PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~(LOSS)~~ EARNINGS- UNAUDITED

(In thousands of dollars, except per share amounts)

Three Months Ended

Nine Months Ended


September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

Net sales

$
90,646

$
99,957

$
289,028

$
303,643

Costs and expenses:

Cost of goods sold

59,200

67,458

192,073

206,706

Selling, general and administrative expenses

12,690

13,899

43,625

43,353

Research and development expenses

5,692

5,807

16,378

16,765

Non-recurring environmental charge

14,541

—

14,541

—

Restructuring and impairment charges

2,373

1,570

5,229

4,806

Operating (loss) earnings

(3,850)

11,223

17,182

32,013

Other (expense) income:

Interest expense

(714)

(568)

(1,955)

(1,763)

Interest income

713

707

2,354

1,959

Other

(3,072)

562

(4,641)

(1,618)

Total other (expense) income

(3,073)

701

(4,242)

(1,422)

(Loss) earnings before income taxes

(6,923)

11,924

12,940

30,591

Income tax (benefit) expense

(2,163)

3,807

(7,667)

11,033

Net (loss) earnings

$
(4,760)

$
8,117

$
20,607

$
19,558

(Loss) earnings per share:

Basic

$
(0.15)

$
0.24

$
0.62

$
0.58

Diluted

$
(0.15)

$
0.24

$
0.61

$
0.57

Basic weighted – average common shares outstanding:

32,770

33,599

33,083

33,683

Effect of dilutive securities

—

508

485

515

Diluted weighted – average common shares outstanding

32,770

34,107

33,568

34,198

Cash dividends declared per share

$
0.040

$
0.040

$
0.120

$
0.120



	Three Months Ended						Nine Months Ended
	September 30,			September 27,			September 30,			September 27,
	2016			2015			2016			2015
Net sales	$	99,697		$	90,646		$	295,095		$	289,028
Cost of goods sold	63,056			59,200			190,528			192,073
Gross Margin	36,641			31,446			104,567			96,955
Selling, general and administrative expenses	16,048			12,689			46,459			43,623
Research and development expenses	6,284			5,692			18,414			16,378
Non-recurring environmental charge	—			14,541			—			14,541
Restructuring and impairment charges	1,969			2,373			2,175			5,229
(Gain) loss on sale of assets	(150		)	1			(11,501		)	2
Operating earnings (loss)	12,490			(3,850		)	49,020			17,182
Other (expense) income:
Interest expense	(917		)	(714		)	(2,746		)	(1,955		)
Interest income	203			713			1,082			2,354
Other expense	(46		)	(3,072		)	(1,482		)	(4,641		)
Total other expense	(760		)	(3,073		)	(3,146		)	(4,242		)
Earnings (loss) before income taxes	11,730			(6,923		)	45,874			12,940
Income tax expense (benefit)	8,010			(2,163		)	19,804			(7,667		)
Net earnings (loss)	$	3,720		$	(4,760	)	$	26,070		$	20,607
Earnings (loss) per share:
Basic	$	0.11		$	(0.15	)	$	0.80		$	0.62
Diluted	$	0.11		$	(0.15	)	$	0.79		$	0.61

Basic weighted – average common shares outstanding:	32,759			32,770			32,716			33,083
Effect of dilutive securities	495			—			494			485
Diluted weighted – average common shares outstanding	33,254			32,770			33,210			33,568

Cash dividends declared per share	$	0.04		$	0.04		$	0.12		$	0.12

See notes to unaudited condensed consolidated financial statements.

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CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~EARNINGS~~INCOME ~~(LOSS)~~ ‑ UNAUDITED

(In thousands of dollars)

Three Months Ended

Nine Months Ended


September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014


Net earnings (loss)

$
(4,760)

$
8,117

$
20,607

$
19,558

Other comprehensive (loss) earnings:

Changes in fair market value of hedges, net of tax

(17)

153

(34)

26

Changes in unrealized pension cost, net of tax

1,336

1,036

3,299

2,857

Cumulative translation adjustment, net of tax

(1,204)

(981)

(817)

(160)

Other comprehensive earnings

$
115

$
208

$
2,448

$
2,723

Comprehensive (loss) earnings

$
(4,645)

$
8,325

$
23,055

$
22,281



	Three Months Ended						Nine Months Ended
	September 30,			September 27,			September 30,			September 27,
	2016			2015			2016			2015
Net earnings (loss)	$	3,720		$	(4,760	)	$	26,070		$	20,607
Other comprehensive income (loss):
Changes in fair market value of derivatives, net of tax	(263		)	(17		)	(36		)	(34		)
Changes in unrealized pension cost, net of tax	898			1,336			2,753			3,299
Cumulative translation adjustment, net of tax	(164		)	(1,204		)	(890		)	(817		)
Other comprehensive income	$	471		$	115		$	1,827		$	2,448
Comprehensive earnings (loss)	$	4,191		$	(4,645	)	$	27,897		$	23,055

See notes to unaudited condensed consolidated financial statements.

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CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

(Unaudited) September 27,

December 31,


2015

2014

ASSETS


Current Assets

Cash and cash equivalents

$
150,755

$
134,508

Accounts receivable, net

59,213

56,894

Inventories, net

26,974

27,887

Other current assets

20,766

21,112

Total current assets

257,708

240,401

Property, plant and equipment, net

68,932

71,414

Other Assets

Prepaid pension asset

38,773

32,099

Goodwill

32,047

32,047

Indefinite-lived intangible asset

690

690

Other intangible assets, net

32,960

35,902

Deferred income taxes

56,610

43,120

Other

1,021

1,253

Total other assets

162,101

145,111

Total Assets

$
488,741

$
456,926

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable

$
39,483

$
43,343

Accrued payroll and benefits

9,089

11,283

Accrued liabilities

43,031

25,356

Total current liabilities

91,603

79,982

Long-term debt

90,500

75,000

Post retirement obligations

2,729

3,049

Other long-term obligations

8,305

9,106

Shareholders’ Equity

Common stock

300,897

299,892

Additional contributed capital

40,481

39,153

Retained earnings

396,796

380,145

Accumulated other comprehensive loss

(101,785)

(104,233)

Total shareholders’ equity before treasury stock

636,389

614,957

Treasury stock

(340,785)

(325,168)

Total shareholders’ equity

295,604

289,789

Total Liabilities and Shareholders’ Equity

$
488,741

$
456,926



	(Unaudited)
	September 30,			December 31,
	2016			2015
ASSETS
Current Assets
Cash and cash equivalents	$	114,433		$	156,928
Accounts receivable, net	62,380			54,563
Inventories, net	29,178			24,600
Other current assets	10,852			9,863
Total current assets	216,843			245,954
Property, plant and equipment, net	79,329			69,872
Other Assets
Prepaid pension asset	39,678			33,779
Goodwill	61,744			33,865
Other intangible assets, net	65,930			34,758
Deferred income taxes	48,963			63,809
Other	1,084			1,336
Total other assets	217,399			167,547
Total Assets	$	513,571		$	483,373
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	43,290		$	40,299
Accrued payroll and benefits	11,876			7,147
Accrued liabilities	45,969			47,174
Total current liabilities	101,135			94,620
Long-term debt	96,000			90,700
Post retirement obligations	7,066			7,230
Other long-term obligations	3,102			9,169
Total Liabilities	207,303			201,719
Shareholders’ Equity
Common stock	302,156			300,909
Additional contributed capital	40,567			41,166
Retained earnings	403,979			381,840
Accumulated other comprehensive loss	(97,178		)	(99,005		)
Total shareholders’ equity before treasury stock	649,524			624,910
Treasury stock	(343,256		)	(343,256		)
Total shareholders’ equity	306,268			281,654
Total Liabilities and Shareholders’ Equity	$	513,571		$	483,373

See notes to unaudited 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 27, 2015

September 28, 2014

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings

$
20,607

$
19,558

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization

11,987

12,722

Amortization of retirement benefit adjustments

4,945

4,296

Equity-based compensation

2,655

1,839

Restructuring charges

5,229

4,806

Prepaid pension asset

(6,633)

(6,687)

Gain on sale of fixed assets

(121)

(1,915)

Changes in assets and liabilities:

Accounts receivable

(3,518)

(1,115)

Inventories

(34)

1,889

Accounts payable

(4,967)

(1,175)

Accrued payroll and benefits

(1,573)

(9,207)

Accrued liabilities

9,945

(7,997)

Income taxes payable

1,715

1,599

Deferred income taxes

(15,428)

3,872

Other

(691)

(7,142)

Net cash provided by operating activities

24,118

15,343

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(6,559)

(9,006)

Proceeds from sale of assets

1,878

1,851

Net cash used in investing activities

(4,681)

(7,155)

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments of long-term debt

(943,300)

(757,700)

Proceeds from borrowings of long-term debt

958,800

763,000

Payments of short-term notes payable

(164)

(778)

Proceeds from borrowings of short-term notes payable

164

778

Purchase of treasury stock

(15,623)

(5,084)

Dividends paid

(3,984)

(4,038)

Exercise of stock options

64

1,328

Other

144

235

Net cash used in financing activities

(3,899)

(2,259)

Effect of exchange rate on cash and cash equivalents

709

587

Net increase in cash and cash equivalents

16,247

6,516

Cash and cash equivalents at beginning of year

134,508

124,368

Cash and cash equivalents at end of year

$
150,755

$
130,884

Supplemental cash flow information

Cash paid for Interest

$
1,717

$
1,434

Cash paid for Income taxes, net

$
5,657

$
6,141



	Nine Months Ended
	September 30,			September 27,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	26,070		$	20,607
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	14,010			11,987
Pension and other post-retirement plan income	(1,188		)	(1,510		)
Equity-based compensation	1,759			2,655
Restructuring charges	2,175			5,229
Non-recurring environmental charge	—			14,541
Deferred income taxes	8,332			(15,241		)
Gain on sales of fixed assets	(11,501		)	(121		)
Gain on foreign currency hedges	(15		)	—
Changes in assets and liabilities:
Accounts receivable	(5,971		)	(3,518		)
Inventories	(2,318		)	(34		)
Other assets	(489		)	(222		)
Accounts payable	2,717			(4,967		)
Accrued payroll and benefits	2,376			(1,573		)
Accrued expenses	(3,124		)	(4,596		)
Income taxes payable	690			1,715
Other liabilities	(1,543		)	(656		)
Pension and other post-retirement plans	(393		)	(178		)
Net cash provided by operating activities	31,587			24,118
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(14,467		)	(6,559		)
Proceeds from sale of assets	12,248			1,878
Payment for acquisition, net of cash acquired	(73,063		)	—
Net cash used in investing activities	(75,282		)	(4,681		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt	(2,048,000		)	(943,300		)
Proceeds from borrowings of long-term debt	2,053,300			958,800
Payments of short-term notes payable	—			(164		)
Proceeds from borrowings of short-term notes payable	—			164
Purchase of treasury stock	—			(15,623		)
Dividends paid	(3,923		)	(3,984		)
Windfall tax benefits from equity awards	696			144
Proceeds from exercise of stock options	—			64
Net cash provided by (used in) financing activities	2,073			(3,899		)
Effect of exchange rate changes on cash and cash equivalents	(873		)	709
Net (decrease) increase in cash and cash equivalents	(42,495		)	16,247
Cash and cash equivalents at beginning of period	156,928			134,508
Cash and cash equivalents at end of period	$	114,433		$	150,755
Supplemental cash flow information:
Cash paid for interest	$	2,292		$	1,046
Cash paid for income taxes, net	$	10,136		$	4,248

See notes to unaudited condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL ~~STATEMEN~~TSSTATEMENTS - UNAUDITED

(in thousands except for share and per share data)

September ~~27, 2015~~

30, 2016

NOTE 1—Basis of Presentation

The accompanying condensed consolidated 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 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, ~~2014.~~

2015.

The accompanying unaudited condensed consolidated 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.

Subsequent Events

CTS has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements are issued.

Reclassifications

Certain prior period reclassifications have been made ~~for the prior periods presented~~ in the ~~Unaudited~~ Condensed Consolidated ~~Statements~~Balance Sheet as a result of ~~Cash Flows to conform to~~including our other post-retirement benefit plan liabilities in Post-retirement obligations as well as the ~~current period’s presentation.~~

retrospective application of a new accounting pronouncement upon the adoption of ASU 2015-17 (see Note 18 - Recent Accounting Pronouncements for additional details). The chart below quantifies the effects of these reclassification adjustments on our December 31, 2015, financial statements:



	At December 31, 2015
Consolidated Balance Sheet Line Item	As previously reported			Reclassification adjustment			As currently reported
Other current assets	$	15,888		$	(6,025	)	$	9,863
Deferred income taxes	$	58,544		$	5,265		$	63,809
Accrued liabilities	$	(53,905	)	$	6,731		$	(47,174	)
Post-retirement obligations	$	(2,703	)	$	(4,527	)	$	(7,230	)
Other long-term obligations	$	(7,725	)	$	(1,444	)	$	(9,169	)

NOTE 2 – Accounts Receivable

The components of accounts receivable are as follows:

As of

September 27,

December 31,

($ in thousands)

2015

2014

Accounts receivable, gross

$
59,343

$
56,994

Less: Allowance for doubtful accounts

(130)

(100)

Accounts receivable, net

$
59,213

$
56,894



	As of
	September 30,			December 31,
	2016			2015
Accounts receivable, gross	$	62,556		$	54,696
Less: Allowance for doubtful accounts	(176		)	(133		)
Accounts receivable, net	$	62,380		$	54,563

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NOTE 3 – Inventories

Inventories consist of the following:

As of

September 27,

December 31,

($ in thousands)

2015

2014

Finished goods

$
9,230

$
11,728

Work-in-process

7,938

7,297

Raw materials

15,746

15,562

Less: Inventory reserves

(5,940)

(6,700)

Inventories, net

$
26,974

$
27,887



	As of
	September 30,			December 31,
	2016			2015
Finished goods	$	6,084		$	6,972
Work-in-process	9,884			6,828
Raw materials	19,380			16,991
Less: Inventory reserves	(6,170		)	(6,191		)
Inventories, net	$	29,178		$	24,600

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NOTE 4 – Property, Plant and Equipment

Property, plant and equipment is comprised of the following:


	As of
	September 27,		December 31,		As of
($ in thousands)	2015		2014
					September 30,			December 31,
					2016			2015
Land	$	2,286	$	3,044	$	2,330		$	2,401
Buildings and improvements		65,617		67,269	63,192			65,731
Machinery and equipment		191,042		185,999	208,389			191,212
Less: Accumulated depreciation		(190,013)		(184,898)	(194,582		)	(189,472		)
Property, plant and equipment, net	$	68,932	$	71,414	$	79,329		$	69,872


~~($ in thousands~~) ~~June 2013 Plan and April 2014 Plan~~
~~Restructuring liability at January 1, 2015~~	$	~~3,904~~
~~Restructuring and restructuring-related charges, excluding asset impairments and write-offs~~		~~5,791~~
~~Cost paid~~		~~(7,351)~~
~~Restructuring liability at September 27, 2015~~	$	~~2,344~~

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NOTE 8 – Accrued Liabilities

The components of accrued liabilities are as follows:

As of

September 27,

December 31,

($ in thousands)

2015

2014

Accrued product related costs

$
4,208

$
5,216

Accrued income taxes

5,161

3,346

Accrued property and other taxes

2,607

2,547

Dividends payable

1,307

1,336

Remediation and monitoring reserves

19,085

3,918

Other accrued liabilities

10,663

8,993

Total accrued liabilities

$
43,031

$
25,356

Remediation and monitoring reserves of $19,085,000 as of September 27, 2015 include a non-recurring environmental charge for the third quarter of 2015 of $14,541,000 which represents the estimated liability for one of the CTS’ sites. See further discussion in Note 9. Other remediation and monitoring charges incurred in the normal course of business are recorded in selling, general, and administrative expenses.



	As of
	September 30,		December 31,
	2016		2015
Accrued product related costs	$	4,622	$	5,245
Accrued income taxes	9,564		8,845
Accrued property and other taxes	1,990		1,838
Accrued outside commissions	1,267		97
Accrued professional fees	907		704
Accrued building improvement costs	1,669		1,768
Dividends payable	1,310		1,302
Remediation reserves	18,895		20,603
Other accrued liabilities	5,745		6,772
Total accrued liabilities	$	45,969	$	47,174

NOTE 9 – Contingencies

Certain processes in the manufacture of ~~CTS’~~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, ~~(“EPA”),~~ state environmental agencies, and in some cases, generator groups, that it is or may be a potentially responsible party regarding hazardous substances at several sites either presently or historically owned, ~~not owned,~~leased, or operated by CTS. Some sites are Superfund sites such as in Asheville, North Carolina and Mountain View, California. ~~Estimating our degree of responsibility~~CTS reserves for probable remediation ~~is inherently difficult.~~activities and for claims and proceedings against CTS ~~recognizes and accrues for an estimated remediation liability when it determines that such liability is probable and estimable.~~

with respect to other environmental matters. CTS accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. In addition to amounts accrued, remediation expenses are also paid as incurred. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is considered probable.

Asrecords reserves on a result of this practice, to provide for certain remedial work expected to commence in 2016 relating to the Asheville site, CTS increased its accrual for remediation and monitoring reserves, as set forth in Note 8. This increased amount reflects the probable costs to remediate environmental conditions at the site for which costs can be reasonably estimated. Based on the current projection modeling of the most probable outcome, CTS recorded an additional non-recurring environmental charge of $14,541,000 in the third quarter of 2015.

The charge recorded includes both the interim remediation proposed by CTS and accepted by the EPA and anticipated future remediation costs and monitoring for a final site-wide remediation. As assessments and cleanups proceed, the reserve may be adjusted based on progress made in determining the extent of remedial actions and related costs.undiscounted basis. In the opinion of management, based upon presently available information relating to all such matters, adequate provision for probable and estimable costs ~~has~~have been ~~made.~~recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, CTS cannot provide assurance that its ultimate environmental investigation and ~~cleanup~~clean-up costs and liabilities will not materially exceed the amount of its current reserve.

CTS manufactures accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota Motor Corporation (“Toyota”). In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The recall expanded to include vehicles in Europe Our reserve and ~~Asia. The pedal recall and associated events have led to CTS being named as a co-defendant with Toyota in certain litigation~~disclosures will be adjusted accordingly if additional information becomes available in the ~~United States and Canada. CTS is not aware of any legal actions filed in Asia or Europe against CTS at this time. In February~~

future.

~~Table of Contents~~

~~2010, CTS entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold CTS harmless from, and~~Unrelated to the ~~parties will cooperate in the defense of, third-party civil~~environmental claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles. The limited exceptions to indemnification restrict CTS’ share of any liability to amounts collectable from its insurers.

~~Certain~~described above, certain other claims are pending against CTS with respect to matters arising out of the ordinary conduct of CTS’ business. InAlthough the ~~opinion~~ultimate outcome of any potential litigation resulting from these claims cannot be predicted with certainty, and some may be disposed of unfavorably to CTS, management ~~based upon past experience and presently available information, either~~believes that adequate provision for anticipated costs ~~has~~have been ~~reserved~~established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or ~~the ultimate anticipated costs will not materially affect CTS’~~reasonably possible of having a material impact on our consolidated financial position, results of operations, or cash flows.

NOTE 10 - Debt

Long-term debt was comprised of the following:

As of

September 27,

December 31,

($ in thousands)

2015

2014

Revolving credit facility due in 2020

$
90,500

$
75,000

Weighted average interest rate

1.5
%

1.5
%
Amount available

$
107,185

$
122,535

Total credit facility

$
200,000

$
200,000

Standby letters of credit

$
2,315

$
2,465

Commitment fee percentage per annum

0.30

0.25



	As of
	September 30,			December 31,
	2016			2015
Revolving credit facility due in 2020	$	96,000		$	90,700
Weighted average interest rate	1.9		%	1.5		%
Amount available	$	201,835		$	106,985
Total credit facility	$	300,000		$	200,000
Standby letters of credit	$	2,165		$	2,315
Commitment fee percentage per annum	0.25		%	0.25		%

Table of Contents

On August 10, 2015, CTS entered into a new five-year credit agreement (“Revolving Credit Facility”) with a group of banks ~~(“Revolving Credit Facility”)~~ in order to support CTS’ ~~working capital needs and other general corporate purposes.~~financing needs. The Revolving Credit Facility ~~provides~~originally provided for a credit line of ~~$200,000,000,~~$200,000. On May 23, 2016, CTS requested and received a $100,000 increase in the aggregate revolving credit commitments under its existing credit agreement, which ~~may be~~ increased ~~by $100,000,000 at~~ the ~~request of CTS, subject~~credit line from $200,000 to ~~an Administrative Agent’s approval. This~~$300,000.

The Revolving Credit Facility replaces the prior unsecured credit facility. Borrowings under the previous credit agreement were refinanced under the new Revolving Credit Facility and the previous credit agreement was terminated on August 10, 2015.

~~The revolving credit facility provided under the new credit agreement~~ includes a swing line sublimit of ~~$15,000,000~~$15,000 and a letter of credit sublimit of ~~$10,000,000.~~$10,000. Borrowings under the ~~credit facility~~Revolving Credit Facility bear interest, at CTS’ option, at the base rate plus the applicable margin for base rate loans or LIBOR plus the applicable margin for LIBOR loans. CTS also pays a quarterly commitment fee on the unused portion of the ~~revolving credit facility.~~Revolving Credit Facility. The commitment fee ~~may range~~ranges from 0.20% to 0.40% based on the CTS’ total leverage ratio.

The ~~revolving credit facility~~Revolving Credit Facility requires, among other things, that CTS comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure of CTS to comply with these covenants could reduce the borrowing availability under the ~~revolving credit facility.~~Revolving Credit Facility. CTS was in compliance with all debt covenants at September ~~27, 2015.~~30, 2016. The ~~revolving credit facility~~Revolving Credit Facility requires that CTS to deliver quarterly financial statements, annual financial statements, auditors certifications and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the ~~revolving credit facility~~Revolving Credit Facility contains restrictions limiting CTS' ability to: dispose of assets; incur certain additional debt; 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; engage in certain transactions with CTS' subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the ~~revolving credit facility~~Revolving Credit Facility fluctuate based upon the London Interbank Offered Rate and the Company’s quarterly total leverage ratio. ~~CTS pays a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly leverage ratio.~~

CTS has debt issuance costs related to its long-term debt that are being amortized using the straight-line method over the life of the debt. These costs are included in interest expense in our Statement of Earnings. Amortization expense was approximately ~~$61,000~~$46 and $61 for the three months ended September 30, 2016 and September 27, 2015, respectively, and approximately ~~$165,000~~$116 and $165 for the first nine months ended September 30, 2016 and September 27, 2015, respectively.

Note 11 - Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.

The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

Foreign Currency Hedges

In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. Ineffectiveness is recorded in other income (expense) in our Condensed Consolidated Statement of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income to other income (expenses).

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At September 30, 2016, we had a net unrealized loss of $219 in accumulated other comprehensive income, of which $201 is expected to be reclassified to income within the next 12 months. The notional amount of foreign currency forward contracts outstanding was ~~recognized as interest expense.~~

$13.8 million at September 30, 2016.

Interest Rate Swaps

~~Table of Contents~~

CTS uses interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on ~~$50,000,000~~$50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTS entered into four ~~separate~~additional interest rate swap agreements to fix interest rates on ~~$25,000,000~~$25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, CTS entered into three additional forward-starting interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

Table of Contents

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in ~~Other~~other comprehensive income (loss) ~~income.~~. The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) ~~income~~ that is expected to be reclassified into earnings within the next twelve months is approximately ~~$556,000. Interest rate swaps activity recorded~~$246.

The location and fair values of derivative instruments designated as hedging instruments in ~~Other comprehensive (loss) earnings before tax includes~~ the ~~following:~~

Condensed Consolidated Balance Sheets as of September 30, 2016, are shown in the following table:

Three Months Ended

Nine Months Ended

($ in thousands)

September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

Unrealized (loss) gain

$
(219)

$
124

$
(628)

$
(288)

Realized gain reclassified to interest expense

$
192

$
123

$
574

$
363

~~Interest rate swaps included~~



	As of
	September 30,			December 31,
	2016			2015
Foreign currency hedges reported in Accrued liabilities	$	(234	)	$	—
Interest rate swaps reported in Accrued liabilities	$	(246	)	$	(768	)
Interest rate swaps reported in Other long-term obligations	$	(360	)	$	—

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $53 and foreign currency derivative liabilities of $287.

The effect of derivative instruments on the ~~balance sheets are comprised~~Condensed Consolidated Statements of ~~the following:~~

Earnings is as follows:

As of

September 27,

December 31,

($ in thousands)

2015

2014

Accrued liabilities

$
892

$
640

Other long-term obligations

$
181

$
380



	Three Months Ended					Nine Months Ended
	September 30,			September 27,		September 30,			September 27,
	2016			2015		2016			2015
Foreign Exchange Contracts:
Loss recognized in Net Sales	$	(35	)	$	—	$	(125	)	$	—
Gain recognized in Cost of Goods Sold	51			—		139			—
Gain recognized in Selling, General and Administrative expense	—			—		10			—
Loss recognized in Other (expenses) income	(5		)	—		(9		)	—

Interest Rate Swaps:
Interest Expense	$	158		$	192	$	471		$	574
Total	$	169		$	192	$	486		$	574

NOTE 1112 – Accumulated Other Comprehensive (Loss) ~~Earnings~~

Income

Shareholders’ equity includes certain items classified as ~~Accumulated~~accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:

Unrealized gains (losses) on hedges relate to interest rate swaps to convert the line of credit’s variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and CTS has deferred income statement recognition of gains and losses until the hedged transaction occurs, at which time amounts are reclassified into earnings. Further information related to CTS’ derivative financial instruments is included in Note 11 - Derivative Financial Instruments and Note 15 – Fair Value Measurements.

Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension income / (expense). Further information related to CTS’ pension obligations is included in Note 5 – Retirement Plans.


·
	~~Unrealized gains (losses) on hedges~~ relate to interest rate swaps to convert the line of credit’s variable rate of interest into a fixed rate. These hedges are designated as cash flow hedges, and CTS has deferred income statement recognition of gains and losses until the hedged transaction occurs. Amounts reclassified to income from AOCI for hedges are included in interest expense. Further information related to CTS’ interest rate swaps is included in NOTE 10 – Debt and NOTE 14 – Fair Value Measurements.

~~Unrealized gains (losses) on pension obligations~~ are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension expense. Further information related to CTS’ pension obligations is included in NOTE 5 – Retirement Plans.

~~Cumulative translation adjustment~~ relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. CTS is required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income. Changes in exchange rates between the functional currency and the currency in which a transaction is denominated is a foreign exchange transaction gain or loss. Transaction loss for the nine month period ended September 27, 2015 was $4,640,000 which is included in Other in the Condensed Consolidated Statement of (Loss) Earnings.

Table of Contents

Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. CTS is required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income.

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction (losses)/gains for the three and nine month periods ended September 30, 2016 were ($165) and ($1,656), respectively, and for the three and nine month periods ended September 27, 2015 were $(3,076) and ($4,640), respectively, which are included in other income/(expenses) in the Condensed Consolidated Statement of Earnings.

The components of accumulated other comprehensive (loss) income for the three months ended September 30, 2016, are as follows:



							Gain (Loss)
	As of			Gain (Loss)			reclassified			As of
	June 30,			Recognized			from AOCI			September 30,
	2016			in OCI			to income			2016
Changes in fair market value of hedges:
Gross	$	(403	)	$	(643	)	$	221		$	(825	)
Income tax expense (benefit)	151			242			(83		)	310
Net	(252		)	(401		)	138			(515		)

Changes in unrealized pension cost:
Gross	(158,763		)	—			1,437			(157,326		)
Income tax expense (benefit)	63,260			—			(539		)	62,721
Net	(95,503		)	—			898			(94,605		)

Cumulative translation adjustment:
Gross	(1,995		)	(161		)	—			(2,156		)
Income tax expense (benefit)	101			(3		)	—			98
Net	(1,894		)	(164		)	—			(2,058		)
Total accumulated other comprehensive (loss) income	$	(97,649	)	$	(565	)	$	1,036		$	(97,178	)

Table of Contents

The components of accumulated other comprehensive (loss) income for the three months ended September 27, 2015, are as follows:

Gain (Loss)


As of

Gain (Loss)

reclassified

As of

June 28,

Recognized

from AOCI

September 27,

($ in thousands)

2015

in OCI

to income

2015

Changes in fair market value of hedges:

Gross

$
(1,047)

$
(219)

$
192

$
(1,074)

Income tax (benefit)

(394)

(82)

72

(404)

Net

(653)

(137)

120

(670)

Changes in unrealized pension cost:

Gross

(166,161)

2,039

—

(164,122)

Income tax (benefit)

(63,957)

703

—

(63,254)

Net

(102,204)

1,336

—

(100,868)

Cumulative translation adjustment:

Gross

572

(1,056)

—

(484)

Income tax (benefit)

(385)

148

—

(237)

Net

957

(1,204)

—

(247)

Total accumulated other comprehensive (loss) income

$
(101,900)

$
(5)

$
120

$
(101,785)



							Gain (Loss)
	As of			Gain (Loss)			reclassified			As of
	June 28,			Recognized			from AOCI			September 27,
	2015			in OCI			to income			2015
Changes in fair market value of hedges:
Gross	$	(1,047	)	$	(219	)	$	192		$	(1,074	)
Income tax expense (benefit)	394			82			(72		)	404
Net	(653		)	(137		)	120			(670		)

Changes in unrealized pension cost:
Gross	(166,161		)	2,039			—			(164,122		)
Income tax expense (benefit)	63,957			(703		)	—			63,254
Net	(102,204		)	1,336			—			(100,868		)

Cumulative translation adjustment:
Gross	572			(1,056		)	—			(484		)
Income tax expense (benefit)	385			(148		)	—			237
Net	957			(1,204		)	—			(247		)
Total accumulated other comprehensive (loss) income	$	(101,900	)	$	(5	)	$	120		$	(101,785	)

The components of accumulated other comprehensive (loss) income for the ~~three~~nine months ended September ~~28, 2014~~30, 2016, are as follows:

Gain (Loss)


As of

Gain (Loss)

reclassified

As of

June 29,

Recognized

from AOCI

September 28,

($ in thousands)

2014

in OCI

to income

2014

Changes in fair market value of hedges:

Gross

$
(1,170)

$
124

$
123

$
(923)

Income tax (benefit)

(447)

47

47

(353)

Net

(723)

77

76

(570)

Changes in unrealized pension cost:

Gross

(135,180)

1,575

—

(133,605)

Income tax (benefit)

(53,896)

539

—

(53,357)

Net

(81,284)

1,036

—

(80,248)

Cumulative translation adjustment:

Gross

1,470

(590)

—

880

Income tax (benefit)

(1,155)

391

—

(764)

Net

2,625

(981)

—

1,644

Total accumulated other comprehensive (loss) income

$
(79,382)

$
132

$
76

$
(79,174)



							Gain (Loss)
	As of			Gain (Loss)			reclassified			As of
	December 31,			Recognized			from AOCI			September 30,
	2015			in OCI			to income			2016
Changes in fair market value of hedges:
Gross	$	(768	)	$	(742	)	$	685		$	(825	)
Income tax expense (benefit)	289			278			(257		)	310
Net	(479		)	(464		)	428			(515		)

Changes in unrealized pension cost:
Gross	(161,719		)	—			4,393			(157,326		)
Income tax expense (benefit)	64,361			—			(1,640		)	62,721
Net	(97,358		)	—			2,753			(94,605		)

Cumulative translation adjustment:
Gross	(1,279		)	(877		)	—			(2,156		)
Income tax expense (benefit)	111			(13		)	—			98
Net	(1,168		)	(890		)	—			(2,058		)
Total accumulated other comprehensive (loss) income	$	(99,005	)	$	(1,354	)	$	3,181		$	(97,178	)

Table of Contents

The components of accumulated other comprehensive (loss) income for the nine months ended September 27, 2015, are as follows:

Gain (Loss)


As of

Gain (Loss)

reclassified

As of


December 31,

Recognized

from AOCI

September 27,

($ in thousands)

2014

in OCI

to income

2015

Changes in fair market value of hedges:

Gross

$
(1,020)

$
(628)

$
574

$
(1,074)

Income tax (benefit)

(384)

(236)

216

(404)

Net

(636)

(392)

358

(670)

Changes in unrealized pension cost:

Gross

(169,291)

5,169

—

(164,122)

Income tax (benefit)

(65,124)

1,870

—

(63,254)

Net

(104,167)

3,299

—

(100,868)

Cumulative translation adjustment:

Gross

245

(729)

—

(484)

Income tax (benefit)

(325)

88

—

(237)

Net

570

(817)

—

(247)

Total accumulated other comprehensive (loss) income

$
(104,233)

$
2,090

$
358

$
(101,785)

~~The components of other comprehensive (loss) income for the nine months ended September 28, 2014 are as follows:~~

Gain (Loss)


As of

Gain (Loss)

reclassified

As of


December 31,

Recognized

from AOCI

September 28,

($ in thousands)

2013

in OCI

to income

2014

Changes in fair market value of hedges:

Gross

$
(998)

$
(288)

$
363

$
(923)

Income tax (benefit)

(402)

(90)

139

(353)

Net

(596)

(198)

224

(570)

Changes in unrealized pension cost:

Gross

(138,133)

4,356

172

(133,605)

Income tax (benefit)

(55,028)

1,605

66

(53,357)

Net

(83,105)

2,751

106

(80,248)

Cumulative translation adjustment:

Gross

949

(69)

—

880

Income tax (benefit)

(855)

91

—

(764)

Net

1,804

(160)

—

1,644

Total accumulated other comprehensive (loss) income

$
(81,897)

$
2,393

$
330

$
(79,174)



							Gain (Loss)
	As of			Gain (Loss)			reclassified			As of
	December 31,			Recognized			from AOCI			September 27,
	2014			in OCI			to income			2015
Changes in fair market value of hedges:
Gross	$	(1,020	)	$	(628	)	$	574		$	(1,074	)
Income tax expense (benefit)	384			236			(216		)	404
Net	(636		)	(392		)	358			(670		)

Changes in unrealized pension cost:
Gross	(169,291		)	5,169			—			(164,122		)
Income tax expense (benefit)	65,124			(1,870		)	—			63,254
Net	(104,167		)	3,299			—			(100,868		)

Cumulative translation adjustment:
Gross	245			(729		)	—			(484		)
Income tax expense (benefit)	325			(88		)	—			237
Net	$	570		$	(817	)	$	—		$	(247	)
Total accumulated other comprehensive (loss) income	$	(104,233	)	$	2,090		$	358		$	(101,785	)

~~Table of Contents~~

NOTE 1213 – Shareholders’ Equity

Share count and par value data related to shareholders’ equity are as follows:

As of

September 27,

December 31,

2015

2014

Preferred Stock

Par value per share

No par value

No par value

Shares authorized

25,000,000

25,000,000

Shares outstanding

—

—

Common Stock

Par value per share

No par value

No par value

Shares authorized

75,000,000

75,000,000

Shares issued

56,241,819

56,101,700

Shares outstanding

32,680,297

33,392,060

Treasury stock

Shares held

23,561,522

22,709,640

~~CTS uses the cost method to account for its~~



	As of
	September 30,	December 31,
	2016	2015
Preferred Stock
Par value per share	No par value	No par value
Shares authorized	25,000,000	25,000,000
Shares outstanding	—	—
Common Stock
Par value per share	No par value	No par value
Shares authorized	75,000,000	75,000,000
Shares issued	56,453,531	56,242,499
Shares outstanding	32,759,509	32,548,477
Treasury stock
Shares held	23,694,022	23,694,022

No common stock ~~purchases. During~~repurchases were made during the nine ~~month period~~months ended September ~~27, 2015,~~30, 2016. Through September 30, 2016, CTS had purchased ~~851,882~~395,763 shares of common stock for an aggregate of ~~$15,623,000~~$7,446 under a previously board-authorized share repurchase ~~plan. For the nine month period ended September 28, 2014, CTS purchased 288,382 shares of common~~plan allowing for up to $25,000 in stock ~~for an aggregate of $5,084,000.~~repurchases. Approximately ~~9,742,922 shares are~~$17,554 is available for future ~~issuances.~~

purchases.

Table of Contents

A ~~roll forward~~roll-forward of common shares outstanding is as follows:

Nine Months Ended

September 27, 2015

September 28, 2014

Balance at the beginning of the year

33,392,060

33,558,864

Repurchases

(851,882)

(288,382)

Shares issued upon exercise of stock options

5,200

101,350

Restricted share issuances

134,919

172,891

Balance at the end of the period

32,680,297

33,544,723



	Nine Months Ended
	September 30,	September 27,
	2016	2015
Balance at the beginning of the year	32,548,477	33,392,060
Repurchases	—	(851,882	)
Shares issued upon exercise of stock options	—	5,200
Restricted share issuances	211,032	134,919
Balance at the end of the period	32,759,509	32,680,297

Certain potentially dilutive restricted stock units are excluded from diluted earning per share because they are anti-dilutive. The number of awards that were anti-dilutive at September 30, 2016 and September 27, 2015 were 2,019 and 0, respectively.

NOTE 1314 - Equity-Based Compensation

At September ~~27, 2015,~~30, 2016, CTS had ~~five~~four equity-based compensation plans: ~~the 2001 Stock Option Plan (“2001 Plan”),~~ the Nonemployee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), and the 2014 Performance & Incentive Plan (“2014 Plan”). Future grants can only be made under the 2014 Plan.

The 2009 Plan, and previously the ~~2001 Plan and~~ 2004 Plan, provides for grants of incentive stock options or nonqualified stock options to officers, key employees, and ~~nonemployee~~non-employee members of CTS’ Board of Directors. In addition, the 2014 Plan, the 2009 Plan, and the 2004 Plan allow for grants of stock appreciation rights, restricted stock, ~~RSUs,~~restricted stock units ("RSUs"), performance shares, performance units, and other stock awards.

The following table summarizes the compensation expense included in ~~Selling,~~selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to equity-based compensation plans:

Three Months Ended

Nine Months Ended

($ in thousands)

September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

Service-Based RSUs

$
295

$
397

$
1,244

$
1,080

Performance-Based RSUs

(62)

146

709

419

Market-Based RSUs

60

117

702

340

Total

$
293

$
660

$
2,655

$
1,839

Income tax benefit

$
110

$
252

$
998

$
703



	Three Months Ended					Nine Months Ended
	September 30,		September 27,			September 30,		September 27,
	2016		2015			2016		2015
Service-Based RSUs	$	523	$	295		$	1,471	$	1,244
Performance-Based RSUs	132		(62		)	107		709
Market-Based RSUs	137		60			181		702
Total	$	792	$	293		$	1,759	$	2,655
Income tax benefit	$	298	$	110		$	661	$	998

~~Table of Contents~~

The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

Unrecognized

compensation

Weighted-

expense at

average

($ in thousands)

September 27, 2015

period

Service-Based RSUs

$
1,548

1.2
years

Performance-Based RSUs

1,118

1.2
years

Market-Based RSUs

614

1.0
years

Total

$
3,280



	Unrecognized
	compensation		Weighted-
	expense at		average
	September 30, 2016		period
Service-Based RSUs	$	1,532	1.3 years
Performance-Based RSUs	595		1.4 years
Market-Based RSUs	535		1.3 years
Total	$	2,662	1.3 years

CTS recognizes expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

Table of Contents

The following table summarizes the ~~status~~maximum number of awards available to be granted under these plans as of September ~~27, 2015:~~

30, 2016:

2014 Plan

2009 Plan

2004 Plan

2001 Plan

Awards originally available

1,500,000

3,400,000

6,500,000

2,000,000

Stock options outstanding

—

—

—

—

RSUs outstanding

78,947

240,091

131,857

—

Options exercisable

—

—

—

—

Awards available for grant

1,349,075

1,627,069

106,423

—



	2014 Plan	2009 Plan	2004 Plan	Directors' Plan
Awards originally available	1,500,000	3,400,000	6,500,000	N/A
Stock options outstanding	—	—	—	—
Options exercisable	—	—	—	—
Performance-based options outstanding	320,000	—	—	—
Service-based RSUs outstanding	253,826	169,444	78,947	25,985
Performance and market-based RSUs outstanding at 200% of target	337,300	86,120	—	—
RSUs vested and released	49,173	—	—	—
Awards available for grant	539,701	255,564	78,947	25,985

Stock Options

Stock options are exercisable in cumulative annual installments over a maximum 10-year period, commencing at least one year from the date of grant. Stock options are generally granted with an exercise price equal to the market price of CTS’ stock on the date of ~~grant. The stock options generally~~grant, vest over four years, and have a 10-year contractual life. The awards generally contain provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age requirements are met. The awards also provide for accelerated vesting if there is a change in control event.

CTS estimated the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for expected price volatility, option term, risk-free interest rate, and dividend yield. Expected price volatilities were based on historical volatilities of CTS’ common stock. The expected option term is derived from historical data on exercise behavior. The dividend yield was based on historical dividend payments. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant.

~~A summary of the status of~~has no stock options exercisable or outstanding as of September ~~27,~~30, 2016, other than the performance-based stock options described below.

Performance-Based Stock Options

During 2015 and ~~changes during the period then ended, is presented below:~~

Nine Months Ended

September 27, 2015

Weighted

Average

Exercise

Options

Price

Outstanding at beginning of year

5,200

$
12.35

Exercised

(5,200)

$
12.35

Outstanding at end of period

—

$
—

Exercisable at end of period

—

$
—

~~Table of Contents~~

~~Performance-Based Stock Options~~

~~During the second quarter of 2015,~~2016, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted a total of ~~430,000~~350,000 performance-based stock option awards (“Performance-Based Option Awards”) for certain CTS employees under the 2014 ~~Plan.~~Plan, of which 320,000 remain outstanding after considering forfeitures. The Performance-Based Option Awards ~~which~~ have ~~a grant date of May 26, 2015 and a grant date fair value~~an exercise price of $18.37, ~~are subject to the terms of the 2014 Plan. The Performance-Based Option Awards generally have~~ a term of five years, and generally will become exercisable (provided the optionee remains employed by CTS or an affiliate) upon CTS’ attainment of at least ~~$600,000,000~~$600,000 in revenues during any of CTS’ four-fiscal-quarter trailing periods (as determined by the Committee) during the term. CTS has not recognized any expense on these Performance-Based Option Awards for the nine months ended September ~~27, 2015~~30, 2016, since the revenue target is not deemed likely to be attained based ~~upon the CTS’ earnings history and forecast, at this time.~~

on our current forecast.

Service-Based Restricted Stock Units

Service-based RSUs entitle the holder to receive one share of common stock for each unit when the unit vests. RSUs are issued to officers, key employees and non-employee directors as compensation. Generally, the RSUs vest over a three-year period. RSUs granted to non-employee directors vest one month after ~~granted.~~the grant date. Upon ~~vesting, the~~grant, each non-employee ~~directors elect~~director elects to either receive the stock associated with the RSU immediately upon vesting, or defer receipt of the stock until ~~their~~his or her retirement from the Board of Directors. The fair value of the RSUs is equivalent to the trading value of CTS’ common stock on the grant date.

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A summary of the status of RSUs granted under the 2004, 2009, and 2014 plans is presented below:

Nine Months Ended

September 27, 2015

Weighted

Average

Grant Date

Units

Fair Value

Outstanding at January 1, 2015

517,965

$
12.06

Granted

125,525

17.10

Converted

(165,801)

12.41

Forfeited

(26,794)

17.20

Outstanding at September 27, 2015

450,895

$
13.03

~~Performance-Based~~



	Nine Months Ended
	September 30, 2016
	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016	471,196		$	13.27
Granted	164,922		13.97
Vested and released	(98,633	)	14.45
Forfeited	(35,268	)	17.05
Outstanding at September 30, 2016	502,217		$	12.93
Releasable at September 30, 2016	278,082		$	11.34

A summary of the status of RSUs granted under the Director's Plan is presented below:



	Nine Months Ended
	September 30, 2016
	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016	33,974		$	11.75
Granted	—		—
Vested and released	(7,989	)	11.75
Forfeited	—		—
Outstanding at September 30, 2016	25,985		$	11.75
Releasable at September 30, 2016	25,985		$	11.75

Performance and Market-Based Restricted Stock Units

CTS grants performance-based restricted stock unit awards ~~for~~to certain executives. Vesting may occur in the ~~range from~~amount of zero percent to 200% of the ~~target amount.~~grant target. Vesting is subject to certification of the ~~fiscal~~financial results offor the last year ~~prior to~~in the ~~target year~~performance period by CTS’ independent auditors. ~~Vesting~~The number of awards vesting is dependent upon CTS’ achievement of either sales growth targets or cash flow targets as ~~noted~~defined in the ~~table below.~~

~~Performance-Based RSUs include the following components:~~

Target

Vesting

Vesting

Units

Grant Date

Units

Year

Dependency

Awarded

February 11, 2013

47,164

2016

Sales growth

—

February 11, 2013

40,425

2016

Cash flow

—

February 14, 2014

15,071

2017

Sales growth

—

February 14, 2014

12,918

2017

Cash flow

—

February 13, 2015

24,150

2018

Sales growth

—

February 13, 2015

20,700

2018

Cash flow

—

agreements.

~~Table of Contents~~

~~Market-Based Restricted Stock Units~~

CTS grants market-based restricted stock unit awards ~~for~~to certain executives and key employees. Vesting may occur in the ~~range from~~amount of zero percent to 200% of the ~~target amount.~~grant target. Vesting is subject to certification of the ~~fiscal~~financial results for the last year of the ~~year prior to the~~ target ~~year~~range by CTS’ independent auditors. The number of awards vesting ~~rate will be~~is determined using a matrix based on a percentile ranking of ~~CTS~~CTS' total stockholder return with a peer group total shareholder return over athe three-year period comprising the performance period. Vesting is tied exclusively to ~~CTS~~CTS' total stockholder return relative to peer group companies’ total stockholder return ~~rates.~~

~~Market-Based RSUs include~~rates during the performance period.

The following ~~components:~~

table summarizes the performance and market-based RSU activity as of and for the nine months ended September 30, 2016:

Number of

Target

Vesting

Peer Group

Units

Grant Date

Units

Year

Companies

Awarded

February 11, 2013

40,425

2016

20

—

February 11, 2013

48,750

2016

20

—

February 14, 2014

15,071

2017

15

—

February 13, 2015

24,150

2018

23

—

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	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016	249,560		14.59
Granted	108,650		13.56
Attained by performance	97,017		10.48
Released	(234,517	)	10.52
Forfeited	(9,000	)	14.41
Outstanding at September 30, 2016	211,710		16.58
Maximum potential units outstanding at September 30, 2016	423,420		16.58

NOTE 1415 — Fair Value Measurements

CTS uses interest rate swaps to convert ~~the~~our line of credit’s variable rate of interest into a fixed ~~rate. The interest~~ rate ~~swaps~~and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis.

The table below summarizes CTS’ financial ~~liability~~assets (liabilities) that ~~was~~were measured at fair value ~~as of three month period~~at September ~~27, 2015 and the loss recorded during the nine month period ended September 27, 2015:~~

30, 2016:

Quoted

Prices

in Active

Significant

Carrying

Markets for

Other

Significant

Loss for

Value at

Identical

Observable

Unobservable

Nine Months Ended

September 27,

Instruments

Inputs

Inputs

September 27,

($ in thousands)

2015

(Level 1)

(Level 2)

(Level 3)

2015

Interest rate swap – cash flow hedge

$
1,074

$
—

$
1,074

$
—

$
574



				Quoted
				Prices
				in Active		Significant
	Carrying			Markets for		Other			Significant
	Value at			Identical		Observable			Unobservable
	September 30,			Instruments		Inputs			Inputs
	2016			(Level 1)		(Level 2)			(Level 3)
Interest rate swaps	$	(606	)	$	—	$	(606	)	$	—
Foreign currency hedges	$	(234	)	$	—	$	(234	)	$	—

The table below summarizes the financial liability that was measured at fair value on a recurring basis as of December 31, ~~2014 and the loss recorded during the year ended December 31, 2014:~~

2015:

Quoted

Prices

��

in Active

Significant

Carrying

Markets for

Other

Significant

Loss for

Value at

Identical

Observable

Unobservable

Year Ended

December 31,

Instruments

Inputs

Inputs

December 31,

($ in thousands)

2014

(Level 1)

(Level 2)

(Level 3)

2014

Interest rate swap – cash flow hedge

$
1,020

$
—

$
1,020

$
—

$
488

Quoted

Prices

in Active

Significant

Carrying

Markets for

Other

Significant

Value at

Identical

Observable

Unobservable

December 31,

Instruments

Inputs

2015

(Level 1)

(Level 2)

(Level 3)

Interest rate swaps

(768

)

—

(768

)

—

The fair value of ~~CTS’~~our interest rate swaps and foreign currency hedges were measured using ~~a market approach which uses current industry information.~~standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and ~~these swaps~~therefore they are classified within level 2 of the fair value hierarchy.

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The table below provides a reconciliation of the recurring financial ~~liability related to interest rate swaps:~~

assets (liabilities) for our derivative instruments:


	~~Interest~~
~~($ in thousands)~~	~~Rate Swaps~~
~~Balance at January 1, 2014~~	$	~~(998)~~
~~Total gains (losses) for the period:~~
~~Included in earnings~~		~~488~~
~~Included in other comprehensive earnings~~		~~(510)~~
~~Balance at December 31, 2014~~	$	~~(1,020)~~
~~Total gains (losses) for the period:~~
~~Included in earnings~~		~~574~~
~~Included in other comprehensive earnings~~		~~(628)~~
~~Balance at September 27, 2015~~	$	~~(1,074)~~



				Foreign
	Interest			Currency
	Rate Swaps			Hedges
Balance at January 1, 2015	$	(1,020	)	$	—
Realized gains included in earnings	768			—
Unrealized (losses)	(516		)	—
Balance at December 31, 2015	$	(768	)	$	—
Realized gains included in earnings	709			—
Unrealized (losses)	(547		)	(234		)
Balance at September 30, 2016	$	(606	)	$	(234	)

~~CTS’~~

CTS' long-term debt consists of ~~a revolving credit facility~~the Revolving Credit Facility which is recorded at its carrying value. There is a readily determinable market for ~~CTS’ revolving credit~~CTS' long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt ~~was measured using a market approach which uses current industry information and~~ approximates carrying ~~value.~~

value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.

NOTE 1516 — Income Taxes

The effective tax rates for ~~2015~~the three and ~~2014~~nine-month periods in 2016 and 2015 are as follows:

Three Months Ended

Nine Months Ended


September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

Effective tax rate

31.2
%
31.9
%
(59.2)
%
36.1
%

~~The 2015~~



	Three Months Ended				Nine Months Ended
	September 30,		September 27,		September 30,		September 27,
	2016		2015		2016		2015
Effective tax rate	68.3	%	31.2	%	43.2	%	(59.2	)%

CTS' effective income tax rate ~~for~~was 68.3% and 31.2% in the ~~three~~third quarter of 2016 and 2015, respectively. The tax rate in the third quarter and first nine months ~~ended September 27, 2015 reflects~~of 2016 reflected an increase in valuation allowances recorded against certain state net operating losses and tax credits and the ~~change~~revaluation of U.S. deferred taxes as a result of the June 2016 restructuring activities discussed in Note 7. The rates also reflect an increase in a valuation allowance on certain non-U.S. losses as a result of changes in the expectation of CTS' ability to utilize those losses, changes in the mix of earnings by jurisdiction, ~~as well as~~various other discrete items, CTS' decision to no longer permanently reinvest the ~~impact~~earnings of ~~true ups related~~its Canadian and U.K. subsidiaries, and tax expense for withholding taxes on earnings in China that are not anticipated to ~~the filing of 2014~~be maintained in China. CTS began recording tax ~~returns. For the nine months ended September 27, 2015, the effect of the uncertain tax benefits increased the effective tax rate by 42.9 percentage points and the effect of amending the tax returns~~expense for ~~2006 to 2013 decreased the effective rate by 122.1 percentage points~~

~~The 2014 effective tax rate reflected higher profits, primarily from a change~~withholding taxes in China in the ~~mix of earnings by jurisdiction, and the effect of tax adjustments which decreased the effective rate by 3.3 percentage points in the third~~fourth quarter of ~~2014~~2015 and ~~increased the effective rate by 0.4 percentage points in~~expects to continue this practice going forward. During the first nine months of ~~2014.~~

2015, CTS reflected a benefit attributable to filing amended U.S. federal tax returns in order to take credits for foreign taxes paid which was partially offset by a reserve recorded on an uncertain tax position.

CTS’ continuing practice is to recognize interest and/or penalties related to income tax matters as income tax expense. For the three ~~and nine~~ months ended September 30, 2016, and September 27, 2015, CTS accrued $181 and ~~September 28, 2014, CTS included $136,000 and $957,000~~$136 of interest or penalties in income tax expense. For the nine months ended September 30, 2016 and September 27, 2015, CTS ~~did not accrue any~~accrued $552 and $957 of interest or penalties ~~into~~in income tax expense.

Note 17 - Business Combinations

On March 11, 2016, CTS acquired all of the outstanding membership interests in CTG Advanced Materials, LLC (“CTG-AM”), a privately-held company, for $73 million in cash plus a working capital adjustment. CTG-AM, formerly operated as H.C. Materials, is the market leading designer and manufacturer of single crystal piezoelectric materials, serving major original equipment manufacturers throughout the medical marketplace. These materials enable high definition ultrasound imaging (3D and 4D), as well as intravascular ultrasound applications. Other applications for these materials include wireless pacemakers, implantable hearing aids, and defense technologies.

With the CTG-AM acquisition, CTS gains technology and proprietary manufacturing methods that expand its offering of piezoelectric materials. This allows CTS to become the leading large-scale commercial producer of both single crystal materials and traditional piezoelectric ceramics.

The purchase price of $73,063, net of cash acquired of $4, has been allocated to the fair values of assets and liabilities acquired as of March 11, 2016.

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The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:



	Fair Values at March 11, 2016
Current assets	$	4,215
Property, plant and equipment	6,173
Other assets	37
Goodwill	27,879
Intangible assets	35,427
Fair value of assets acquired	73,731
Less fair value of liabilities acquired	(668		)
Net cash paid	$	73,063

Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:



Intangible Asset Type	Fair Value		Weighted Average Amortization Period (in years)
Developed Technology	$	23,730	15.0
Customer Relationships and Contracts	11,502		14.6
Other	195		0.8
Total	$	35,427	14.8

CTS incurred $804 in transaction related costs during the nine months ended September 30, 2016. These costs are included in selling, general, and administrative costs in our Condensed Consolidated Statement of Earnings.

Results of operations for CTG -AM are included in our consolidated condensed financial statements beginning on March 11, 2016. The amount of net sales and net loss from CTG-AM since the acquisition date that have been included in the Condensed Consolidated Statement of Earnings are as follows:



	For the period March 11, 2016 through September 30, 2016
Net sales	$	7,096
Net earnings	$	256

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Supplemental Pro Forma Information

The unaudited pro forma amounts below include CTG-AM's revenues and earnings that would have been included in our Condensed Consolidated Statement of Earnings had the acquisition date been January 1, 2015.



	Three Months Ended					Nine Months Ended
	September 30,		September 27,			September 30		September 27,
	2016		2015			2016		2015
Net sales	$	99,697	$	93,818		$	297,407	$	299,123
Net earnings	$	3,720	$	(4,014	)	$	25,969	$	22,301

Earnings per share:
Basic	$	0.11	$	(0.12	)	$	0.79	$	0.67
Diluted	$	0.11	$	(0.12	)	$	0.78	$	0.66

The pro forma results have been prepared for informational purposes only and include adjustments to amortize acquired intangible assets with finite life, reflect additional interest expense on debt used to fund the acquisition, and to record the tax consequences of the pro forma adjustments. Included in the pro forma results are nonrecurring expenses for transaction costs of $0 and $804 and additional cost of goods sold of $0 and $1,151 for the three and ~~nine months~~nine-month periods ended September ~~28, 2014.~~

30, 2016 for inventory recognized at fair value as a result of acquisition-related adjustments.

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NOTE 1618 — Recent Accounting Pronouncements

ASU ~~2015-16.~~2016-15 "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance will not have a material impact on our consolidated financial statements.

ASU 2016-9 "Compensation-Stock Compensation (Topic 718): Improvement to Employee Share Based Payment Accounting"

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods. Early adoption is permitted. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

ASU 2016-5 "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships"

In March 2016, the FASB issued ASU No. 2016-5 "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". This amendment clarifies that a change in the counterparty to a derivative instrument does not on its own require dedesignation of the hedging instrument under Topic 815, provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. This update can be applied prospectively or retrospectively and is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. This update is not expected to have an impact to our financial statements.

ASU 2016-2 "Leases (Topic 842)"

In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability to the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees, the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.

The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be based on the present value of the lease payments. If a lease term is less than twelve month, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized straight-line over the term of the lease.

Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.

Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.

These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date.

The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those periods. Early adoption is allowed. The provisions of this guidance are still being evaluated and the impact on CTS' financial statements has not yet been determined.

ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”

In November 2015, FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes".The amendment requires Company's to begin classifying all deferred income taxes as non-current. The provisions are expected

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to simplify the presentation of deferred income taxes and align the presentation of deferred income taxes with the International Financial Reporting Standards ("IFRS"). The amendments in this update are effective for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The update can be applied prospectively or retrospectively.

The Company early adopted the above guidance on January 1, 2016 and elected to retrospectively apply its provisions. This resulted in reclassification of the amounts in our December 31, 2015 Consolidated Balance Sheet as shown in Note 1 - Basis of Presentation.

ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”

In September 2015, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments of Inventory". The amendments clarify that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements, the effect of changes in depreciation, amortization, or other income as a result of the change to the provisional amounts as if the accounting had been completed at the acquisition date. This amendment requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item, as if the provisional adjustments had

~~Table of Contents~~

been recognized as of the acquisition date. This ASU isbecame effective for ~~fiscal years beginning after December 15, 2015 including interim periods within those fiscal years. These~~CTS on January 1, 2016 and its provisions ~~are~~did not ~~anticipated to~~ have ~~a material~~an impact on our financial statements.

ASU ~~2015-11.~~ 2015-14~~“Inventory~~, "Revenue from Contracts with Customers (Topic ~~330): Simplifying the Measurement of Inventory”~~606)"

In ~~July~~August 2015, the FASB issued ASU ~~2015-11, "Inventory~~2015-14, "Accounting for Revenue from Contracts with Customers (Topic ~~330) Simplifying the Measurement of Inventory"~~606)". The amendments clarify that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. These provisions are not anticipated to have a material impact on our financial statements.

~~ASU 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115~~”

In May 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115”. This ASU amends various SEC paragraphs included in the FASB’s ASC to reflect the issuance of Staff Accounting Bulletin (“SAB”) No. 115. SAB 115 rescinds portions of the interpretiveamended guidance included in the SEC’s Staff Accounting Bulletin series and brings existing guidance into conformity with ASU 2014-17, Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.

An acquired entity is not only able to apply this amendment to change in control events occurring after the effective date, but is also permitted to apply pushdown accounting as a change in accounting principle to its most recent change in control event that had occurred beforedeferred the effective date of ~~this new amendment. The decision to apply pushdown accounting to a specific change in control event, if elected by an acquiree, is irrevocable.~~

The amendment also amends the reporting for a bargain purchase option. The acquired entity would not report a gain in its income statement as a result of a bargain purchase. Rather, the acquiree shall recognize the bargain purchase gain recognized by the acquirer as an adjustment to additional paid-in capital.

~~This amendment is effective immediately. This amendment does not have a material impact on our financial statements.~~

~~ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)~~”

In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. This amendment applies to reporting entities that elect to measure the fair value of an investment within the scope of paragraphs 820-10-15-4 through 15-5 using the net asset value per share (or its equivalent) practical expedient in paragraph 820-10-35-59. This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. It also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.

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The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. These provisions are not anticipated to have a material impact on our financial statements.

~~ASU 2015-04, “Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Benefit Obligation and Plan Assets~~”

In April 2015, FASB issued ASU 2015-04, “Compensation –Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”. The amended guidance permits companies to use a practical expedient which allows an employer to measure defined benefit plan assets and obligations as of the month-end date that is closest to the employer’s fiscal year-end (alternative measurement date). An employer using this policy election must apply it consistently to all of its defined benefit plans.

In accordance with this ASU, an employer using the practical expedient is required to adjust the funded status for contributions and other significant events (as defined in paragraph 715-30-35-66) occurring between the alternative measurement date and its fiscal year-end. Paragraph 715-30-35-66 defines a significant event as: a plan amendment, settlement, or curtailment that calls for remeasurement. This ASU also allows employers the use of the practical expedient in interim remeasurements of significant events.

The employer would be required to disclose the election to use the practical expedient and the measurement date of the plan assets and obligations. Early application of this ASU is permitted. Entities must apply the guidance prospectively.

The guidance is effective for financial statements for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The changes would be effective for employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. These provisions are not anticipated to have a material impact on our financial statements.

~~ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement~~”

In April 2015, the FASB issued ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. The amendments in this ASU provide guidance to customers about a customer’s accounting for fees paid in a cloud computing arrangement. This ASU clarifies that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer’s accounting for service contracts. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.

The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. For prospective transition, the disclosure requirements at transition include the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. These provisions are not anticipated to have a material impact on our financial statements.

~~Table of Contents~~

~~ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs~~”

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amended guidance require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.

Early adoption of this ASU is permitted for financial statements that have not been previously issued. Entities must apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These provisions are not anticipated to have a material impact on our financial statements.

~~ASU 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period~~”

In June 2014, the FASB issued ASU 2014-12, “Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition.

Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The amendments in this update provide explicit guidance for those awards.

The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments either prospectively to all awards granted or modified after the effective date, or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. These provisions are not anticipated to have a material impact on our financial statements.

ASU 2014-09 “~~Revenue~~"Revenue from Contracts with Customers”

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The new revenue recognition guidance more closely aligns U.S. GAAP with International Financial Reporting Standards ("IFRS"). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

~~To achieve that core principle, an entity should apply the following steps:~~

~~Step 1:~~(Topic 606)~~Identify the contract(s) with a customer.~~

~~Step 2:~~" ~~Identify the performance obligations in the contract.~~

~~Step 3:Determine the transaction price.~~

~~Step 4:Allocate the transaction price~~ to ~~the performance obligations in the contract.~~

~~Step 5:Recognize revenue when (or as) the entity satisfies a performance obligation.~~

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~~The guidance is effective for~~ annual periods beginning ~~on or~~ after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted ~~provided that it is not before the original effective date of~~for annual periods beginning after December 15, ~~2016. These provisions~~2016, and interim periods within that annual period. In addition, in April 2016 the FASB issued ASU 2016-10 "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)", which amends the revenue guidance on identifying performance obligations and accounting for intellectual property licenses. In May 2016, the FASB issued ASU 2016-12 "Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (Topic 606)", which provides additional guidance in assessing whether a transaction meets the definition of ~~this guidance are still being evaluated.~~revenue, in narrowed circumstances during the transition to ASU 2014-09 and subsequent to implementation. This update can either be applied under either a cumulative effect or retrospective method. ASU 2016-10 and ASU 2016-12 must be adopted concurrently with ASU 2014-09. The impact of ASU 2014-9 on ~~CTS'~~our financial statements has not yet been determined.

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Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations (“MD&A”)

(in thousands, except percentages and per share amounts)

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, ~~2014.~~

2015.

Overview

CTS Corporation (“CTS”, “we”, “our” or “us”) is a ~~global~~leading designer and manufacturer of products that Sense, Connect and Move. CTS manufactures sensors, actuators and electronic components in North America, Europe, and ~~sensors used primarily~~Asia, and supplies these products to OEMs in the ~~automotive,~~aerospace, communications, defense, industrial, information technology, medical and ~~aerospace, medical, industrial and computer~~transportation markets.

Results of Operations: Third Quarter ~~2015~~2016 versus Third Quarter ~~2014~~

2015

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September ~~27, 2015~~30, 2016, and September ~~28, 2014:~~

27, 2015:

Three Months Ended

Percent of

Percent of

(Amounts in thousands, except

    September 27,

September 28,

Percent

Net Sales –

Net Sales –

percentages and per share amounts)

2015

2014

  Change

2015

2014

Net sales

$
90,646

$
99,957

(9.3)

100.0

100.0

Cost of goods sold(1)

59,200

67,458

(12.2)

65.3

67.5

Gross margin

31,446

32,499

(3.2)

34.7

32.5

Selling, general and administrative expenses

12,690

13,899

(8.7)

14.0

13.9

Research and development expenses

5,692

5,807

(2.0)

6.3

5.8

Non-recurring environmental charge

14,541

—

—

16.0

—

Restructuring and impairment charges

2,373

1,570

51.1

2.6

1.6

Total operating expenses

35,296

21,276

65.9

38.9

21.3

Operating (loss) earnings

(3,850)

11,223

(134.3)

(4.2)

11.2

Other (expense) income

(3,073)

701

(538.4)

(3.4)

0.7

Earnings before income taxes

(6,923)

11,924

(158.1)

(7.6)

11.9

Income tax expense (benefit)

(2,163)

3,807

(156.8)

(2.4)

3.8

Net (loss) earnings

$
(4,760)

$
8,117

(158.6)

(5.2)

8.1

(Loss) earnings per share:

Diluted net earnings per share

$
(0.15)

$
0.24

~~(1)~~

~~Cost of goods sold includes restructuring related charges of $152 in 2015 and $494 in 2014.~~



	Three Months Ended								Percent of		Percent of
	September 30,			September 27,			Percent		Net Sales –		Net Sales –
	2016			2015			Change		2016		2015
Net sales	$	99,697		$	90,646		10.0		100.0		100.0
Cost of goods sold(1)	63,056			59,200			6.5		63.2		65.3
Gross margin	36,641			31,446			16.5		36.8		34.7
Selling, general and administrative expenses	16,048			12,689			26.5		16.1		14.0
Research and development expenses	6,284			5,692			10.4		6.3		6.3
Non-recurring environmental charge	—			14,541			—		—		16.0
Restructuring and impairment charges	1,969			2,373			(17.0	)	2.0		2.6
(Gain) loss on sale of assets	(150		)	1			—		(0.1	)	—
Total operating expenses	24,151			35,296			(31.6	)	24.3		38.9
Operating earnings	12,490			(3,850		)	(424.4	)	12.5		(4.2	)
Total other expense	(760		)	(3,073		)	(75.3	)	(0.8	)	(3.4	)
Earnings (loss) before income taxes	11,730			(6,923		)	(269.4	)	11.7		(7.6	)
Income tax expense (benefit)	8,010			(2,163		)	(470.3	)	8.0		(2.4	)
Net earnings (loss)	$	3,720		$	(4,760	)	(178.2	)	3.7		(5.2	)
Earnings per share:
Diluted net earnings per share	$	0.11		$	(0.15	)

(1) Cost of goods sold includes restructuring related charges of $0 in 2016 and $152 in 2015.

Sales of ~~$90,646,000~~$99,697 in the third quarter of ~~2015 decreased $9,311,000~~2016 increased $9,051 or ~~9.3%~~10.0% from the third quarter of ~~2014.~~2015. Sales to automotive markets ~~declined $4,486,000 due to lower~~increased $3,173 driven by higher volumes ~~and~~which were partially offset by unfavorable foreign exchange impact. Other sales ~~declined $4,825,000~~increased $5,878 due to ~~lower volume~~the addition of sales from the single crystal acquisition and higher demand for electronic ~~components.~~components in certain end markets. Changes in foreign exchange rates ~~caused $1,700,000 of the total~~reduced sales ~~decrease, driven~~ by $600 year-over-year due to the U.S. Dollar appreciating compared to the ~~Euro~~Chinese Renminbi and relating mostly to sales of automotive products.

Gross margin as a percent of sales was 36.8% in the third quarter of 2016 compared to 34.7% in the third quarter of ~~2015 compared to 32.5% in the third quarter of 2014.~~2015. The increase in gross margin resulted from cost savings from continued efficiency gains, material and labor productivity projects, ~~and~~ savings from restructuring ~~projects.~~projects, favorable mix, and the addition of sales from the single crystal acquisition. In addition, foreign exchange rates had a favorable impact on manufacturing costs asprimarily due to the strengthening of the U.S. Dollar ~~appreciated against various local currencies in countries in which we have manufacturing operations.~~

compared to the Mexican Peso.

Selling, general and administrative expenses were ~~$12,690,000~~$16,048 or ~~14.0%~~16.1% of sales in the third quarter of ~~2015~~2016 versus ~~$13,899,000~~$12,689 or ~~13.9%~~14.0% of sales in the comparable quarter of ~~2014.~~2015. The ~~decrease was~~increase is primarily ~~due~~attributable to ~~continued~~

added costs as a result of the single crystal

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~~efficiency gains from restructuring projects implemented over~~

acquisition, including amortization of intangibles, and the ~~past several quarters as well as cost containment efforts.~~

timing of certain expenses. In addition, CTS paid an early termination fee related to its leased facility in Lisle, Illinois in anticipation of a move in the 2017/2018 time frame to another leased facility in the same area, which will consolidate the Bolingbrook and Lisle, Illinois sites into one facility and reduce ongoing expenses.

Research and development expenses were ~~$5,692,000~~$6,284 or 6.3% of sales in the third quarter of ~~2015~~2016 compared to ~~$5,807,000~~$5,692 or ~~5.8%~~6.3% of sales in the comparable quarter of ~~2014.~~2015. The increase was related to continued investment in new products to drive organic growth. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements.

A non-recurring environmental charge of ~~$14,541,000 that~~$14,541 was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina. The charge recorded ~~includes~~included both the interim remediation proposed by CTS and accepted by the Environmental Protection Agency ~~(“EPA”~~("EPA") and anticipated future remediation ~~costs~~ and monitoring for a final site-wide remediation. As assessments and cleanups proceed, CTS may need to adjust its reserve for the Asheville site based on progress made in determining the extent of remedial actions and related costs.

monitoring.

Restructuring and impairment charges were $1,969 or 2.0% of sales in the third quarter ~~totaled $2,373,000 and~~2016 compared to $2,373 or 2.6% of sales in the second quarter of 2015. The 2016 charges are for severance costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan announced in June 2016. The 2015 charges consist primarily of severance, transition and shutdown costs related to the consolidation of ~~CTS’~~CTS' Canadian operation in Streetsville, Ontario into other CTS facilities. Also included in the third quarter charges are severance and restructuring costs in Singapore and China. The third quarter 2014 restructuring charges totaled $1,570,000 and consisted primarily of accruals for severance costs related to the consolidation of CTS’ Canadian operation into other CTS facilities, severance costs in China and at CTS’s corporate office as well as a lease impairment charge in the UK.

Operating ~~loss was $3,850,000~~earnings were $12,490 or ~~4.2%~~12.5% of sales in the third quarter of ~~2015~~2016 compared to ~~earnings~~an operating loss of ~~$11,223,000~~$3,850 or ~~11.2%~~(4.2)% of sales in the comparable quarter of ~~2014~~2015 as a result of the items discussed above.

Other income and expense items are summarized in the following table:

Three Months Ended

September 27,

September 28,

($ in thousands)

2015

2014

Interest expense

$
(714)

$
(568)

Interest income

713

707

Other (expense) income, net

(3,072)

562

Total other (expense) income

$
(3,073)

$
701



	Three Months Ended
	September 30,			September 27,
	2016			2015
Interest expense	$	(917	)	$	(714	)
Interest income	203			713
Other expense, net	(46		)	(3,072		)
Total other expense	$	(760	)	$	(3,073	)

Interest expense increased in the third quarter of ~~2015~~2016 versus the third quarter of ~~2014 primarily~~2015 as a result of higher borrowings related to the single crystal acquisition. Interest income decreased due to ~~higher outstanding debt in 2015. Interest income increased slightly due to higher~~lower cash balances. ~~The increase in other~~Other expense in the third quarter of 2015 was driven by ~~unfavorable~~ foreign currency translation losses, primarily due to the appreciation of the U.S. Dollar compared to the Chinese ~~Renminbi, while other~~Renminbi.



	Three Months Ended
	September 30,		September 27,
	2016		2015
Effective tax rate	68.3	%	31.2	%

CTS' effective income tax rate was 68.3% and 31.2% in the third quarter of ~~2014 was driven by collection of bad debts~~2016 and ~~favorable foreign exchange impact related to the appreciation of the Chinese Renminbi which was partially offset by unfavorable foreign exchange impact related to the depreciation of the Euro.~~

Three Months Ended


September 27,

September 28,

2015

2014

Effective tax rate

31.2
%
31.9
%

2015, respectively. The ~~effective income~~ tax rate ~~for~~in the third quarter of ~~2015 was 31.2%, which~~2016 reflected an increase in valuation allowances recorded against certain state net operating losses and tax credits and the revaluation of U.S. deferred taxes as a result of the June 2016 restructuring activities discussed in Note 7. The rate also reflects an increase in a valuation allowance on certain non-U.S. losses as a result of changes in the ~~change~~expectation of CTS' ability to utilize those losses, changes in the mix of earnings by jurisdiction, ~~as well as~~various other discrete items, CTS' decision to no longer permanently reinvest the ~~impact~~earnings of ~~true ups related~~its Canadian and U.K. subsidiaries, and tax expense for withholding taxes on earnings in China that are not anticipated to be maintained in China. CTS began recording tax expense for withholding taxes in China in the ~~filing of 2014 tax returns. In the third~~fourth quarter of ~~2014, the effective tax rate was 31.9%, which reflected higher profits, primarily from a change in the mix of earnings by jurisdiction~~2015 and ~~the effect of tax adjustments which decreased the effective rate by 3.3%.~~

expects to continue this practice going forward.

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Results of Operations: Nine months ended September ~~27, 2015~~30, 2016 versus ~~nine~~Nine months ended September ~~28, 2014~~

27, 2015

The following table highlights changes in significant components of the ~~Unaudited~~unaudited Condensed Consolidated Statements of Earnings for the nine ~~month periods~~months ended September ~~27, 2015~~30, 2016, and September ~~28, 2014:~~

~~(Amounts in thousands, except percentages and per share amounts):~~

27, 2015:

Nine months ended

Percent of

Percent of

(Amounts in thousands, except

September 27,

September 28,

Percent

Net Sales –

Net Sales –

percentages and per share amounts)

2015

2014

Change

2015

2014

Net sales

$
289,028

$
303,643

(4.8)

100.0

100.0

Cost of goods sold(1)

192,073

206,706

(7.1)

66.5

68.1

Gross margin

96,955

96,937

0.0

33.5

31.9

Selling and general and administrative expenses

43,625

43,353

0.6

15.1

14.3

Research and development expenses

16,378

16,765

(2.3)

5.7

5.5

Non-recurring environmental charge

14,541

—

—

5.0

—

Restructuring and impairment charges

5,229

4,806

8.8

1.8

1.6

Total operating expenses

79,773

64,924

22.9

27.6

21.4

Operating earnings

17,182

32,013

(46.3)

5.9

10.5

Other expense

(4,242)

(1,422)

198.3

(1.4)

(0.5)

Earnings before income taxes

12,940

30,591

(57.7)

4.5

10.1

Income tax expense (benefit)

(7,667)

11,033

(169.5)

(2.6)

3.6

Net earnings

$
20,607

$
19,558

5.4

7.1

6.4

Earnings per share:

Diluted net earnings per share

$
0.61

$
0.57



	Nine Months Ended								Percent of		Percent of
	September 30,			September 27,			Percent		Net Sales –		Net Sales –
	2016			2015			Change		2016		2015
Net sales	$	295,095		$	289,028		2.1		100.0		100.0
Cost of goods sold(1)	190,528			192,073			(0.8	)	64.6		66.5
Gross margin	104,567			96,955			7.9		35.4		33.5
Selling, general and administrative expenses	46,459			43,623			6.5		15.8		15.1
Research and development expenses	18,414			16,378			12.4		6.2		5.7
Non-recurring environmental charge	—			14,541			—		—		5.0
Restructuring and impairment charges	2,175			5,229			(58.4	)	0.7		1.8
(Gain) loss on sale of assets	(11,501		)	2			—		(3.9	)	—
Total operating expenses	55,547			79,773			(30.4	)	18.8		27.6
Operating earnings	49,020			17,182			185.3		16.6		5.9
Total other expense	(3,146		)	(4,242		)	(25.8	)	(1.1	)	(1.4	)
Earnings (loss) before income taxes	45,874			12,940			254.5		15.5		4.5
Income tax expense (benefit)	19,804			(7,667		)	(358.3	)	6.7		(2.6	)
Net earnings	$	26,070		$	20,607		26.5		8.8		7.1
Earnings per share:
Diluted net earnings per share	$	0.79		$	0.61

(1) Cost of goods sold includes restructuring related ~~costs~~charges of$0 in 2016 and $444 in ~~2015 and $1,404 in 2014.~~

2015.

Sales of ~~$289,028,000~~$295,095 in the ~~first~~ nine months ~~of 2015 decreased $14,615,000~~ended September 30, 2016 increased $6,067 or ~~4.8%~~2.1% from the ~~comparable period of 2014.~~nine months ended September 27, 2015. Sales to automotive markets ~~decreased $11,008,000 due to lower~~increased $1,712 driven by higher volumes ~~and~~which were partially offset by unfavorable foreign exchange impact. Other sales ~~declined $3,607,000~~increased $4,355 due to the addition of sales from the single crystal acquisition which were partially offset by lower ~~volumes of~~demand for electronic ~~components.~~components in certain end markets. Changes in foreign exchange rates ~~caused $6,200,000 of~~reduced sales by $1,697 year-over-year due to the ~~total sales decrease, driven by the U.S~~U.S. Dollar appreciating compared to the ~~Euro~~Chinese Renminbi and relating mostly to sales of automotive products.

Gross margin as a percent of sales was 35.4% in the first nine months of 2016 compared to 33.5% in the first nine months of ~~2015 versus 31.9% in the comparable period of 2014.~~2015. The increase in gross margin resulted from cost savings from continued efficiency gains, material and labor productivity projects, ~~and~~ savings from restructuring ~~projects.~~projects, favorable mix, and the addition of sales from the single crystal acquisition. In addition, foreign exchange rates had a favorable impact on manufacturing costs asprimarily due to the strengthening of the U.S. Dollar ~~appreciated against various local currencies in countries in which we have manufacturing operations.~~

compared to the Mexican Peso.

Selling, general and administrative expenses were ~~$43,625,000~~$46,459 or 15.8% of sales in the nine-month period ended September 30, 2016 versus $43,623 or 15.1% of sales in the ~~nine month~~comparable year-to-date period in 2015. Expenses in 2016 include added costs as a result of ~~2015 versus $43,353,000 or 14.3%~~the single crystal acquisition, including amortization of ~~sales~~intangibles. In addition, CTS paid an early termination fee related to its leased facility in Lisle, Illinois in anticipation of a move in the ~~comparable period of 2014.~~

2017/2018 time frame to another leased facility in the same area, which will consolidate the Bolingbrook and Lisle, Illinois sites into one facility and reduce ongoing expenses.

Research and development expenses were ~~$16,378,000~~$18,414 or 6.2% of sales in the nine months ended September 30, 2016 compared to $16,378 or 5.7% of sales in the ~~nine month period of 2015 compared~~comparable prior year period. The increase was related to ~~$16,765,000 or 5.5% of sales~~continued investment in ~~the comparable period of 2014.~~new products to drive organic growth. Research and development expenses are ~~primarily~~ focused on expanded applications of existing products and new product development as well as current product and process enhancements.

A non-recurring environmental charge of ~~$14,541,000 that~~$14,541 was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina. The charge recorded ~~includes~~included both the interim remediation proposed by CTS and accepted by the ~~EPA~~Environmental Protection Agency ("EPA") and anticipated future remediation ~~costs~~ and ~~monitoring for a final site-wide remediation. As assessments and~~

monitoring.

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~~cleanups proceed, CTS may need to adjust its reserve for the Asheville site based on progress made in determining the extent of remedial actions and related costs.~~

Restructuring and impairment charges were $2,175 or 0.7% of sales in the first nine months of 2016 compared to $5,229 or 1.8% of sales in the first half of 2015. The 2016 charges are for severance costs related to the ~~nine month period ending September 27,~~restructuring of certain operations as part of the 2016 Restructuring Plan announced in June 2016. The 2015 ~~totaled $5,229,000 and~~charges consist primarily of severance, ~~training~~transition and shutdown costs related to the consolidation of ~~CTS’~~CTS' Canadian operation in Streetsville, Ontario into other CTS facilities. ~~Also~~The information as set forth under Note 7, Costs Associated with Exit and Restructuring Activities, in the condensed consolidated financial statements included in ~~2015 are costs to close~~Part I, Item 1 of this report is incorporated herein by reference.

The gain on sale of assets is driven primarily by the ~~Brugg facility as well as other severance and restructuring costs~~gain on sale of the building in Singapore and China. Restructuring and impairment charges for the nine month period ending September 28, 2014 totaled $4,806,000 and consisted primarily of severance costs related to the consolidation of CTS’ Canadian operation into other CTS facilities, severance costsCanada in ~~China and at CTS’ corporate office and lease impairment costs in the UK.~~

June 2016.

Operating earnings were ~~$17,182,000~~$49,020 or 16.6% of sales in the nine months ended September 30, 2016 compared to operating earnings of $17,182 or 5.9% of sales ~~for~~in the nine ~~month period ending~~months ended September 27, 2015 ~~compared to $32,013,000 or 10.5% of sales in the comparable period of 2014~~ as a result of the items discussed above.

Other income and expense items are summarized in the following table:

Nine Months Ended

September 27,

September 28,

($ in thousands)

2015

2014

Interest expense

$
(1,955)

$
(1,763)

Interest income

2,354

1,959

Other income, net

(4,641)

(1,618)

Total other income (expense)

$
(4,242)

$
(1,422)



	Nine Months Ended
	September 30,			September 27,
	2016			2015
Interest expense	$	(2,746	)	$	(1,955	)
Interest income	1,082			2,354
Other expense, net	(1,482		)	(4,641		)
Total other expense	$	(3,146	)	$	(4,242	)

Interest expense increased in the first nine ~~month period~~months of 2016 versus the nine months of 2015 ~~versus the comparable period in 2014~~ as a result of higher ~~outstanding~~ borrowings ~~in 2015.~~related to the single crystal acquisition. Interest income ~~increased primarily~~decreased due to ~~higher~~lower cash balances. Other expense in the first nine ~~month period~~months of 2016 is largely the result of foreign currency translation losses, primarily due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi. Other expense in the first nine months of 2015 ~~increased as the amount of currency related impact in 2015~~ was ~~significantly higher than~~also driven by foreign currency ~~impact in same period of 2014. The foreign currency loss in 2015 and 2014 was~~translation losses, primarily due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi, Euro and ~~the Euro.~~

Canadian Dollar.

Nine Months Ended


September 27,

September 28,

2015

2014

Effective tax rate

(59.2)
%
36.1
%

~~The~~



	Nine Months Ended
	September 30,		September 27,
	2016		2015
Effective tax rate	43.2	%	(59.2	)%

CTS' effective income tax rate ~~for~~was 43.2% and (59.2)% in the first nine months ~~ending September 27,~~of 2016 and 2015, ~~was a negative 59.2%.~~respectively. The ~~effect of uncertain tax benefits increased the effective~~ tax rate ~~by 42.9 percentage points~~in the first nine months of 2016 reflected an increase in valuation allowances recorded against certain state net operating losses and tax credits and the ~~effect~~revaluation of ~~amending~~U.S. deferred taxes as a result of the ~~tax returns for 2006~~June 2016 restructuring activities discussed in Note 7. The rate also reflects an increase in a valuation allowance on certain non-U.S. losses as a result of changes in the expectation of CTS' ability to ~~2013 decreased the effective rate by 122.1 percentage points. The effective income tax rate for the nine months ending September 28, 2014 was 36.1%.~~ ~~The 2014 effective rate reflects higher profits primarily from a change~~utilize those losses, changes in the mix of earnings by jurisdiction, various other discrete items, CTS' decision to no longer permanently reinvest the earnings of its Canadian and ~~the effect of~~U.K. subsidiaries, and tax ~~adjustments made~~expense for withholding taxes on earnings in China that are not anticipated to be maintained in China. CTS began recording tax expense for withholding taxes in China in the ~~comparable period~~fourth quarter of ~~2014.~~

2015 and expects to continue this practice going forward. During the first nine months of 2015, CTS reflected a benefit attributable to filing amended U.S. federal tax returns in order to take credits for foreign taxes paid which was partially offset by a reserve recorded on an uncertain tax position.

Liquidity and Capital Resources

Cash and cash equivalents were ~~$150,755,000~~$114,433 at September ~~27, 2015~~30, 2016 and ~~$134,508,000~~$156,928 at December 31, ~~2014.~~2015, of which $113,359 and $156,310, respectively, were held outside the United States. The ~~increase~~decrease in cash and cash equivalents of $42,495 was primarily driven by cash used in investing activities of $75,282, which included a payment for a business acquisition in the amount of $73,063, capital expenditures of $14,467 and offset by net borrowings on our credit facility of $5,300 proceeds from the sale of assets of $12,248, and cash generated from operations ~~which exceeded the cash used for financing and investing activities.~~of $31,587. Total debt was $96,000 as of September ~~27, 2015 was $90,500,000~~30, 2016 and at$90,700 as of December 31, ~~2014 was $75,000,000.~~2015. Total debt as a percentage of total capitalization, ~~was 23.4% at September 27, 2015 compared to 20.6% at December 31, 2014. Total debt as a percentage of total capitalization is~~ defined as the sum of ~~notes payable and~~ long-term debt as a percentage of total debt and ~~shareholders’ equity.~~

shareholders' equity, was 23.9% at September 30, 2016, compared to 24.4% at December 31, 2015.

Working capital ~~increased~~decreased by ~~$5,686,000 from December 31, 2014 to~~$35,626 during the nine months ended September ~~27, 2015,~~30, 2016, primarily due to ~~a $16,247,000 increase~~the aforementioned decrease in cash and cash equivalents and a $3,860,000 decrease in accounts payable which were partially offset by a $15,481,000 increase in accrued liabilities and payroll and benefits. The increase in accrued liabilities was driven by a $14,541,000 environmental charge noted in the Results of Operations section of the MD&A.

equivalents.

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Cash Flows from Operating Activities

Net cash provided by operating activities was ~~$24,118,000~~$31,587 during the first nine months of ~~2015.~~2016. Components of net cash provided by operating activities included net earnings of ~~$20,607,000, an environmental charge of $14,541,000,~~$26,070, depreciation and amortization expense of ~~$11,987,000~~$14,010, and ~~net changes~~equity-based compensation of ~~other non-cash items such as~~$1,759 offset by amortization of retirement ~~benefits~~benefit adjustments ~~equity based compensation, restructuring charges and prepaid pension asset totaling $6,075,000 which were offset by~~of $1,188, net changes in assets and liabilities of ~~$29,092,000. The net changes in~~$8,055, and other non-cash items such as gains on sales of fixed assets, ~~and liabilities were primarily driven by increases in~~ deferred income taxes, and ~~accounts receivable and decreases in accounts payable and accrued liabilities.~~

restructuring charges of $1,009.

Cash Flows from Investing Activities

Net cash used in investing activities for the first nine months of ~~2015~~2016 was ~~$4,681,000,~~$75,282, which ~~was comprised~~includes a payment for a business acquisition of ~~$6,559,000~~$73,063, net of cash acquired, $14,467 for capital expenditures ~~partially~~and offset by ~~a $1,878,000 gain on~~proceeds from the sale of ~~assets.~~

assets of $12,248.

Cash Flows from Financing Activities

Net cash ~~used~~provided by financing activities for the first nine months of ~~2015~~2016 was ~~$3,899,000. The primary driver for~~$2,073. These cash inflows were the ~~cash outflow~~result of net borrowings under our credit facility totaling $5,300 and windfall tax benefits from ~~financing activities were $15,623,000 paid to purchase shares~~equity awards of ~~CTS common stock and $3,984,000 of dividend payments~~$696 which were partially offset by ~~a $15,500,000 increase in net borrowings.~~

dividend payments of $3,923.

Capital Resources

Long‑term debt was comprised of the following:



	As of
	September 30,			December 31,
	2016			2015
Revolving credit facility due in 2020	$	96,000		$	90,700
Weighted average interest rate	1.9		%	1.5		%
Amount available	$	201,835		$	106,985
Total credit facility	$	300,000		$	200,000
Standby letters of credit	$	2,165		$	2,315
Commitment fee percentage per annum	0.25		%	0.25		%

The Revolving Credit Facility replaces the prior unsecured credit facility. Borrowings of $93,000,000 under the previous credit agreement were refinanced under the new Revolving Credit Facility and the previous credit agreement was terminated as of August 10, 2015.

~~Long‑term debt was comprised of the following:~~

~~The revolving credit facility~~ requires, among other things, that CTS comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure of CTS to comply with these covenants could reduce the borrowing availability under the ~~revolving credit facility.~~Revolving Credit Facility. CTS was in compliance with all debt covenants at September ~~27, 2015.~~

30, 2016.

~~During the first nine months of 2015, we repurchased 851,882 shares of CTS common stock at a total cost of $15,623,000, or an average price of $18.34 per share.~~

~~Table of Contents~~

~~As of September 27, 2015, CTS’ intent~~Generally, CTS' practice and intention is to ~~permanently~~ reinvest ~~funds~~the earnings of its non-U.S. subsidiaries outside the U.S. However, CTS determined during 2015 that as a result of changes in the business, the foreign earnings of its subsidiaries in Canada and the U.K. were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded at that time. Any repatriation may not result in significant cash income tax payments as the taxable event would likely be offset by the utilization of the then available tax credits, resulting in no significant net ~~operating losses and tax credits.~~cash taxes being incurred. CTS does not provide for U.S. income taxes on undistributed earnings of its foreign subsidiaries that are intended to be permanently reinvested.

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our ~~credit agreements.~~Revolving Credit Facility. We believe that cash flows from operating activities and available borrowings

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under our ~~current credit agreements~~Revolving Credit Facility will be adequate to fund our working capital, capital expenditures and debt service requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Critical Accounting Policies and Estimates

Management prepared the consolidated financial statements of CTS under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available.

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating ~~CTS’~~CTS' reported financial results.

Revenue Recognition

Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment, provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:



Credit reviews of all new customer accounts,



Ongoing credit evaluations of current customers,



Credit limits and payment terms based on available credit information,



Adjustments to credit limits based upon payment history and the ~~customer’s~~customer's current credit worthiness,



An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and

~~Limited credit insurance on the majority of our international receivables.~~

We reserve for estimated credit losses based ~~upon~~on historical experience and specific customer collection issues. Over the last three years, accounts receivable ~~allowance varied from~~reserves have been approximately 0.2% to ~~0.5%~~0.3% of total accounts receivable. We believe our ~~allowance for doubtful accounts~~reserve level is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations and the ~~provisions~~reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the ~~first‑in, first‑out (“FIFO”~~first-in, first-out ("FIFO") method, or the current estimated market value. We review inventory quantities on hand and record a ~~reserve~~provision for excess and obsolete inventory based on forecasts of product demand and production requirements.

~~Table of Contents~~

Over the last three years, our reserves for excess and obsolete inventories have ranged from ~~8.1%~~17.5% to ~~15.3%~~20.4% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our pension benefit obligation. We utilize actuaries from consulting companies in each applicable country to develop our discount rates that match ~~high‑quality~~high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets and a rate of compensation increase in determining our annual pension income and expense and the projected benefit obligation. During the fourth quarter of each year, we review our 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 effect on our results of operations.

Valuation of Goodwill

Goodwill of a reporting unit is tested for impairment ~~between annual tests~~annually, or more frequently if an event occurs or circumstances change that would ~~more likely than not~~more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:



Significant decline in market capitalization relative to net book value,

Significant adverse change in legal factors or in the business climate,



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Adverse action or assessment by a regulator,



Unanticipated competition,

~~Loss of key personnel,~~

~~More‑likely‑than‑not~~

More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,



Testing for recoverability of a significant asset group within a reporting unit, and



Allocation of a portion of goodwill to a business to be ~~disposed of.~~

disposed.

If CTS believes that one or more of the above indicators of impairment have occurred, ~~it performs~~we perform an impairment test. The performance of the test involves a ~~two‑step~~two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using two valuation methods: ~~Income~~"Income Approach — Discounted Cash Flow ~~Method~~Method" and ~~Market~~"Market Approach — Guideline Public Company ~~Method.~~Method". The approach defined below is based upon our last impairment test conducted as of ~~December 31, 2014.~~

October 1, 2015.

Under the ~~“Income~~"Income Approach — Discounted Cash Flow ~~Method”~~Method", the key assumptions consider sales, cost of sales and operating expenses projected through the year ~~2018.~~2020. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues, ~~and~~ operating expenses, and gross margin assumptions. The fourth key assumption under this approach is the discount rate which is determined by looking at current ~~risk‑free~~risk-free rates, ~~of capital,~~ current market interest rates and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change which could result in impairment.

Under the ~~“Market~~"Market Approach — Guideline Public Company ~~Method”~~Method", we identified eight publicly traded companies, including CTS, which we believe have significant relevant similarities. For these eight companies, we calculated the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the Income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates were the key assumptions utilized. The market prices of CTS and other guideline company shares are also key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.

~~Table of Contents~~

The results of these two methods are weighted based upon ~~management’s~~management's determination. The Market approach is based upon historical and current economic conditions, which might not reflect the ~~long‑term~~long-term prospects or opportunities for ~~CTS’~~CTS' business being evaluated.

If the carrying amount of a reporting unit exceeds the reporting ~~unit’s~~unit's fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment ~~loss. The second step of the goodwill impairment test~~loss, which involves comparing the implied fair value of the affected reporting ~~unit’s~~unit's goodwill with the carrying value of that goodwill.

There have not been any significant changes to our impairment testing methodology other than ~~updating~~updates to the assumptions to reflect the current market environment. As discussed above, key assumptions used in the first step of the goodwill impairment test were determined by management utilizing ~~the~~CTS' internal operating plan. The key assumptions utilized include forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current ~~risk‑free~~risk-free rates of capital, current market interest rates and the evaluation of a risk premium relevant to the business segment. CTS will monitor future results and will perform a test if indicators trigger an impairment review.

We test the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Based upon our latest assessment, we determined that our goodwill was not impaired as of ~~the end~~December 31, 2015, and there have been no further indicators of ~~December 2014.~~

goodwill impairment since that time.

Valuation of ~~Long‑Lived~~Long-Lived and Other Intangible Assets

We evaluate the impairment of identifiable intangibles and other ~~long‑lived~~long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of:



Significant underperformance relative to expected historical or projected future operating results,



Significant changes in the manner of use of the acquired assets or the strategy for the overall business,



Significant negative industry or economic trends,



Significant decline in ~~CTS’~~CTS' stock price for a sustained period, and



Significant decline in market capitalization relative to net book value.

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If CTS believes that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test ~~has~~ failed in the case of amortizable assets, it measures impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows.

Income Taxes

CTS ~~has~~ identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal, state and foreign net operating losses. CTS intends to utilize these net operating loss carryforwards to offset future income taxes.

~~CTS’~~

CTS' practice is to recognize interest and penalties related to income tax matters as part of income tax expense.

CTS earns a significant amount of its operating income outside of the U.S., which is generally deemed to be permanently reinvested in foreign jurisdictions. However, CTS determined during 2015 that as a result of changes in the business, the foreign earnings of its subsidiaries in Canada and the U.K. were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded. CTS does not intend to repatriate funds beyond the amount from its Canadian and U.K. subsidiaries; however, should CTS require more capital in the U.S. than is generated by our domestic operations, ~~locally,~~ CTS could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. Repatriation ~~could~~would result in a higher effective tax ~~rates.~~rate. Borrowing in the U.S. would result in increased interest expense.

Significant Customers

~~Table of Contents~~

~~Significant Customer~~

Our net sales to ~~significant~~ customers ~~as a percentage~~representing at least 10% of total net sales were as follows:

Three Months Ended

Nine Months Ended

September 27,

September 28,

September 27,

September 28,


2015

2014

2015

2014

Customer A

11.7
%
11.3
%
10.5
%
10.6

Customer B

10.3
%
8.7
%
9.5
%
7.9

Customer C

10.0
%
7.9
%
9.0
%
7.6

~~No other customer accounted for 10% or more of total net sales during these periods.~~



	Three Months Ended				Nine Months Ended
	September 30,		September 27,		September 30,		September 27,
	2016		2015		2016		2015
Honda Motor Co.	10.5	%	11.7	%	10.8	%	10.5	%
Toyota Motor Corporation	9.9	%	10.3	%	10.5	%	9.5	%
Cummins Inc.	9.5	%	10.0	%	9.8	%	9.0	%

Forward‑Looking Statements

This document contains statements that are, or may be deemed to be, forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‑looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward‑looking statements are based on management’s expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward‑looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward‑looking statements are made subject to certain risks, uncertainties and other factors, which could cause our actual results, performance or achievements to differ materially from those presented in the forward‑looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition our business; rapid technological change; general market conditions in the automotive, communications, and computer industries, as well as conditions in the industrial, defense and aerospace, and medical markets; reliance on key customers; unanticipated natural disasters or other events; the ability to protect our intellectual property; pricing pressures and demand for our products; unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters as well as any product liability claims; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these and other risks and uncertainties are discussed in further detail in Item 1A. of ~~this~~CTS' Annual Report on Form 10‑K for the fiscal year ended December 31, ~~2014.~~2015. We undertake no obligation to publicly update our forward‑looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since December 31, ~~2014.~~

2015.

Item 4. Controls and Procedures

Pursuant to Rule 13a-15(e) of the Securities and Exchange Act of 1934, management, under the direction of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September ~~27, 2015.~~

30, 2016.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended September ~~27, 2015~~30, 2016, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~Table of Contents~~

PART II - OTHER INFORMATION

Not applicable

Item 1. Legal Proceedings

We manufacture accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota. In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The recall expanded

From time to include vehicles in Europe and Asia. The pedal recall and associated events have led to us being named as a co‑defendant with Toyota in certain litigation in the United States and Canada. CTS is not aware of any legal actions filed in Asia or Europe against CTS at this time.

In February 2010, we entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold us harmless from, and the parties will cooperate in the defense of, certain third‑party civil claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles. Under our agreement with Toyota, if it is determined that CTS acted negligently in selecting materials or processes where we had sole control over the selection process, in failing to meet Toyota’s specifications, or in making unapproved changes in component design or materials, and such negligence caused or contributed to a claim, we will be responsible for any judgment that may be rendered against us individually, or any portion of a judgment that may be allocated to us, but limited only to the extent of insurance collected from our insurers. Toyota would remain responsible to defend CTS in these actions and would remain responsible for any balance of the remaining liability over amounts recovered by insurance. The agreement also does not cover costs or liabilities in connection with government investigations, government hearings, or government recalls.

Presently, we have been served process and are a named co‑defendant with Toyota in approximately thirty‑one lawsuits. The claims generally fall into two categories, those that allege sudden unintended acceleration of Toyota vehicles led to injury or death, and those that allege economic harm to owners of Toyota vehicles related to vehicle defects. Some suits combine elements of both. Claims include demands for compensatory and special damages. To date, the only actions filed wheretime we are ~~aware we have been named as a co‑defendant are civil actions filed~~involved in the Unites States or Canada. All currently open lawsuits are subject to the indemnification agreement described above. Some of these lawsuits arise out of incidents involving models for which we do not manufacture the pedal, such as all Lexus models, the Toyota Prius, and the Toyota Tacoma, or for which we manufacture only a portion of the pedals, such as the Toyota Camry. Many lawsuits have been consolidated in federal multidistrict litigation ~~in the United States District Court, Southern District of California, though some remain in various other courts.~~

~~Certain other claims are pending against us~~ with respect to matters arising ~~out of~~from the ordinary conduct of our ~~business. For all other~~business, and currently certain claims inare pending against us. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows. ~~However, given the uncertainty, the complexity and the many variables involved in litigation and other claims, our actual costs may differ from our estimates.~~

Item 1A. Risk Factors

There have been no significant changes to our risk factors since December 31, ~~2014.~~

2015.

~~Table of Contents~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~The~~

On April 27, 2015, CTS announced that its Board of Directors authorized an expansion to its repurchase program by authorizing the purchase of an additional $25 million dollars of its common stock in the open market. This authorization has no expiration. As shown in the following table, ~~summarizes the~~there were no stock repurchases ~~of CTS common stock~~ during the ~~three months~~quarter ended September ~~27, 2015 made by the Company under the expanded repurchase program announced on April 27, 2015:~~

30, 2016.

(c)



Total Number

(d)

(a)

of Shares

Maximum Dollar Value

Total Number of

(b)

Purchased as

of Shares That May Yet Be

Shares

Average Price

Part of Plans or

Purchased Under the

Purchased

Paid per Share

Program

Plans or Programs(2)

Balance at June 28, 2015

$
24,272,100
June 29, 2015 – July 26, 2015

95,000

$
19.11

95,000

$
22,456,732
July 27, 2015 – August 23, 2015

70,000

$
18.94

70,000

$
21,130,813
August 24, 2015 – September 27, 2015

60,000

$
18.54

60,000

$
20,018,377
Total

225,000

$
18.91

225,000

(c)

Total Number

(d)

(a)

of Shares

Maximum Dollar Value

Total Number of

(b)

Purchased as

of Shares That May Yet Be

Average Price

Part of Plans or

Purchased Under the

Purchased

Paid per Share

Program

Plans or Programs(2)

Balance at June 30, 2016

17,554

July 1, 2016 - September 30, 2016

—

Total

—

17,554


~~(1)~~
	On April 27, 2015, CTS announced that its Board of Directors authorized an expansion to its repurchase program by authorizing the purchase of an additional $25 million dollars of its common stock in the open market. This authorization has no expiration.

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Item 6. Exhibits


~~(10)(a)~~	~~Credit Agreement between CTS Corporation and BMO Harris Bank N.A dated August 10, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on~~ ~~August 12, 2015).~~
(31)(a)
~~(31)(a)~~	Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

(31)(b)	Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

(32)(a)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

(32)(b)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

~~Table of Contents~~

~~SIGNATURE~~S

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~~	~~CTS Corporation~~
CTS Corporation		CTS Corporation

/s/ Luis F. Machado	/s/ Ashish Agrawal
Luis F. Machado Vice President, General Counsel and Secretary	Ashish Agrawal Vice President and Chief Financial Officer

Dated: October ~~27, 2015~~ 28, 2016	Dated: October ~~27, 2015~~	28, 2016



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

~~1142 West Beardsley Avenue, Elkhart, IN~~ 2375 Cabot Drive, Lisle, IL		~~46514~~ 60532
(Address of principal executive offices)		(Zip Code)


	Domestic Pension Plans				Foreign Pension Plans
Nine months:	Nine Months Ended				Nine Months Ended
($ in thousands)	September 27, 2015		September 28, 2014		September 27, 2015		September 28, 2014
Service cost	$	128	$	144	$	49	$	63
Interest cost		8,444		9,163		371		461
Expected return on plan assets (1)		(15,204)		(15,625)		(402)		(509)
Amortization of loss		4,754		4,237		269		177
Other cost due to retirement		—		172		—		—
(Income) expense, net	$	(1,878)	$	(1,909)	$	287	$	192


	As of
	September 27, 2015
($ in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Amount
Amortized intangible assets:
Customer lists/relationships	$	51,804	$	(26,423)	$	25,381
Patents		10,319		(10,319)		—
Other intangibles		12,270		(4,691)		7,579
Other intangible assets, net	$	74,393	$	(41,433)	$	32,960

Amortization expense for the three months ended September 27, 2015			$	985

Amortization expense for the nine months ended September 27, 2015			$	2,942


	As of
	December 31, 2014
($ in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Amount
Amortized intangible assets:
Customer lists/relationships	$	51,804	$	(24,415)	$	27,389
Patents		10,319		(10,319)		—
Other intangibles		12,270		(3,757)		8,513
Other intangible assets, net	$	74,393	$	(38,491)	$	35,902

Amortization expense for the three months ended September 28, 2014			$	1,046

Amortization expense for the nine months ended September 28, 2014			$	3,125



	As of
	September 30, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Amount
Amortized intangible assets:
Customer lists/relationships	$	63,386	$	(29,490	)	$	33,896
Patents	10,319		(10,319		)	—
Technology and other intangibles	36,715		(6,881		)	29,834
In process research and development	2,200		—			2,200
Other intangible assets, net	$	112,620	$	(46,690	)	$	65,930

Amortization expense for the three months ended September 30, 2016			$	1,638

Amortization expense for the nine months ended September 30, 2016			$	4,254


☒
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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



~~Indiana~~				~~35-0225010~~ CTS CORPORATION
(Exact name of registrant as specified in its charter)


			~~Page~~
			Page

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Statements of ~~(Loss)~~ Earnings ~~– Unaudited ‑~~(Unaudited) For the Periods Ended September ~~27, 2015~~30, 2016 and September ~~28, 2014~~27, 2015	3

		Condensed Consolidated Statements of Comprehensive ~~(Loss) Earnings – Unaudited ‑~~Income (Unaudited) For the Periods Ended September ~~27, 2015~~30, 2016 and September ~~28, 2014~~27, 2015	4

		Condensed Consolidated Balance Sheets As of September ~~27, 2015 –~~30, 2016 (Unaudited) and December 31, ~~2014~~2015	5

		Condensed Consolidated Statements of Cash Flows ~~– Unaudited ‑~~(Unaudited) For the Periods Ended September ~~27, 2015~~30, 2016 and September ~~28, 2014~~27, 2015	6

		Notes to Condensed Consolidated Financial Statements ‑ ~~Unaudited~~(Unaudited )	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27 29

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35 37

	Item 4.	Controls and Procedures	35 37

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	36 37

	Item 1A.	Risk Factors	36 37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

	Item 6.	Exhibits	38

SIGNATURES		39 38


	(Unaudited) September 27,		December 31,
	2015		2014
ASSETS
Current Assets
Cash and cash equivalents	$	150,755	$	134,508
Accounts receivable, net		59,213		56,894
Inventories, net		26,974		27,887
Other current assets		20,766		21,112
Total current assets		257,708		240,401
Property, plant and equipment, net		68,932		71,414
Other Assets
Prepaid pension asset		38,773		32,099
Goodwill		32,047		32,047
Indefinite-lived intangible asset		690		690
Other intangible assets, net		32,960		35,902
Deferred income taxes		56,610		43,120
Other		1,021		1,253
Total other assets		162,101		145,111
Total Assets	$	488,741	$	456,926
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	39,483	$	43,343
Accrued payroll and benefits		9,089		11,283
Accrued liabilities		43,031		25,356
Total current liabilities		91,603		79,982
Long-term debt		90,500		75,000
Post retirement obligations		2,729		3,049
Other long-term obligations		8,305		9,106
Shareholders’ Equity
Common stock		300,897		299,892
Additional contributed capital		40,481		39,153
Retained earnings		396,796		380,145
Accumulated other comprehensive loss		(101,785)		(104,233)
Total shareholders’ equity before treasury stock		636,389		614,957
Treasury stock		(340,785)		(325,168)
Total shareholders’ equity		295,604		289,789
Total Liabilities and Shareholders’ Equity	$	488,741	$	456,926


	Domestic Pension Plans				Foreign Pension Plans
Three months:	Three Months Ended				Three Months Ended
($ in thousands)	September 27, 2015		September 28, 2014		September 27, 2015		September 28, 2014
									Domestic Pension Plans						Foreign Pension Plans
									Three Months Ended						Three Months Ended
									September 30,			September 27,			September 30,			September 27,
									2016			2015			2016			2015
Service cost	$	42	$	48	$	16	$	21	$	21		$	42		$	13		$	16
Interest cost		2,815		3,052		124		156	2,756			2,815			12			124
Expected return on plan assets (1)		(5,068)		(5,209)		(135)		(172)	(4,744		)	(5,068		)	(33		)	(135		)
Amortization of loss		1,585		1,408		89		59	1,499			1,585			36			89
Other cost due to retirement		—		—		—		—
(Income) expense, net	$	(626)	$	(701)	$	94	$	64	$	(468	)	$	(626	)	$	28		$	94


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



	As of
	December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Amount
Amortized intangible assets:
Customer lists/relationships	$	51,804	$	(27,101	)	$	24,703
Patents	10,319		(10,319		)	—
Technology and other intangibles	12,871		(5,016		)	7,855
In process research and development	2,200		—			2,200
Other intangible assets, net	$	77,194	$	(42,436	)	$	34,758

Amortization expense for the three months ended September 27, 2015			$	985

Amortization expense for the nine months ended September 27, 2015			$	2,942


($ in thousands)	Amortization expense
2015	$	1,007


			Amortization expense
2016		3,647	$	1,557
2017		3,569	6,064
2018		3,484	5,956
2019		3,475	5,947
2020			5,947
Thereafter		17,778	40,459
Total amortization expense	$	32,960	$	65,930


	Three Months Ended
	September 27,		September 28,
($ in thousands)	2015		2014
Restructuring related charges	$	152	$	494
Restructuring and impairment charges		2,373		1,570
Total restructuring, impairment, and restructuring related charges	$	2,525	$	2,064



		Actual costs
		incurred through
June 2016 Plan	Planned Costs	September 30, 2016
Workforce reduction	3,075	2,175
Equipment relocation	7,925	—
Asset impairment charge	3,700	—
Other charges	1,300	—
Restructuring and impairment charges	16,000	2,175


			Actual costs
	Planned		incurred through
($ in thousands) April 2014 Plan	Costs		September 27, 2015
Inventory write-down	$	850	$	—
Equipment relocation		1,800		258
Other charges		1,400		111
Restructuring related charges, included in cost of goods sold	$	4,050	$	369

Workforce reduction	$	4,200	$	4,262
Asset impairment charge		—		—
Other charges, including pension termination costs		1,700		3,110
Restructuring and impairment charges	$	5,900	$	7,372

Total restructuring, impairment and restructuring related charges	$	9,950	$	7,741



			Actual costs
			incurred through
April 2014 Plan	Planned Costs		September 30, 2016
Inventory write-down	$	850	$	—
Equipment relocation	1,800		444
Other charges	1,400		113
Restructuring-related charges, included in cost of goods sold	$	4,050	$	557

Workforce reduction	$	4,200	$	4,423
Other charges, including pension termination costs	1,700		3,413
Restructuring and impairment charges	$	5,900	$	7,836

Total restructuring, impairment and restructuring related charges	$	9,950	$	8,393


	Planned		Actual costs incurred through
($ in thousands) June 2013 Plan	Costs		September 27, 2015
Inventory write-down	$	800	$	1,143
Equipment relocation		900		1,792
Other charges		100		652
Restructuring-related charges, included in cost of goods sold	$	1,800	$	3,587

Workforce reduction	$	10,150	$	9,216
Asset impairment charge		3,000		4,139
Other charges, including pension termination costs		7,650		1,784
Restructuring and impairment charges	$	20,800	$	15,139

Total restructuring and restructuring-related charges	$	22,600	$	18,726



			Actual
	Planned		incurred through
June 2013 Plan	Costs		September 30, 2016
Inventory write-down	$	800	$	1,143
Equipment relocation	900		1,792
Other charges	100		702
Restructuring-related charges, included in cost of goods sold	$	1,800	$	3,637

Workforce reduction	$	10,150	$	9,615
Asset impairment charge	3,000		4,139
Other charges, including pension termination costs	7,650		10,205
Restructuring and impairment charges	$	20,800	$	23,959

Total restructuring and restructuring-related charges	$	22,600	$	27,596



Combined Plans
Restructuring liability at January 1, 2016	$	826
Restructuring and restructuring-related charges, excluding asset impairments and write-offs	2,175
Cost paid	(1,026		)
Other activity (1)	$	30
Restructuring liability at September 30, 2016	$	2,005


	Nine Months Ended
	September 27, 2015
		Weighted
		Average
		Exercise
	Options	Price
Outstanding at beginning of year	5,200	$	12.35
Exercised	(5,200)	$	12.35
Outstanding at end of period	—	$	—
Exercisable at end of period	—	$	—


	Target	Vesting	Vesting	Units
Grant Date	Units	Year	Dependency	Awarded
February 11, 2013	47,164	2016	Sales growth	—
February 11, 2013	40,425	2016	Cash flow	—
February 14, 2014	15,071	2017	Sales growth	—
February 14, 2014	12,918	2017	Cash flow	—
February 13, 2015	24,150	2018	Sales growth	—
February 13, 2015	20,700	2018	Cash flow	—


			Number of
	Target	Vesting	Peer Group	Units
Grant Date	Units	Year	Companies	Awarded
February 11, 2013	40,425	2016	20	—
February 11, 2013	48,750	2016	20	—
February 14, 2014	15,071	2017	15	—
February 13, 2015	24,150	2018	23	—