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

FORM 10-Q

(Mark One)
 X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       For the Quarterly Period Ended September 28, 2003
       OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       For the Transition Period from _______________ to _______________

Commission File Number: 1-4639

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  X      No     

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  X     No     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2003:  35,836,060

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

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PART I  -  FINANCIAL INFORMATION

   Item 1.   Financial Statements

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) - UNAUDITED
(In thousands, except per share amounts)

See notes to condensed consolidated financial statements.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands of dollars)

See notes to condensed consolidated financial statements.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) - UNAUDITED
(In thousands of dollars)

See notes to condensed consolidated financial statements.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED
September 28, 2003

NOTE A—Basis of Presentation

The accompanying condensed consolidated interim financial statements have been prepared by CTS Corporation (CTS or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The condensed consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

The accompanying unaudited condensed consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ materially from those estimates.  The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

Certain reclassifications have been made for the periods presented in the financial statements to conform to the classifications adopted in 2003.

NOTE B—Employee Stock-Based Compensation

CTS accounts for employee stock-based 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.  CTS has adopted the disclosure requirements of the Financial Accounting Standards Board's (FASB) Financial Accounting Standard (FAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."  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 (loss) and net earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

NOTE C—Inventories

The components of inventory consist of the following:

NOTE D—Restructuring and Impairment Charges

During the third quarter of 2003, CTS recorded a $4.6 million pre-tax 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 reflects a writedown 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 relates to excess capacity on a production line following an assessment of future capacity needs.

In the third quarter of 2002, CTS recorded $18.3 million of pre-tax restructuring and impairment charges.  The restructuring and impairment charges were incurred in order to effect operational improvements and related organizational realignments primarily in the Components and Sensors business segment involving the relocation of certain manufacturing operations.   CTS completed substantially all of these restructuring actions by the end of 2002.

The restructuring charge of $5.0 million recorded in the third quarter of 2002 relates primarily to organizational realignment in the Components and Sensors business segment, and reductions in support staff for the design of new custom variations of certain product lines.  Included in this amount is $4.6 million of severance costs associated with the separation of approximately 300 employees, substantially all of which have been severed as of September 28, 2003.  Approximately 67% of the employees severed were salary and indirect employees and 33% were hourly production employees.

The following table displays the restructuring activity and restructuring reserve balances as of September 28, 2003 for actions initiated in 2002:

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

NOTE D—Restructuring and Impairment Charges (Continued)

The 2002 restructuring plan also included $12.5 million of asset impairment charges.  Approximately $9.8 million of the impairment charge was the adjustment needed to recognize impairments resulting from the reduction in the remaining useful lives of certain manufacturing equipment. Approximately $2.1 million of the impairment charge related to the write-off of leasehold improvements at its engineering and design facility in Taiwan and at its manufacturing facility in China.  Approximately $0.2 million related to impairment of certain intangible assets acquired in the 1999 acquisition of the Component Products Division of Motorola.  The remaining $0.4 million impairment charge related to adjustments to the estimated fair value of certain assets held for sale.

CTS also recognized a pension plan curtailment loss of approximately $0.8 million in the third quarter of 2002, resulting from reduced employment levels as a result of the restructuring activities.

In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment charges, $14.0 million in the second quarter and $26.0 million in the fourth quarter.  Plan actions were designed to permit the Company to operate more efficiently in the then-existing environment and, at the same time, position the Company for success when the economy improved.  CTS completed these consolidations and transfers in fiscal 2002.

During the first nine months of 2002, CTS recorded in cost of sales, $1.3  million of restructuring-related, one-time charges, consisting primarily of equipment relocation and other employee-related costs.  No unusual charges of this nature were incurred in the first nine months of 2003.

Note E—Assets Held for Sale

Assets held for sale at September 28, 2003 are comprised of facilities, primarily the Longtan, Taiwan, building and other machinery and equipment that has been removed from service and is to be disposed of pursuant to the Company’s restructuring activities (refer also to Note D, “Restructuring and Impairment Charges”).  The assets are held by the Components and Sensors business segment.  These assets are recorded at amounts not in excess of what management currently expects to receive upon sale, less cost of disposal; however, the amounts the Company will ultimately realize are dependent on numerous factors, some of which are beyond management’s ability to control, and could differ materially from the amounts currently recorded.

As described in Note D, during the third quarter of 2003, CTS further impaired certain electronic equipment associated primarily with previously announced “end-of-life” products. Also during the first nine months of 2003, CTS sold the production equipment from its 3.2x5mm TCXO production line.  This equipment was classified as assets held for sale at December 31, 2002.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

Note F—Financial Instruments

In the second quarter of 2003, CTS entered into a series of forward exchange contracts to manage its risk to fluctuations in foreign currency exchange rates between the Euro and the United Kingdom Pound.  These contracts, which expire monthly in 2003, are designed to hedge anticipated foreign currency transactions.  In accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these forward contracts for forecasted transactions are designated as cash flow hedges and recorded as assets or liabilities on the balance sheet at fair value.  Changes in the contracts’ fair values are recognized in accumulated other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs.

Note G—Long-Term Debt

On July 14, 2003, CTS entered into a new, three-year credit agreement (the new credit agreement) containing a $55 million senior, secured revolving credit facility, replacing the former $85 million senior, secured credit agreement.  The outstanding balance was $14.0 million at September 28, 2003.

The new credit agreement categorized this debt as senior to CTS´ $25 million convertible debentures. The debt 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 these borrowings 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 is currently 0.50 percent per annum. The new credit agreement requires, among other things, that CTS comply with a minimum fixed charge coverage, maximum leverage ratio and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the new credit agreement. Additionally, the new credit agreement limits the amounts allowed for dividends, capital expenditures and acquisitions. The new credit agreement also allows for expansion of the facility commitment to $75 million after January 14, 2004 if certain conditions are met by CTS.

NOTE H—Income Taxes Payable

During the quarter ended September 28, 2003, CTS recorded a tax benefit of $7.9 million resulting from the reversal of reserves that were no longer required following the expiration of statutory deadlines.

NOTE I—Business Segments

FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires companies to provide certain information about their operating segments.  At the beginning of the fourth quarter of 2002, the Company renamed the reportable business segments and realigned the product lines included in each segment to reflect changes in its organizational structure and the manner that results are evaluated and resources allocated by the chief operating decision maker.  All segment data included in these condensed consolidated financial statements reflects the reportable business segments adopted in 2002.  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; quartz crystals and oscillators used in the communications and computer markets; low temperature cofired ceramics (LTCC) used in global positioning systems (GPS) and electronic substrates used in various communications and automotive applications; pointing sticks/cursor controls for computers and games for the computer market; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets.

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PART I  -  FINANCIAL INFORMATION(Continued)

   Item 1.   Financial Statements (Continued)

NOTE I—Business Segments (Continued)

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.  EMS also includes design of interconnect systems and complex backplanes, global supply-chain management services and related manufacturing and design services as may be required by the customer.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's annual report on Form 10-K. Management evaluates performance based upon operating earnings before interest and income taxes.

Summarized financial information concerning CTS’ reportable segments, including reclassification of prior years, is shown in the following table:

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PART I  -  FINANCIAL INFORMATION(Continued)

   Item 1.   Financial Statements (Continued)

NOTE I—Business Segments (Continued)

Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table:

NOTE J—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 by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS’ consolidated financial position or results of operations.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

NOTE J—Contingencies (Continued)

In 1999, CTS acquired certain assets and liabilities of the Component Products Division of Motorola.  The acquisition was accounted for under the purchase method of accounting.  As part of the purchase agreement, CTS may be obligated to pay additional amounts.  No amounts are due to Motorola in 2003 for 2002 under the agreement.  CTS does not expect to make a material payment under this agreement in 2004 for 2003, which is the final year of potential obligations.   The maximum remaining potential payment under the acquisition agreement was $17.4 million at September 28, 2003.

NOTE K—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 nine months and quarter ending September 28, 2003.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 1.   Financial Statements (Continued)

NOTE K—Earnings Per Share (Continued)

The following table shows the potentially dilutive securities which have been excluded from the diluted earnings per share calculation for the three and nine month periods ending September 28, 2003 and September 29, 2002 because they are either anti-dilutive or the exercise price exceeds the average market price:

NOTE L—Accounting Pronouncements

In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  FAS No. 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  FAS No. 149 was generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.   Adoption of FAS No. 149 did not have a significant impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  FAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities.  The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock.  FAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003 and must be applied to CTS´ existing financial instruments effective June 30, 2003, the beginning of the first interim period after June 15, 2003.  The adoption of FAS No. 150 did not have a material impact on its results of operations or financial condition.

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PART I  -  FINANCIAL INFORMATION (Continued)

   Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion includes certain non-GAAP financial measures which CTS' management believes are useful to investors in analyzing CTS' financial performance and results of operations over time. Reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures are included herein.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management believes that judgment and estimates related to the following critical accounting policies could materially affect its consolidated financial statements.

     •  Estimating inventory valuation, the allowance for doubtful accounts and other accrued liabilities
     •  Valuation of long-lived and intangible assets and depreciation / amortization periods
     •  Income taxes
     •  Retirement plans

In the first nine months of 2003, there have been no changes in the above critical accounting policies.

Results of Operations

Comparison of Third Quarter 2003 and Third Quarter 2002

Business Segment Discussion

The following table highlights the business segment results for the three-month periods ending September 28, 2003 and September 29, 2002:

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PART I  -  FINANCIAL INFORMATION (Continued)

    Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

The third quarter of 2003 sales of components and sensors and EMS products, as a percentage of total sales, were 57% and 43% respectively. The third quarter of 2002 sales of components and sensors and EMS products, as a percentage of total sales, were 62% and 38% respectively. Refer also to Note I, "Business Segments," for a description of the Company's business segments.

Components and Sensors business segment sales decreased $7.3 million or 11% from the prior year quarter. The decrease was primarily due to a $5.2 million reduction in end-of-life product sales and general softness in the computer, communications and automotive markets. The segment operating earnings of $1.5 million increased $1.9 million. In the third quarter of 2003, lower manufacturing and selling, general and administrative expenses of approximately $2.4 million combined with lower depreciation and amortization of $2.5 million caused the segment operating earnings improvement despite lower sales volumes in 2003 and approximately $1.0 million pertaining to the resolution of a customer credit recorded in 2002.

EMS business segment sales increased $4.9 million, or 12%, from the prior year quarter. The incremental segment operating earnings generated from higher sales levels were impacted by less favorable product mix. This resulted in approximately the same level of segment operating earnings, $2.4 million, as in the third quarter of 2002.

Total Company Discussion

The following table highlights changes in significant components of the condensed consolidated statements of earnings (loss) for the three-month periods ended September 28, 2003 and September 29, 2002: