesting acceleration, CTS reported additional pro forma stock-based employee compensation cost, net of tax, of approximately $310,000 in the “Stock-Based Employee Compensation” section of Note A, “Summary of Accounting Policies.”

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 also allows for grants of stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock awards.

Options are exercisable in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. The following table summarizes the status of these plans as of December 31, 2005:

 
  
2004 Plan
  
2001 Plan
  
1996 Plan
  
Awards originally available
  
6,500,000
  
 2,000,000
  
 1,200,000
  
Options outstanding
    
239,000
    
976,549
    
351,950
  
Restricted stock units outstanding
    
525,898
    
—
    
—
  
Awards exercisable
    
44,039
    
748,804
    
304,151
  
Awards available for grant
    
5,677,473
    
—
    
—
  

31
 
A summary of the status of stock options as of December 31, 2005, 2004, and 2003, and changes during the years ended on those dates, is presented below:

 
  
2005
  
2004
  
2003
  
 
       
Weighted-
       
Weighted-
       
Weighted-
  
 
       
Average
       
Average
       
Average
  
 
       
Exercise
       
Exercise
       
Exercise
  
 
  
Shares
  
Price
  
Shares
  
Price
  
Shares
  
Price
  
Outstanding at beginning of year
    
1,636,900
  
$
16.80
    
1,621,925
  
$
17.33
    
1,560,789
  
$
18.74
  
Granted
    
136,600
    
11.11
    
129,900
    
11.74
    
482,600
    
9.52
  
Exercised
    
(29,951
)
  
8.61
    
(21,000
)
  
8.12
    
(244,114
)
  
10.40
  
Expired or canceled
    
(176,050
)
  
21.73
    
(93,925
)
  
20.89
    
(177,350
)
  
18.17
  
Outstanding at end of year
    
1,567,499
  
$
15.93
    
1,636,900
  
$
16.80
    
1,621,925
  
$
17.33
  
Options exercisable at end of year
    
1,078,556
        
823,500
        
525,200
      
Weighted-average fair value of options:
                          
Granted at market price
  
$
6.50
           
$
5.49
      
$
4.84
  
Granted above market price
    
—
              
—
        
3.16
  
Weighted-average exercise price of options:
                          
Granted at market price
  
$
11.11
           
$
11.74
      
$
9.78
  
Granted above market price
    
—
              
—
        
7.75
  


The following table summarizes information about stock options outstanding at December 31, 2005:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options Outstanding
 
Options Exercisable
 
            
Weighted-
                        
 
            
Average
  
Weighted-
          
Weighted-
Range of
  
Number
  
Remaining
  
Average
  
Number
  
Average
Exercise
  
Outstanding
  
Contractual
  
Exercise
  
Exercisable
  
Exercise
Prices
  
at 12/31/05
  
Life (Years)
  
Price
  
at 12/31/05
  
Price
$
7.70 - 11.11
    
955,949
 
 
 
7.54
 
 
$
9.32
 
 
 
485,406
    
$
8.69
  
 
14.02 - 16.24
    
144,800
 
 
 
6.18
 
 
 
14.37
 
 
 
126,400
    
 
14.32
  
 
23.00 - 33.63
    
359,250
 
 
 
5.00
 
 
 
24.74
 
 
 
359,250
    
 
24.74
  
 
35.97 - 50.00
    
106,000
 
 
 
4.70
 
 
 
47.09
 
 
 
106,000
    
 
47.09
  
 
56.94 - 79.25
    
1,500
 
 
 
3.78
 
 
 
64.38
 
 
 
1,500
    
 
64.38
  
 
 
32
Restricted Stock Units

Restricted stock units (RSUs) entitle the holder to receive one share of common stock for each unit when the units vest. RSUs are issued to officers and key employees as compensation. Generally, the RSUs vest over a five-year period. During 2005 and 2004, CTS recorded $2.3 million and $0.8 million, respectively, of compensation expense relating to RSUs.

A summary of the status of RSUs as of December 31, 2005 and 2004, and changes during 2005 is presented below:
   
Shares
  
Average Grant Price
  
RSUs outstanding at beginning of year
    
252,000
  
$
11.07
  
Granted
    
384,938
    
11.82
  
Converted to common stock
    
(64,410
)
  
11.48
  
Forfeited
    
(46,630
)
  
11.86
  
RSUs outstanding at end of year
    
525,898
  
$
11.49
  
RSUs exercisable at end of year
    
18,438
        
 
Restricted Stock

CTS’ 1988 Plan originally reserved 2,400,000 shares of CTS’ common stock for sale, at a market price or award, to key employees. Under the 1988 Plan, 56,832 shares were outstanding as of December 31, 2005. 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 the 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 or sale. CTS recorded expense of $0.5 million in 2005, $0.7 million in 2004, and $0.3 million in 2003, under the formula provisions of the 1988 Plan which are based on the fair market value of a share of common stock.

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 to nonemployee directors will be from the 2004 Plan. The amount of compensation expense under the Director’s Plan was $0.1 million in each of 2004 and 2003.

33
NOTE J—Income Taxes

Earnings before income taxes consist of the following:

($ in thousands)
  
2005
  
2004
  
2003
  
Domestic
  
$
13,742
  
$
2,921
  
$
767
  
Non-U.S.
    
21,661
   
22,996
   
5,481
 
Total
  
$
35,403
  
$
25,917
  
$
6,248
  

Significant components of income tax provision (benefit) are as follows:

($ in thousands)
  
2005
  
2004
  
2003
  
Current:
                    
Federal
  
$
(1,419
)
$
—
  
$
(7,889
)
State
    
631
   
563
   
165
 
Non-U.S.
    
4,818
   
5,245
   
1,084
 
Total current
  
$
4,030
  
$
5,808
  
$
(6,640
)
Deferred:
                    
Federal
  
$
6,332
  
$
(3,100
)
$
(3,480
)
State
    
879
   
1,654
   
(96
)
Non-U.S.
    
1,928
   
1,599
   
3,889
 
Total deferred
    
9,139
   
153
   
313
 
Total expense (benefit) for income taxes
  
$
13,169
  
$
5,961
  
$
(6,327
)


Significant components of CTS’ deferred tax liabilities and assets at December 31, 2005 and 2004 are:

($ in thousands)
  
2005
  
2004
  
Pension
  
$
56,367
  
$
51,138
  
Other
    
8,007
   
6,926
 
Gross deferred tax liabilities
    
64,374
    
58,064
 
Fixed assets
    
—
    
3,764
 
Postretirement benefits
    
1,821
   
1,752
 
Inventory items
    
1,419
   
1,671
 
Loss carryforwards
    
80,778
   
71,925
 
Credit carryforwards
    
7,826
    
4,941
  
Nondeductible accruals
    
7,507
   
6,824
 
Research expenditures
    
5,974
   
7,090
 
Other
    
2,640
   
2,015
 
Gross deferred tax assets
    
107,965
   
99,982
 
Net deferred tax assets
    
43,591
   
41,918
 
Deferred tax asset valuation allowance
    
(17,133
)
  
(13,771
)
Total
  
$
26,458
  
$
28,147
  

34

During 2005, the Company increased its net deferred tax assets by $6.5 million related to SMTEK’s net deferred tax assets at the date of the acquisition. At each reporting period, the Company assesses the ultimate realizability of its net deferred tax assets, including deferred tax assets associated with accumulated net operating losses in the various jurisdictions in which it operates. In assessing the ultimate realizability of its net deferred tax assets, the Company considers its past performance, available tax strategies, and expected future taxable income during the tax loss and credit carryforward periods.

Generally, the Company assesses that it is more likely than not its net tax assets will be realized during the available carryforward periods. The Company has determined, however, that a valuation allowance of $17.1 million should be provided for certain deferred tax assets. The $3.3 million increase in the valuation allowance from December 31, 2004 to 2005 is due to an increase in the valuation allowance related to foreign tax credits of $2.2 million, state net operating loss and credit carryforwards of $1.0 million, and net operating loss carryforwards in a foreign jurisdiction of $0.1 million . As of December 31, 2005, the $17.1 million valuation allowance includes $8.6 million for state net operating loss and credit carryforwards, $2.2 million in foreign tax credit carryforwards, and $3.6 million and $2.7 million related to net operating loss carryforwards and other deductible temporary differences, respectively, in a foreign jurisdiction.

The Company’s U.S. deferred tax assets of $60.9 million relate to U.S. net operating loss carryforwards that expire in 2021 through 2024. The Company has foreign deferred tax assets of $6.1 million related to foreign net operating loss carryforwards that expire in 2007 through 2010.



The overall effective income tax rate (expressed as a percentage of income before income taxes) varied from the U.S. statutory income tax rate as follows:

   
2005
 
2004
 
2003
  
Taxes at the U.S. statutory rate
    
35.0
%
  
35.0
%
  
35.0
%
State income taxes, net of federal income tax benefit
    
1.6
%
  
5.6
%
  
0.7
%
Non-U.S. income taxed at rates different than the U.S. statutory rate
    
-8.0
%
  
-11.3
%
  
-2.0
%
Tax exempt earnings
    
-0.4
%
  
-0.5
%
  
-3.4
%
Utilization of foreign NOL
    
—
    
-2.3
%
  
—
  
Benefit of scheduled tax credits
    
-4.1
%
  
-4.0
%
  
-6.1
%
Other
    
0.9
%
  
0.5
%
  
0.8
%
Tax rate before the benefit of reversal of reserves and HIA dividend
    
25.0
%
  
23.0
%
  
25.0
%
Tax benefit, reversal of reserves
    
-4.7
%
  
—
    
-126.3
%
Tax expense, HIA dividend income
    
16.9
%
  
—
    
0.0
%
Effective income tax rate
    
37.2
%
  
23.0
%
  
-101.3
%
 
 
During 2005, the Company recorded a tax benefit of $1.7 million resulting from the reversal of reserves that were no longer required following the successful resolution of tax issues in certain jurisdictions. CTS’ tax rate before the benefit of reversal of reserves and expense of HIA dividend increased from 23% to 25%. This higher tax rate reflects the increased profits being reported in the U.S. and the decreased profits being reported in some of the lower-tax foreign jurisdictions.

In certain taxing jurisdictions, CTS business operations continue to qualify for income tax holidays. As a result, certain earnings of CTS are subject to tax at reduced rates for specified periods of time. These tax holidays, unless extended, are scheduled to expire in 2009-2012.

At December 31, 2005, no provision had been made for U.S. federal and state income taxes on approximately $121 million of foreign earnings, which are expected to be reinvested outside of the United States indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to a possible adjustment for foreign tax credits), state income taxes, and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical because of the complexities associated with the related calculation.

In October 2004, the American Jobs Creation Act of 2004 (Jobs Act) was signed into law. The Jobs Act provides certain domestic companies a temporary incentive to repatriate, during 2005, previously undistributed earnings abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. To qualify, the repatriated earnings must be reinvested in the United States pursuant to a domestic reinvestment plan(s) established by the Company’s chief executive officer and subsequently approved by the Company’s board of directors. In 2005, CTS’ Board of Directors approved two domestic reinvestment plans (the Plans), authorizing the Company to receive cash dividends of up to $84 million during 2005. The Company did receive dividends of $77 million under the Plans from certain foreign subsidiaries during 2005 and, accordingly, the Company recorded the related tax expense of approximately $6.0 million.

NOTE K—Capital Stock

CTS adopted a Rights Plan on August 28, 1998. The Rights Plan was implemented by declaring a dividend, distributable to shareholders of record on September 10, 1998, of one common share purchase right (Right) for each outstanding share of common stock held at the close of business on that date. Each Right under the Rights Plan will initially entitle registered holders of common stock to purchase one one-hundredth of a share of CTS’ Series A Junior Participating Preferred Stock for a purchase price of $125, subject to adjustment. The Rights will be exercisable only if a person or group (1) acquires or obtains the right to acquire 15% or more of the common stock or (2) announces a tender offer that would result in any person or group acquiring beneficial ownership of 15% or more of the outstanding common stock. The Rights are redeemable for $0.01 per Right (subject to adjustment) at the option of the Board of Directors. Until a Right is exercised, the holder of the Right, as such, has no rights as a shareholder of CTS. The Rights will expire on August 27, 2008, unless redeemed or exchanged by CTS prior to that date.

35
NOTE L—Treasury Stock

Common stock held in treasury at December 31, 2005 totaled 17,717,657 shares with a cost of $267.1 million, compared to 16,757,907 shares with a cost of $255.8 million at December 31, 2004.

In November 2005, CTS’ Board of Directors authorized a program to repurchase up to one million shares of CTS common stock. The authorization expires June 30, 2007. The previously authorized one million share repurchase program dated July 2004 was completed in the fourth quarter of 2005. Reacquired shares will be used to support equity-based compensation programs and for other corporate purposes. During 2005, CTS repurchased 956,400 shares of common stock at a total cost of $11.3 million. At December 31, 2005, CTS was authorized to repurchase approximately 860,600 additional shares.

NOTE M—Business Segments

FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires companies to provide certain information about their operating segments. CTS has two reportable business segments: 1) Electronics Manufacturing Services (EMS) and 2) Components and Sensors.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer. Additionally for some customers CTS provides full turnkey manufacturing and completion including design, bill-of-material, management, logistics, and repair.

Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies. Components and sensors consist principally of automotive sensors and actuators used in commercial or consumer vehicles; electronic components used in communications infrastructure and computer markets; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Management evaluates performance based upon operating earnings before interest and income taxes.
36

 
Summarized financial information concerning CTS’ reportable segments is shown in the following table:
 

($ in thousands)
  
Components & Sensors
  
EMS
  
Total
  
2005
              
Net sales to external customers
  
$
253,026
  
$
364,458
  
$
617,484
  
Segment operating earnings
    
30,227
  1  
10,112
    
40,339
  
Total assets
    
373,131
    
160,806
    
533,937
  
Depreciation and amortization
    
20,410
    
6,649
    
27,059
  
Capital expenditures
    
9,165
    
5,844
    
15,009
  
                     
2004
                    
Net sales to external customers
  
$
260,982
  
$
270,334
  
$
531,316
  
Segment operating earnings
    
23,311
 1  
7,817
    
31,128
  
Total assets
    
422,420
    
99,757
    
522,177
  
Depreciation and amortization
    
22,562
    
3,520
    
26,082
  
Capital expenditures
    
9,824
    
2,887
    
12,711
  
                     
2003
                    
Net sales to external customers
  
$
252,911
  
$
210,076
  
$
462,987
  
Segment operating earnings
   
7,394
    
10,985
    
18,379
  
Total assets
    
398,791
    
83,459
    
482,250
  
Depreciation and amortization
    
30,412
    
3,193
    
33,605
  
Capital expenditures
    
8,091
    
953
    
9,044
  
___________________
1 Includes $3.1 million and $3.9 million of gain on asset sales in 2005 and 2004, respectively.


Reconciling information between reportable segments’ operating earnings and CTS’ consolidated pre-tax income is shown in the following table:
 

($ in thousands)
  
2005
  
2004
  
2003
  
Total segment operating earnings
  
$
40,339
  
$
31,128
  
$
18,379
  
Interest expense
    
(5,902
)
  
(5,535
)
  
(7,688
)
Interest income
    
1,300
    
922
    
357
  
Other income (expense)
    
(334
)
  
(598
)
  
(237
)
Asset impairment charge - Components and Sensors
    
—
    
—
    
(4,563
)
Earnings before income taxes
  
$
35,403
  
$
25,917
  
$
6,248
  

Financial information relating to CTS’ operations by geographic area was as follows:

 ($ in thousands)
  
2005
  
2004
  
2003
  
Net Sales
              
United States
  
$
278,397
  
$
197,557
  
$
186,675
  
Singapore
    
143,815
    
66,989
    
15,244
  
United Kingdom
    
87,411
    
122,129
    
127,522
  
China
    
66,528
    
105,196
    
96,492
  
Canada
    
27,303
    
28,468
    
27,535
  
Other non-U.S.
    
14,030
    
10,977
    
9,519
  
Consolidated net sales
  
$
617,484
  
$
531,316
  
$
462,987
  


37
Sales are attributed to countries based upon the origin of the sale.



 ($ in thousands)
  
2005
  
2004
  
2003
  
Long-Lived Assets
  
 
  
 
  
 
  
United States
  
$
38,510
  
$
42,016
  
$
48,680
  
China
    
37,254
    
40,659
    
43,220
  
United Kingdom
    
16,493
    
14,990
    
17,667
  
Singapore
    
7,550
    
7,319
    
8,077
  
Canada
    
5,545
    
5,292
    
3,127
  
Taiwan
    
1,880
    
2,008
    
19,098
  
Other non-U.S
    
2,444
    
211
    
195
  
Consolidated long-lived assets
  
$
109,676
  
$
112,495
  
$
140,064
  

The EMS business segment revenues from Hewlett-Packard represented $173.3 million, or 48%, $177.3 million, or 66%, and $151.8 million, or 72%, of the segment’s revenue for the years ended December 31, 2005, 2004, and 2003, respectively. EMS business segment revenues from Motorola were $40.3 million, or 11%, $60.9 million, or 23%, and $40.2 million, or 19%, of the segment’s revenue for the year ended December 31, 2005, 2004, and 2003, respectively.

NOTE N—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 of CTS.

NOTE O—Leases

CTS incurred approximately $8.1 million of rent expense in 2005, $7.1 million in 2004, and $6.8 million in 2003. The future minimum lease payments under the Company’s operating leases are $3.4 million in 2006, $3.2 million in 2007, $2.5 million in 2008, $2.5 million in 2009, $1.7 million in 2010, and $5.3 million thereafter.

NOTE P - Asset Impairment Charge

During the third quarter of 2003, CTS recorded a $4.6 million pre-tax asset impairment charge to reduce the carrying value of certain assets, held by the Components and Sensors business segment, to their estimated fair value. Approximately $3.3 million of the impairment charge reflected a write down for electronic equipment following final production of previously announced end-of-life products and a re-assessment of the current market value for equipment held for sale. An additional $1.3 million of the impairment charge related to equipment write down on a production line following an assessment of future capacity needs. All restructuring-related reserve balances had been fully utilized at December 31, 2003.


NOTE Q - Subsequent Event

In January 2006, CTS announced that it intends to consolidate its Berne Indiana manufacturing operations into three of its other existing facilities. The consolidation is expected to be largely completed in the second half of 2006 and is estimated to result in pre-tax restructuring charge and related costs of approximately $4.5 million - 5.0 million.
38



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and
Shareholders of CTS Corporation

We have audited the accompanying consolidated balance sheet of CTS Corporation and Subsidiaries (“the Company”) as of December 31, 2005, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for the year then ended. We have also audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and the receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include an assessment of the effectiveness of internal controls over financial reporting of SMTEK International Inc. (“SMTEK”). SMTEK was acquired January 31, 2005, and has been included in the consolidated financial statements of the Company since that date. SMTEK constituted approximately nine percent of total and net assets (excluding goodwill and intangible assets) as of December 31, 2005, and approximately nineteen percent and thirty-nine percent of revenues and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal controls over financial reporting of SMTEK.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited Schedule II of the Company for the year ended December 31, 2005. In our opinion, this Schedule presents fairly, in all material respects, the information required to set forth therein.
 
 
     
  GRANT THORNTON LLP
 
 		  
 		  
 
  By:   /s/ Grant Thornton LLP
 
Chicago, Illinois
February 23, 2006
   
 

39




 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
To the Board of Directors and
Shareholders of CTS Corporation:
 
 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of CTS Corporation and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 

 
 
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 3, 2005
 

40




Shareholder Information
(In thousands of dollars except per share data)

Quarterly Results of Operations
(Unaudited)

   
Net
  
Gross
  
Operating
  
Net
  
   
Sales
  
Margins
  
Earnings
  
Earnings
  
2005
                  
4th quarter 1
  
$
154,598
  
$
32,922
  
$
15,143
  
$
8,575
  
3rd quarter
   
149,210
    
28,986
    
9,204
    
6,330
  
2nd quarter 2
    
158,346
    
32,292
    
10,321
    
3,942
  
1st quarter
   
155,330
    
28,215
    
5,671
    
3,387
  
 
  
$
617,484
  
$
122,415
  
$
40,339
  
$
22,234
  
2004
                  
4th quarter
  
$
142,496
  
$
29,918
  
$
9,737
  
$
6,618
  
3rd quarter
   
129,049
    
26,312
    
5,854
    
3,921
  
2nd quarter 3
    
137,624
    
28,917
    
10,628
    
6,897
  
1st quarter
   
122,147
    
24,609
    
4,909
    
2,520
  
 
  
$
531,316
  
$
109,756
  
$
31,128
  
$
19,956
  
 
 
Per Share Data
(Unaudited)
   
Net Earnings
  
   
High 4
 
Low 4
 
Dividends Declared
 
Basic
 
Diluted
  
2005
                      
4th quarter 1
  
$
12.53
  
$
10.91
  
$
0.03
  
$
0.24
  
$
0.22
  
3rd quarter
    
13.40
    
11.15
    
0.03
    
0.17
    
0.16
  
2nd quarter 2
    
13.16
    
10.13
    
0.03
    
0.11
    
0.10
  
1st quarter
    
14.10
    
11.29
    
0.03
    
0.09
    
0.09
  
               
$
0.12
  
$
0.61
  
$
0.57
  
                                 
2004
                                
4th quarter
  
$
13.92
  
$
11.95
  
$
0.03
  
$
0.18
  
$
0.17
  
3rd quarter
    
12.99
    
10.10
    
0.03
    
0.11
    
0.10
  
2nd quarter 3
    
14.80
    
9.90
    
0.03
    
0.19
    
0.18
  
1st quarter
    
15.85
    
11.60
    
0.03
    
0.07
    
0.07
  
               
$
0.12
  
$
0.56
  
$
0.53
  
___________________
1  
The fourth quarter of 2005 includes $1.5 million, or $0.03 per diluted share, of tax expense relating to the repatriation of foreign cash to the United States under the provisions of the American Jobs Creation Act of 2004 and $0.7 million of tax expense, or $0.02 per diluted share, relating to an increase in the tax rate before the benefit of reversal of reserves and HIA dividends from 23% to 25%.

2 
The second quarter of 2005 includes $4.5 million, or $0.11 per diluted share, of tax expense relating to the repatriation of foreign cash to the United States under the provisions of the American Jobs Creation Act of 2004 and $1.7 million of tax benefit, or $0.04 per diluted share, relating to the reversal of income tax reserves due to the successful resolution of tax issues in certain foreign jurisdictions.

3  
The second quarter of 2004 includes a gain on the sale of excess land located near CTS’ Canadian facility of approximately $2.7 million pre-tax, $2.1 million after-tax, or $0.05 per diluted share.

4  
The market prices of CTS common stock presented reflect the highest and lowest sales prices on the New York Stock Exchange for each quarter of the last two years.

41
Five-Year Summary
(In thousands of dollars except per share and other data)
 
  
2005
  
% of Sales
  
 2004
  
% of Sales
  
 2003
  
% of Sales
  
2002
  
% of Sales
  
2001
  
% of Sales
  
Summary of Operations
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
       
Net sales
  
$
617,484
    
100.0
  
$
531,316
    
100.0
  
$
462,987
    
100.0
  
$
457,804
    
100.0
  
$
577,654
    
100.0
  
Cost of goods sold
    
495,069
    
80.2
   
421,560
    
79.3
    
366,275
    
79.1
    
366,775
    
80.1
    
466,363
    
80.7
  
Selling, general and administrative expenses
    
64,606
    
10.5
   
61,174
    
11.5
    
54,390
    
11.8
    
59,467
    
13.0
    
80,214
    
13.9
  
Research and development expenses
    
17,092
    
2.8
   
19,063
    
3.6
    
21,476
    
4.6
    
24,118
    
5.3
    
32,762
    
5.7
  
Amortization of intangible assets
    
3,443
    
0.5
   
2,311
    
0.4
    
2,467
    
0.5
    
3,870
    
0.8
    
6,765
    
1.2
  
Gain on asset sales
    
(3,065
)
  
(0.5
)
  
(3,920
)
  
(0.7
)
  
—
    
—
    
—
    
—
    
—
    
—
  
Restructuring and impairment charges
    
—
    
—
    
—
    
—
    
4,563
    
1.0
    
18,343
    
4.0
    
40,039
    
6.9
  
Operating earnings (loss)
    
40,339
    
6.5
   
31,128
    
5.9
    
13,816
    
3.0
    
(14,769
)
  
(3.2
)
  
(48,489
)
  
(8.4
)
Other expense—net
    
(4,936
)
  
(0.8
)
  
(5,211
)
  
(1.0
)
  
(7,568
)
  
(1.6
)
  
(9,031
)
  
(2.0
)
  
(12,002
)
  
(2.1
)
Earnings (loss) before income taxes
    
35,403
    
5.7
   
25,917
    
4.9
    
6,248
    
1.4
    
(23,800
)
  
(5.2
)
  
(60,491
)
  
(10.5
)
Income tax expense (benefit)
    
13,169
    
2.1
   
5,961
    
1.1
    
(6,327
)
  
(1.3
)
  
(5,950
)
  
(1.3
)
  
(15,116
)
  
(2.6
)
Net earnings (loss)
    
22,234
    
3.6
   
19,956
    
3.8
    
12,575
    
2.7
    
(17,850
)
  
(3.9
)
  
(45,375
)
  
(7.9
)
Retained earnings—beginning of year
    
279,064
        
263,430
        
255,085
        
276,988
        
325,850
      
Dividends declared
    
(4,342
)
      
(4,322
)
      
(4,230
)
      
(4,053
)
      
(3,487
)
    
Retained earnings—end of year
  
$
296,956
      
$
279,064
      
$
263,430
      
$
255,085
      
$
276,988
      
Net earnings (loss) per share:
                                            
Basic:
  
$
0.61
      
$
0.56
      
$
0.36
      
$
(0.54
)
    
$
(1.61
)
      
Diluted:
  
$
0.57
      
$
0.53
      
$
0.36
      
$
(0.54
)
    
$
(1.61
)
      
Average basic shares outstanding (000’s)
    
36,307
        
35,910
        
34,723
        
33,148
        
28,231
      
Average diluted shares outstanding (000’s)
    
40,960
        
38,893
        
34,989
        
33,148
        
28,231
      
Cash dividends per share
  
$
0.12
      
$
0.12
      
$
0.12
      
$
0.12
      
$
0.12
      
Capital expenditures
    
15,099
        
12,711
        
9,044
        
12,833
        
77,654
      
Depreciation and amortization
    
27,059
        
26,082
        
33,605
        
43,373
        
51,674
      
Financial Position at Year End
                                            
Current assets
  
$
180,674
      
$
204,146
      
$
164,766
      
$
152,334
      
$
200,674
      
Current liabilities
    
119,933
        
102,961
        
95,689
        
134,556
        
153,857
      
Current ratio
    
1.5 to 1
        
2.0 to 1
        
1.7 to 1
        
1.1 to 1
        
1.3 to 1
      
Working capital
  
$
60,741
      
$
101,185
      
$
69,077
      
$
17,778
      
$
46,817
      
Inventories
    
60,564
        
42,734
        
31,925
        
36,262
        
50,149
      
Property, plant and equipment —net
    
109,676
        
112,495
        
122,481
        
148,632
        
191,958
      
Total assets
    
533,936
        
522,177
        
482,250
        
490,032
        
567,931
      
Short-term notes payable
    
13,299
        
3,311
        
—
        
—
        
—
      
Long-term debt
    
68,457
        
94,150
        
75,880
        
67,000
        
125,013
      
Long-term obligations, including long-term debt
    
84,432
        
105,669
        
87,013
        
78,501
        
132,287
      
Shareholders’ equity
    
329,571
        
310,704
        
294,191
        
265,020
        
242,873
      
Common shares outstanding (000’s)
    
35,859
        
35,909
        
36,067
        
34,101
        
30,902
      
Equity (book value) per share
  
$
9.19
      
$
8.65
      
$
8.16
      
$
7.77
      
$
7.86
      
Other Data
                                            
Stock price range
  
$
14.10- 10.13
        
$
15.85-9.90
        
$
14.94-4.90
        
$
19.56-3.65
        
$
47.88 -13.49
      
Number of employees
    
4,902
        
4,487
        
5,041
        
5,313
        
5,837
      
Number of shareholders at year-end
    
1,683
          
1,628
          
1,527
          
1,585
          
1,549
        

EX-21 10 ex21.htm EXHIBIT 21 Exhibit 21
 
CTS CORPORATION AND SUBSIDIARIES
 
As of December 31, 2005 
 
CTS Corporation (Registrant), an Indiana corporation
 
Subsidiaries: 
 
CTS Corporation, a Delaware corporation
 
 
CTS of Panama, Inc., a Republic of Panama corporation

 
CTS Components Taiwan, Ltd., a Taiwan, Republic of China corporation

 
CTS Electro de Matamoros, S.A., 1a Republic of Mexico corporation

 
CTS Japan, Inc., a Japan corporation

 
CTS International B.V., a Netherlands corporation

 
CTS Singapore Pte., Ltd., a Republic of Singapore corporation

 
CTS Electronics Hong Kong, Ltd., 1a Hong Kong corporation

 
CTS (Tianjin) Electronics Company, Ltd., a Peoples’ Republic of China corporation

 
CTS Electronics Dongguan, Ltd., a Peoples’ Republic of China corporation
 
CTS of Canada Holding Company, a Province of Nova Scotia (Canada) corporation
 
 
CTS of Canada G.P., Ltd., a Province of Ontario (Canada) corporation
 
CTS of Canada L.P., a Province of Ontario (Canada) limited partnership 2 
 
 
CTS of Canada Co., a Province of Nova Scotia (Canada) corporation

 
CTS Corporation U.K., Ltd., a Scotland corporation
 
CTS Printex, Inc., a California corporation
 
CTS Electronics Components, Inc., a Delaware corporation
 
Dynamics Corporation of America, a New York corporation
 
 
International Electronic Research Corporation, a California corporation

 
LTB Investment Corporation, a Delaware corporation

 CTS Electronics Manufacturing Solutions, Inc., a Delaware corporation
 
CTS Electronics Manufacturing Solutions (Moorpark), Inc., a California corporation
 
CTS Electronics Manufacturing Solutions (Santa Clara), Inc., a California corporation
 
CTS Electronics Manufacturing Solutions (Massachusetts), Inc., a Massachusetts corporation
 
Technetics, Inc., a California corporation
 
CTS Electronics Corporation (Thailand), Ltd., a Thailand corporation
 
Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is wholly-owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed.
 
_____________________
1 Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership.
 
2  CTS of Canada, L.P., is a limited partnership formed by CTS of Canada Holding Co. and CTS of Canada G.P., Ltd.
 
 EX-23.A 11 ex23_a.htm EXHIBIT 23.A Exhibit 23.a



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We hereby consent to the incorporation of our report dated February 23, 2006 accompanying the consolidated financial statements, schedule II, and management’s assessment of the effectiveness of internal controls over financial reporting on page S-3 of the Annual Report of this Form 10-K for the year ended December 31, 2005 by reference in the prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 333-117826, 333-88448, 333-72146 and 333-90697) and the Registration Statement on Form S-8 (No. 333-116287) of CTS Corporation.
 
 
 
/s/ Grant Thornton LLP
GRANT THORNTON LLP

Chicago, Illinois
February 23, 2006

 EX-23.B 12 ex23_b.htm EXHIBIT 23.B Exhibit 23.b



 

 
 
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-117826, 333-88448, 333-72146 and 333-90697) and the Registration Statement on Form S-8 (No. 333-116287) of CTS Corporation of our report dated March 3, 2005 relating to the financial statements and the financial statement schedule, which appears in this Form10-K.
 

 
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 23, 2006
 
 EX-31.A 13 ex31_a.htm EXHIBIT 31.A Exhibit 31.a

CERTIFICATION

I, Donald K. Schwanz, certify that:

1.  
I have reviewed this annual report on Form 10-K of CTS Corporation;

2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles;

(c)  
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)  
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

     
  CTS Corporation
 
 		  
 		  
 
Date: February 27, 2006 By:   /s/ Donald K. Schwanz
 
Donald K. Schwanz
  Chairman, President and Chief Executive Officer

 
 EX-31.B 14 ex31_b.htm EXHIBIT 31.B Exhibit 31.b

CERTIFICATION

I, Vinod M. Khilnani, certify that:

1.  
I have reviewed this annual report on Form 10-K of CTS Corporation;

2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles;

(c)  
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)  
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
     
  CTS Corporation
 
 		  
 		  
 
Date: February 27, 2006 By:   /s/ Vinod M. Khilnani
 
Vinod M. Khilnani
  Senior Vice President and Chief Financial Officer


EX-32.A 15 ex32_a.htm EXHIBIT 32.A Exhibit 32.a




CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the annual report of CTS Corporation (the Company) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of such officer’s knowledge:

(1)  
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

     
  CTS Corporation
 
 		  
 		  
 
Date: February 27, 2006 By:   /s/ Donald K. Schwanz
 
Donald K. Schwanz
  Chairman, President and Chief Executive Officer 


 

 
A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 EX-32.B 16 ex32_b.htm EXHIBIT 32.B Exhibit 32.b




CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the annual report of CTS Corporation (the Company) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of such officer’s knowledge:

(1)  
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.


     
  CTS Corporation
 
 		  
 		  
Date: February 27, 2006 By:   /s/ Vinod M. Khilnani
 
Vinod M. Khilnani
  Senior Vice President and Chief Financial Officer 

 



A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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