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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 26, 2004
       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 18, 2004:  35,917,877

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 - UNAUDITED
(In thousands, except per share amounts)

				Three Months Ended								Nine Months Ended
				September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
Net sales				$	129,049			$	108,496			$	388,820			$	330,962
Costs and expenses:
	Cost of goods sold				102,737				84,841				308,982				261,704
	Selling, general and administrative expenses				16,017				14,694				47,516				42,165
	Research and development expenses				4,693				5,052				14,250				16,083
	Gain on sales of assets  — Note D				(252	)			—				(3,319	)			—
	Asset impairment charge  — Note E				—				4,563				—				4,563
		Operating earnings (loss)			5,854				(654	)			21,391				6,447
Other (expense) income:
	Interest expense				(1,118	)			(2,139	)			(4,241	)			(6,010	)
	Interest income				180				75				515				225
	Other				176				298				(343	)			323
		Total other expense			(762	)			(1,766	)			(4,069	)			(5,462	)
		Earnings (loss) before income taxes			5,092				(2,420	)			17,322				985
		Income tax expense (benefit) — Note K			1,171				(8,494	)			3,984				(7,643	)
		Net earnings		$	3,921			$	6,074			$	13,338			$	8,628
Net earnings per share — Note L
	Basic			$	0.11			$	0.17			$	0.37			$	0.25
	Diluted			$	0.11			$	0.17			$	0.37			$	0.25
	Cash dividends declared per share			$	0.03			$	0.03			$	0.09			$	0.09
Average common shares outstanding:
	Basic				35,896				34,799				35,946				34,351
	Diluted				36,401				35,352				36,299				34,729

See notes to condensed consolidated financial statements.

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

					September 26, 2004				December 31, 2003*
					(UNAUDITED)
ASSETS
Current Assets
	Cash and cash equivalents				$	47,925			$	25,346
	Accounts receivable, less allowances (2004 — $1,459; 2003 — $1,585)					78,850				72,290
	Inventories — Note C					45,482				31,925
	Other current assets					9,007				6,697
	Deferred income taxes					28,516				28,508
			Total current assets			209,780				164,766
Property, plant and equipment, less accumulated depreciation (2004 — $284,821; 2003 — $261,838)						115,669				122,481
Other Assets
	Prepaid pension asset — Note H					140,486				132,960
	Intangible assets, net					35,721				37,456
	Other assets — Note D					8,787				24,587
			Total other assets			184,994				195,003
Total Assets					$	510,443			$	482,250
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable				$	59,454			$	52,252
	Accrued liabilities					43,911				43,437
			Total current liabilities			103,365				95,689
Long-term debt — Note G						87,000				75,880
Other long-term obligations						11,079				11,133
Deferred income taxes						5,380				5,357
Shareholders’ Equity
	Preferred stock — authorized 25,000,000 shares without par value; none issued					—				—
	Common stock — authorized 75,000,000 shares without par value; 52,644,935 shares issued at September 26, 2004 and 52,632,088 shares issued at December 31, 2003					263,081				262,748
	Additional contributed capital					22,221				21,520
	Retained earnings					273,521				263,430
	Accumulated other comprehensive earnings					472				151
						559,295				547,849
Cost of common stock held in treasury — Note M (2004 — 16,751,326 shares; 2003 — 16,565,558 shares)						(255,676	)			(253,658	)
			Total shareholders’ equity			303,619				294,191
Total Liabilities and Shareholders’ Equity					$	510,443			$	482,250
*The balance sheet at December 31, 2003, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements.

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

				Nine Months Ended
				September 26, 2004				September 28, 2003
Cash flows from operating activities:
	Net earnings			$	13,338			$	8,628
	Adjustments to reconcile net earnings      to net cash provided by operating activities:
	Depreciation and amortization				19,650				25,487
	Asset impairment charge				—				4,563
	Gain on sale of assets				(3,319	)			—
	Changes in assets and liabilities:
	Accounts receivable				(6,560	)			990
	Inventories				(13,557	)			(1,172	)
	Other current assets				(1,881	)			(1,123	)
	Prepaid pension asset				(7,526	)			(9,205	)
	Accounts payable and accrued liabilities				8,109				(13,199	)
	Other				1,409				1,103
	Total adjustments				(3,675	)			7,444
	Net cash provided by operations				9,663				16,072
Cash flows from investing activities:
	Capital expenditures				(10,121	)			(6,206	)
	Proceeds from sales of assets				19,286				4,081
	Other				—				(129	)
	Net cash provided by (used in) investing activities				9,165				(2,254	)
Cash flows from financing activities:
	Payments of long-term debt				(137,070	)			(92,845	)
	Proceeds from issuance of long-term debt				148,190				78,495
	Debt issue costs				(2,229	)			(595	)
	Issuance of common stock				—				14,429
	Purchase of treasury stock				(2,005	)			—
	Dividends paid				(3,463	)			(3,078	)
	Other				15				(47	)
	Net cash provided by (used in) financing activities				3,438				(3,641	)
Effect of exchange rate on cash and cash equivalents					313				244
Net increase in cash and cash equivalents					22,579				10,421
Cash and cash equivalents at beginning of year					25,346				9,225
Cash and cash equivalents at end of period				$	47,925			$	19,646
Supplemental cash flow information
Cash paid during the period for:
	Interest			$	3,087			$	3,638
	Income taxes--net			$	5,588			$	6,036

See notes to condensed consolidated financial statements.

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

			Three Months Ended								Nine Months Ended
			September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
Net earnings			$	3,921			$	6,074			$	13,338			$	8,628
Other comprehensive earnings (loss):
	Cumulative translation adjustment			(342	)			43				314				309
	Deferred gain (loss) on forward contracts       — Note F			(31	)			20				7				(17	)
Comprehensive earnings			$	3,548			$	6,137			$	13,659			$	8,920

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED
September 26, 2004

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 unaudited 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, 2003.

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 2004.

NOTE B—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.  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 and net earnings per share would have been adjusted to the pro forma amounts indicated below:

			Three Months Ended								Nine Months Ended
			September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
			($ in thousands, except per share amounts)
Net earnings, as reported			$	3,921			$	6,074			$	13,338			$	8,628
Deduct:  Stock-based employee compensation                  cost, net of tax, if fair value                  based method were used				(334	)			(554	)			(919	)			(1,351	)
Proforma net earnings			$	3,587			$	5,520			$	12,419			$	7,277
Net earnings per share-basic, as reported			$	0.11			$	0.17			$	0.37			$	0.25
Proforma net earnings per share-basic				0.10				0.16				0.35				0.21
Net earnings per share-diluted, as reported				0.11				0.17				0.37				0.25
Proforma net earnings per share-diluted			$	0.10			$	0.16			$	0.34			$	0.21

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NOTE C—Inventories

Inventory consist of the following:

			September 26, 2004				December 31, 2003
			($ in thousands)
Finished goods			$	8,120			$	8,047
Work-in-process				10,076				7,779
Raw materials				27,286				16,099
			$	45,482			$	31,925

NOTE D—Asset Sales

The December 31, 2003 other assets balance sheet item included $17.6 million of assets held for sale. During the first nine months of 2004, CTS sold approximately $16.5 million of assets held for sale, including its Longtan, Taiwan building. The proceeds on the assets sales approximated the carrying value. In addition, due to changes in circumstances, which were previously considered unlikely, $1.1 million of the assets held for sale at December 31, 2003 were reclassified to fixed assets during the first nine months of 2004.

During the first nine months of 2004, CTS also sold excess land located near its Canadian facility for approximately $2.7 million. Cash proceeds related to the sale approximated $2.1 million, with the remaining proceeds of $0.6 million evidenced by a secured note receivable due in May 2006. A gain of $2.7 million was recognized on the sale.

NOTE E—Asset Impairment Charge

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 reflected a write-down for electronic equipment following final production of previously announced “end–of–life” products and a reassessment of the current market value for equipment held for sale. An additional $1.3 million of the impairment charge related to excess capacity on a production line following an assessment of future capacity needs.

NOTE F—Financial Instruments

In the first quarter of 2004, 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 2004, 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, which totaled $7,000 for the nine months ending September 26, 2004, are recognized in accumulated other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs.

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NOTE G—Long-Term Debt

At September 26, 2004, CTS had a credit agreement containing a $55 million senior, secured revolving credit facility (Credit Facility). There was $2 million outstanding under the Credit Facility at September 26, 2004. On October 12, 2004, CTS amended the Credit Facility to expand the borrowing capacity to $75 million. The amendment also extended the term of the Credit Facility by one year, to July 2007, and revised certain financial covenants. Any outstanding balances are senior to CTS’ convertible debentures. The Credit Facility 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 facility fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the Credit Facility. The commitment fee varies based on performance under certain financial covenants and is currently .0375 percent per annum. The Credit Facility requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio, and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Credit Facility. Additionally, the Credit Facility limits the amounts allowed for dividends, capital expenditures, and acquisitions.

In April 2002, CTS issued $25 million of five-year, 6.5% convertible, subordinated debentures ($25 million Notes). These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right, after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock.

In May 2004, CTS issued $60 million convertible senior subordinated debentures ($60 million Notes). 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 Notes 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 Notes, 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 Notes 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 common 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 September 26, 2004, none of the conditions for conversion of the $60 million Notes were satisfied.

CTS may, at its option, redeem all or a portion of the $60 million Notes 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 principle amount of the notes plus accrued and unpaid interest up to, but not including, the date of purchase.

CTS used a portion of the proceeds from the issuance of the $60 million Notes to repay $40 million of its 7.5% industrial revenue bonds that were due in 2013. Another $2 million of industrial revenue bonds were repaid with cash flows from operations in the first quarter of 2004.

In connection with the issuance of the $60 million Notes, CTS incurred $2.2 million of issuance costs, which primarily consisted of investment banker fees, legal and other professional fees. These costs are being amortized to interest expense over the five year period from May 1, 2004 through May 1, 2009.

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NOTE H—Retirement Plans

Net pension (income) / postretirement expense for the three and nine months ended September 26, 2004 and September 28, 2003 include the following components:

				Three Months Ended								Nine Months Ended
				September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
PENSION PLANS				($ in thousands)
Service cost				$	1,286			$	1,235			$	3,966			$	3,689
Interest cost					2,801				2,721				8,447				8,177
Expected return on plan assets (1)					(6,761	)			(6,727	)			(20,287	)			(20,189	)
Amortization of unrecognized:
	Transition obligation				(119	)			(140	)			(355	)			(420	)
	Prior service cost				226				220				676				662
Recognized (gain) loss					173				(238	)			493				(706	)
Net pension (income)				$	(2,394	)		$	(2,929	)		$	(7,060	)		$	(8,787	)

(1)      Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

				Three Months Ended								Nine Months Ended
				September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
OTHER POSTRETIREMENT BENEFIT PLAN				($ in thousands)
Service cost				$	9			$	9			$	23			$	29
Interest cost					76				80				232				238
Net postretirement expense				$	85			$	89			$	255			$	267

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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.  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; low temperature cofired ceramic (LTCC) 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.

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 and manufacture of interconnect systems and complex backplanes, 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, is shown in the following table:

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

			Three Months Ended								Nine Months Ended
			September 26, 2004				September 28, 2003				September 26, 2004				September 28, 2003
			($ in thousands)
Total segment operating earnings			$	5,854			$	3,909			$	21,391			$	11,010
Interest expense				(1,118	)			(2,139	)			(4,241	)			(6,010	)
Other income (expense)				356				373				172				548
Asset impairment charge -       Components and Sensors				—				(4,563	)			—				(4,563	)
Earnings before income taxes			$	5,092			$	(2,420	)		$	17,322			$	985

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, results of operations or cash flows.

NOTE K—Income Taxes

During the second quarter of 2004, CTS changed the estimate of its 2004 effective tax rate from 25% to 23%. The lower effective tax rate reflects the transfer of certain business operations to jurisdictions with lower statutory tax rates and the notification that manufacturing incentives in one foreign jurisdiction qualified CTS for a lower statutory rate, expiring in 2011, subject to certain conditions.

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.

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NOTE L—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 quarters and nine-month periods ending September 26, 2004 and September 28, 2003.

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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 26, 2004 and September 28, 2003 because they are either anti-dilutive, the exercise price exceeds the average market price or the conversion criteria have not been met.

NOTE M—Treasury Stock

In July 2004, CTS’ Board of Directors authorized a program to repurchase up to one million shares of its common stock in the open market during the next two years. This July 2004 authorization effectively canceled the board's previous stock repurchase authorization. Reacquired shares will be used to support equity-based compensation programs and for other corporate purposes. During the third quarter of 2004, CTS repurchased 183,000 shares at a total cost of $2.0 million.

NOTE N—New Accounting Pronouncement

In September 2004, the Emerging Issues Task Force (EITF) finalized Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” Contingently convertible debt instruments (commonly referred to as Co-Cos) are financial instruments that add a contingent feature to a convertible debt instrument. Co-Cos are generally convertible into common shares of the issuer after the common stock price has exceeded a predetermined threshold for a specified time period. Prior to the issuance of EITF No. 04-8, generally accepted accounting principles allowed companies to exclude the potential dilutive effect of the conversion feature from diluted earnings per share until the market price contingency was met. EITF Issue No. 04-8 requires companies to include the impact of Co-Cos in their diluted earnings per share computation regardless of whether the market price trigger has been met. EITF Issue No. 04-8 is expected to be effective for periods ending after December 15, 2004. Diluted earnings per share for prior periods must be retroactively restated to conform to the EITF Issue No. 04-8 for all periods presented where Co-Cos were outstanding. CTS’ $60 million convertible senior subordinated debentures (see Note G, "Long-term Debt,") are considered Co-Cos that will be subject to EITF Issue No. 04-8. If CTS had used the guidance in EITF Issue No. 04-8, diluted earnings per share would have been $0.10 and $0.36, respectively, for the quarter and nine-month period ending September 26, 2004.

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

Overview

CTS is a global manufacturer of components and sensors to the automotive, communications and computer markets. The Company also offers specialized electronic manufacturing and design to industrial, communications and computing infrastructure original equipment manufacturers (OEMs). Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives and distributors. Sales are reported through two business segments, Components and Sensors and Electronics Manufacturing Services (EMS), which represent 49.0% and 51.0%, respectively, of CTS’ total sales in the third quarter of 2004 and 56.6% and 43.4%, respectively, in the third quarter of 2003.

As discussed in more detail throughout the Management’s Discussion and Analysis:

Outlook

CTS currently expects sales growth and earnings for the full year of 2004 as follows:

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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. 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.