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

FORM 10-K

(Mark One)
 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       For Fiscal Year Ended December 31, 2003
       OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-4639

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

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS’ common stock on June 27, 2003, was approximately $339.2 million. There were 36,071,509 shares of Common Stock, without par value, outstanding on February 17, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

   TABLE OF CONTENTS

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PART 1

Item 1.     Business

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

CTS designs, manufactures, assembles and sells a broad line of components and sensors and provides electronics manufacturing services primarily for the automotive, communications and computer markets. CTS operates manufacturing facilities located throughout North America, Asia and Europe. CTS’ product lines serve major markets globally, focused primarily on the needs of original equipment manufacturers (OEMs). Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives and distributors.

BUSINESS SEGMENTS AND PRODUCTS BY MAJOR MARKET

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

Components and sensors are products that perform specific electronic functions for a given product family for use by global original equipment manufacturers, contract manufacturers and electronic distributors. Components and sensors consist principally of:

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

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Electronics Manufacturing Services (EMS) include the higher level assembly of electronic and mechanical components into a finished subassembly, including printed circuit assembly, or the final assembly of a product performed under a contract manufacturing agreement with OEMs or other contract manufacturers. EMS also includes the design of interconnect systems and complex backplanes, global supply-chain management services, such as bill-of-material development and sourcing, related manufacturing and design services as may be required by the customer, and logistical and transportation services related to delivery completion. EMS services are principally sold into the computer and communications OEM markets. In addition, the CTS EMS segment also serves the networking, medical diagnostic and imaging, industrial and automotive industries.

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

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

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

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

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MARKETING AND DISTRIBUTION

CTS sales engineers and independent manufacturers’ representatives sell products from both the Components and Sensors business segment and the EMS business segment to OEMs. CTS maintains sales offices in China, Hong Kong, Japan, Scotland, Singapore, Taiwan and the United States. Approximately 82% of 2003 net sales was attributable to coverage by CTS sales engineers.

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

CTS utilizes the services of independent manufacturers’ representatives in the United States and other countries for customers not serviced directly by CTS sales engineers for both of its business segments. Independent manufacturers’ representatives receive commissions from CTS. During 2003, 14% of net sales was attributable to coverage by independent manufacturers’ representatives. CTS also uses distributors for customers in its Components and Sensors business segment. Independent distributors purchase component and sensor products from CTS for resale to customers. In 2003, independent distributors accounted for approximately 4% of net sales.

RAW MATERIALS

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

These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe it is dependent upon one or a limited number of vendors. Although CTS purchases all of its semiconductors from a limited number of vendors, alternative sources are available. In 2003, substantially all of these materials were available in adequate quantities to meet CTS’ production demands.

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

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

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WORKING CAPITAL

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

CTS carries raw materials, including certain semiconductors, work-in-process and finished goods inventories which are unique to particular customers. In the event of reductions or cancellations of orders, some inventories may not be useable or returnable to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover a significant portion of the financial exposure of CTS for inventories that are unique to a customer. CTS does not customarily grant special return or payment privileges to customers. CTS’ working capital requirements and businesses are generally neither cyclical nor seasonal.

PATENTS, TRADEMARKS AND LICENSES

CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents and trademarks. CTS believes its success is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS was issued 26 new U.S. patents in 2003 and currently holds in excess of 355 U.S. patents with hundreds of non-U.S. counterpart patents.

CTS has licensed the right to use several of its patents to both U.S. and non-U.S. companies. In 2003, license and royalty income was less than 1% of net sales. CTS believes its success is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee.

MAJOR CUSTOMERS

CTS’ 15 largest customers represented 71% of net sales in 2003, 73% of net sales in 2002 and 75% of net sales in 2001. This percentage is decreasing as the Company continues efforts to broaden its customer base, particularly in automotive and wireless infrastructure offerings. Sales to Hewlett-Packard Company (Hewlett-Packard) amounted to 33% of net sales in 2003 and 2002. Hewlett-Packard acquired Compaq Computer Corporation (Compaq) in May 2002. The Compaq sales are included in the Hewlett-Packard percentages in 2003 and 2002. In 2001, sales to Compaq were 28% of net sales while sales to Hewlett-Packard were not significant. Sales to Motorola, Inc. (Motorola) accounted for 13% of net sales in 2003, 12% of net sales in 2002, and 17% of net sales in 2001.

The Components and Sensors business segment revenues from Motorola represent $38.6 million, or 14%, and $84.3 million, or 23%, of the segment’s revenue for the years ended December 31, 2002 and 2001, respectively. Components and Sensors business segment revenues from Motorola were less than 10% of the segment’s revenue in 2003.

EMS business segment revenues from Hewlett-Packard represent $151.8 million, or 72%, and $150.4 million, or 80% of the segment’s revenue for the years ended December 31, 2003 and 2002, respectively. EMS business segment revenues from Motorola were $40.2 million, or 19%, of the segment’s revenue for the year ended December 31, 2003. EMS business segment revenues from Compaq were $160.2 million, or 76% of the segment’s revenue for the year ended December 31, 2001.

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

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

ORDER BACKLOG

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

The following table shows order backlog by segment and in total as of January 25, 2004 and January 26, 2003.

Order backlog at the end of January 2004 will generally be filled during the 2004 fiscal year.

COMPETITION

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

In the EMS segment, CTS competes with a number of well-established U.S. and non-U.S. manufacturers on the basis of process capability, price, technology, quality, reliability, delivery and service in the markets in which we participate.  Some of its competitors have greater manufacturing and financial resources.  However, CTS generally does not pursue extremely high volume, highly price sensitive business, as do some of its major competitors.  Some competitors are also CTS customers for components and sensors, as well as EMS services.

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

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

NON-U.S. REVENUES AND RISKS

In 2003, 60% of net sales to external customers originated from non-U.S. operations compared to 56% in 2002 and 57% in 2001. At December 31, 2003, approximately 37% of total CTS assets were located at non-U.S. operations compared to 39% of total CTS assets at the end of 2002. A substantial portion of these assets, other than cash and equivalents, cannot readily be liquidated. CTS believes the business risks to its non-U.S. operations, though substantial, are normal risks for non-U.S. businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations and expropriation. CTS’ non-U.S. manufacturing facilities are located in Canada, China, Mexico, Scotland, Singapore and Taiwan.

Net sales to external customers originating from non-U.S. operations for the Components and Sensors business segment were $144.0 million in 2003, compared to $153.8 million in 2002 and $210.4 million in 2001. Net sales to external customers originating from non-U.S. operations for the EMS business segment were $132.3 million in 2003, compared to $104.0 million in 2002 and $120.6 million in 2001. Additional information about net sales to external customers, operating earnings and total assets by segment, and net sales to external customers and long-lived assets by geographic area, is contained in Note I, “Business Segments,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

RESEARCH AND DEVELOPMENT ACTIVITIES

In 2003, 2002 and 2001, CTS spent $21.5 million, $24.1 million, and $32.8 million, respectively, for research and development. The reductions in research and development spending from 2001 to 2003 reflect savings due to organizational consolidation, changing business mix and streamlining of research and development activities. Significant ongoing research and development activities continue in CTS’ Components and Sensors business segment, particularly for automotive products in support of growth initiatives. Our research and development investment is primarily focused at expanded applications and new product development, as well as current product and process enhancements. Research and development expenditures in the EMS business segment are typically very low.

CTS believes a strong commitment to research and development is required for future growth. Most CTS research and development activities relate to developing new products and technologies, improving product flow and adding product value to meet the current and future needs of its customers. CTS employs approximately 460 engineers and technicians who are specifically assigned to the development and engineering support of new materials, new processes and innovative products. CTS provides its customers with full systems support to ensure quality and reliability through all phases of design, launch and manufacturing to meet or exceed customer requirements. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. CTS expenses all research and development costs as incurred.

EMPLOYEES

CTS employed 5,041 people at December 31, 2003, and 75% of these people were employed outside the United States. Approximately 255 CTS employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2003. One agreement will expire in 2010 and the other will expire in 2008. CTS employed 5,313 people at December 31, 2002.

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ADDITIONAL INFORMATION

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

Exhibit 99(a) to this report contains an updated description of CTS’ capital stock. This exhibit, which is incorporated herein by reference, updates and supersedes the description of CTS’ capital stock in CTS prospectuses related to CTS’ active registration statements listed in Exhibit 23 hereto.

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