Kieran O’Sullivan - President and CEO Ashish Agrawal - CFO and VP

Larry Solow - CJS Securities John Franzreb - Sidoti & Company Hendi Susanto - Gabelli & Company Ian Gilson - Zacks Investment Research Rob Crystal - Goldman Sachs Asset Management

Thank you, Paula and good morning. Thank you for joining us today and welcome to CTS’s third quarter 2015 conference call.

We continue to pursue our strategy to simplify, focus and drive profitable growth, around products that sense, connect and move. We remain on-track to complete the transition from Canada this year, which will take us to 11 manufacturing locations globally.

We achieved another solid quarter of new business awards, bringing our year-to-date new business awards to 455 million. Gross margins grew both year-over-year and sequentially despite softer sales.

We addressed the legacy environmental issue dating back several decades. We delivered strong operating cash flow of 8.6 million and repurchased 225,000 shares during the third quarter.

Ashish Agrawal, our CFO is joining me on today’s call. Ashish will take us through the Safe Harbor statements, Ashish?

I would like to remind our listeners that this conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Additional information regarding these risks and uncertainties is contained in the Press Release issued yesterday and more information can be found in the Company’s SEC filings. To the extent that today's discussions refer to any non-GAAP measures relative to Regulation G, the required explanations and reconciliations are available in the Investor Relations section of the CTS Web site.

I will now turn the discussion back over to our CEO, Kieran O’Sullivan.

Thank you, Ashish. Yesterday we reported our third quarter 2015 financial results.

Third quarter sales were 90.6 million, down 9% compared to the same quarter last year. Foreign currency impacted sales unfavourably by 1.7 million.

We also experienced lower sales driven by softness in certain end-markets, in particular HDD and communications. In the automotive end-market, we saw lower sales in our older automotive products and some impact from softness in China.

We do expect sequential sales growth in the fourth quarter of 2015. Gross margins up 34.7% improved by 220 basis points year-over-year, and 140 basis points sequentially.

Adjusted earnings per share were $0.23, compared to $0.29 in the third quarter of 2014. Lower volumes and unfavourable foreign exchange impact due to balance sheet translation drove the decline in earnings.

This unfavourable exchange rate impacted diluted earnings per share by $0.06. We are working closely with the EPA to address the legacy environmental issue, had a site in North Carolina which CTS owned, operated and sold many decades ago.

In the third quarter, we proposed a remediation solution to the EPA to clean up the source. We recorded a charge of 14.5 million or $0.28 per diluted share in the third quarter for the probable cost of remediation.

As we stated in our past disclosures estimating the cost of such remediation is inherently difficult. We believe our current reserves, addresses the current and future expected cost.

New business awards for the third quarter were 95 million. We were awarded 71 million in new business and program extensions driven by automotive customers, including a significant chasse ride height program and an actuator program with existing customers.

For the electronic component product lines, we secure 24 million in new business awards, including orders from a new wireless telecom OEM, a new EMC product for test and implementation and RF filter products for a small cell filter application. We added several new customers for the electronic component product lines in several markets including medical, industrial and communications.

Our new business awards for the first three quarters of the year totalled 455 million compared to 313 million last year. Our focus is to continue to build the backlog for future years.

As noted in the earnings release issued yesterday, we expect full year 2015 adjusted earnings per diluted share to be in the range of $0.95 to $1.05, consistent with our guidance, but expect that we will be challenged to achieve the low-end of the sales guidance range of 390 million to 405 million. As discussed in the last couple of quarters, we are still targeting mid single-digit sales growth for 2016.

In an effort to revitalize the culture and identity of our Company, we remain on-track to launch a refreshed identity in the fourth quarter with a focus on products that sense, connect and move. Related to this effort we expect to launch a new and improved CTS Web site in the fourth quarter.

Please keep an eye out for this later in the year. I will now hand the call over to Ashish to walk us through the financial results in more detail, Ashish?

Thank you, Kieran. Third quarter 2015 sales were $90.6 million down 9% compared to the same quarter last year.

Foreign currency impacted sales unfavorably by $1.7 million mostly due to the U.S. dollar appreciating against the euro.

As noted earlier, sales were softer than we anticipated this quarter due to weak market demand in the HDD and communications end-markets and lower volume of older automotive products. Gross margins for the third quarter 2015 were 34.7% versus 32.5% in the same quarter a year ago.

Margins increased year-over-year as we continued to achieve efficiency gains and implement material and labor productivity projects. We are also starting to realize savings from our project to shift production from Canada to lower cost locations.

Currency impact on manufacturing costs was favourable as the U.S. dollar appreciated against various local currencies in countries in which we have manufacturing operation.

Operating expenses in the third quarter of 2015 were substantially higher than last year as we took a $14.5 million charge for environmental remediation. Kieran elaborated on this earlier.

Operating expenses also include $2.4 million in restructuring charges primarily related to moving production from Canada. $1.6 million in restructuring charges were recorded in the second quarter of 2014.

Now providing a little bit more detail on the operating expenses. SG&A expenses were $12.7 million in the third quarter of 2015 compared to $13.9 million in the third quarter last year.

This decrease was primarily due to continued efficiency gains from restructuring projects, cost containment efforts and timing of certain expenses. R&D expenses were $5.7 million in the third quarter of 2015 compared to $5.8 million in the same period last year.

R&D expenses grew sequentially from the second quarter of 2015 and we plan to continue investing in new products to drive organic growth. Net interest expense in the third quarter of 2015 was slightly higher than the third quarter of last year due to higher average debt balances this year.

In the third quarter of 2015, other expense was $3.1 million. This was almost entirely due to the impact of changes in foreign currency rates on our assets and liability.

The primary factor was the devaluation of Chinese renminbi compared to the U.S. dollar.

The effective income tax rate for the third quarter of 2015 was 31.2%. This includes the impact of valuation allowance on certain foreign tax assets, as well as the impact of true-ups related to the filing of 2014 tax returns.

In the third quarter of 2014 the effective tax rate was 31.9%. We expect our tax rate for 2015 to be in the low 30% range excluding the impact of onetime charges and credits consistent with our prior estimation.

Our third quarter 2015 GAAP loss was $0.15 per share, included in this number is a $0.28 environmental charge and a $0.06 charge for restructuring and related expenses. In addition foreign tax items resulted in a net impact of $0.04.

Excluding these items adjusted earnings per diluted share were $0.23 in the third quarter of 2015. GAAP earnings were $0.24 per diluted share in the third quarter of last year.

Included in these earnings were $0.05 in restructuring and related charges. Excluding these items adjusted earnings per diluted share were $0.29 in the third quarter of 2014.

We continue to monitor currency fluctuations. In the third quarter we saw an unfavorable impact of currency on our top-line of $1.7 million as the U.S.

dollar appreciated against the euro. This impact was offset by lower costs due to the U.S.

dollar's strength against currencies, in countries in which we have manufacturing operations. For the balance of the year depending on currency movements, we could see additional impact on sales and earnings.

Now I'll cover the balance sheet. Cash and cash equivalents were $150.8 million at the end of the third quarter of 2015 compared to $134.5 million at the end of last year.

Our debt balance was $90.5 million, up from $75 million at December 31, 2014. This increase is primarily on account of higher share buybacks.

Debt to capitalization was 23.4% at the end of the third quarter of 2015, up from 20.6% at the end of last year. Our controllable working capital as a percentage of sales was 12.9% in the third quarter of 2015.

In the third quarter of last year, the controllable working capital was 11.9% of sales. We continue to focus on improving our working capital performance and expect to improve in this area in the fourth quarter.

For the third quarter of 2015, operating cash flow was $8.6 million versus $5.3 million in the same period a year ago. Capital expenditures were $2.7 million in the third quarter, compared to $3 million in the third quarter of 2014.

We repurchased 225,000 shares of CTS stock for $4.3 million in the third quarter. Year-to-date, we have returned nearly $20 million to shareholders, 4 million in dividends and 15.6 million through share buybacks.

We will continue to buyback additional shares in the fourth quarter. This concludes our prepared comments.

We would like to open the line for questions at this time.

Just a couple of questions, one on revenue and then one on expenses, clearly the sales were less than you guys expected, and it looks like more of the weakness is coming out of the electronic component side where I think sales were down about 13% and that there is no FX impact if I am not mistaken. Have things gotten worse in the hard disk drive market or are there further delays in build-out of the wireless infrastructure clearly those have been the two issues nagging those sales for the last few quarters.

Do you see visibility on that is it more of a timing thing that may get a little worse this quarter or inventory related or any color on that would be great? Thanks.

I’ll cover both and product lines, starting which you highlighted first was the component side of it, the biggest issue we have was inventory levels on HDD. We’ve seen this once before where there is a little bit of rebalancing going on.

We did obviously see some softness in telecom impacting frequency, but HDD was the biggest part. We expect that to normalize over the next few quarters and get back to normal level, so we’re pretty happy with how that’s going and we’re actually launching some new products in that area as well that we should improve cost quality performance overall.

And I would like to comment on the automotive side, we said in the last few years we’re in transition and of course the markets are often auto and we’re building our backlog story and driving the new business wins which really is very strong when you see how much we’re up year-over-year. But when you look at there on a little deeper level, to give you an example, we have one or two older products out there that are going away an example would be belt tension sensors which are linked up with the safety system with year banks and that system one OEM upgraded their level of safety device start and that eliminates that sensor to an older sensor.

So that’s the challenging news. The good news as far as transitions are concerned the more advanced systems rely, they have lower year back deployment forces and they rely on the C Track position sensor and we have two wins there in the last year so we’re feeling really good that we’re in the right spaces going forward too.

And then how about on the cost side, gross margin 35% on lower sales I know you’ve sort of guided towards a lower 30s range, even looking out into ’16. So just curious I know you talked about productivity gains and labor and material improvement.

Is some of this sustainable, how do you look at that? And then also on SG&A, a much lower number than we expected and you mentioned some of the same issues but also some timing there so I am just trying to parcel out on both the gross margin and the operating expense side, what is sort of sustainable, how did you get there and what is more timing related?

Thanks.

You’ve correctly over said that margins will be in the low-30s and I’ll pass it over to Ashish in a second. But at a high level we always are pretty prudent about managing cost.

And on the flip side, we’re getting hit on the top-line with the dollar being so strong and on the other side of it, it helps us, which Ashish should probably add comments to.

Okay. Let me first cover the gross margin and then I’ll talk about the SG&A.

Gross margin there are a couple of things that are helping us. Number one, we are starting to get some benefits from the Canada transition already being reflected in our numbers.

And the other piece is a little bit of a favourable impact of mix, the products that were down are not the strongest margin products in our product portfolio and that’s helping us as well. So going forward the low-30s is roughly the right range to look at in terms of gross margin.

The SG&A expenses, in any given quarter we’ll have certain timing, which also was visible as you look at the numbers for this year. G&A expenses, as we have manage in the last couple of years, they have improved consistently and we are on a better run rate.

And we are continuing to prudently invest in the sales and marketing going forward. The 14%-15% is the right range to be thinking about Larry.

Okay. So this is somewhat of a sustainable number then I guess, if you will, relatively speaking obviously plus or minus.

Yes.

I’d like to start I guess with the orders, Kieran can you kind of just remind us about the volatility of the order intake and how long of a tale is it to realize the orders that you have booked to 95 million in the third quarter, just some background would be helpful?

Yes, John, so first of all it is just when you look at last two quarters, this quarter was a little software obviously and we’re not concerned about that because when you look back at 2013 and 2014 third quarters, we’re up from 2014’s number, so a little bit of seasonality in there the OEMs had to shut down during the summer months and that impacts us. From a backlog perspective 69 those automotive orders which were at 71 as part of that 95, there adds 2.5-3 years to generating revenue in the transition and then typically they ramp-up a little bit in the first year and then significantly in the second year, so we’re pleased John with how we are performing in this area, a big emphasis for us is to get that backlog going and the components is obviously different it's -- when you look at some of the products like frequency or EMC, they tend to be orders within the year, PA is a product line of a blend they tend to go somewhat in the year, somewhat about two-three years.

Okay. And against that backdrop, and the strong orders you’ve already booked in previous quarters, I know it's a little bit far out, but the 2017 revenue profile, how would you expect that to play out if 2016 is in that mid single-digit target as you’ve talked about it earlier?

John, we’ve always talked about trying to get to double-digit sales growth, but not just organic but through acquisition as well and we still want to achieve that.

Okay. Switching gears to the Asheville charge that you took, I thought it was actually a relatively small property I know it was closing 86 or so, I was kind of surprised by the magnitude of it, can you just discuss why I guess?

Yes, John and very simply, we worked with the EPA, and we did some testing, and through that testing we gained clarity on them what the necessary remediation needed to be and therefore we adjusted reserve and based on all the current available information for and all the costs were satisfied that we’ve done the right thing.

Okay. And a question on or I guess it was Ashish who said about the mix and sustainability on the gross margin, if the auto business is going to essentially go end of life, why wouldn’t the gross margin be a little bit higher than we were previously discussing, I mean I know you did mention the HDD expect a bounce back, but it should a little bit north of may be some of the lower barriers you were talking about previously?

John, I just want to clarify there are some very few product lines that Kieran talked about in the automotive business that are transitioning from one product line to another, so I don't want to characterize a big portion of the automotive business going end of life that would not be accurate. The softness that we saw in some of the electronic components that's where we have seen some favourable mix impact not necessarily from the HDD, but from the frequency side, as that volume comes back, we will give up a little bit of that benefit, but I still think the low 30s is the right range across all our product lines.

Well I have first question, with regard to your mid single-digit growth target in 2016, can you break that down between auto and electronic components in terms of your expectation like where one versus another?

We don't typically guide in the pieces, Hendi, just the overall but we’re expecting growth in all the areas.

Got it.

And obviously from an automotive perspective, one thing that we’re always watching is that the order cycle has been running for a long time and we get concerned that how that long that rally is going to go for, the good news is Europe has been staying at the kind of the bottom, just drifting along and it should improve, North America has been extremely strong, which will -- is forecasted to continue through ’16, but it’s been running for a long time, and the other side of it as we’ve said, overtime, we’d really like to get our business mix and that isn’t in the next year or two, but several years out more like 50% auto but still grow that auto business.

Okay, and then second with regard to shifting your manufacturing to best cost location, may I know where we are now and then how much more savings or benefit can you generate between now and your 2017 goal.

So, Hendi once we complete Canada, we should be slightly north of 70%. And our stated goal is 80% but we'll have a few more tweaks to make to get to the 80% point in the next couple of years.

And of course what helps that a little bit as well Hendi, is that increasing order backlog, and where we launch those new products.

So, will it be like a long tail between 70% to 80%?

Well, we're not backing off our goal, so it's still going to be 80%. We made a commitment as a management team and it'll I think we could expect to be there end of '17 and '18.

Okay.

Hendi, when you think about the revenue profile, we have talked about a little bit better growth in '17 and '18 timeframe. So as those production volumes are ramping up we'll be getting to that, closer to that 80% mark.

Okay. And then Kieran based on your backlog design wins, business awards, if we look ahead to 2017 where you expect growth to be more significant.

Does the composition reflect the current market segment or the current market exposure or it is quite different from like where you are today?

And you seem, I just want to make sure I'm understanding the question Hendi can you repeat that piece about market exposure?

Yes, so let’s say in your latest corporate overview presentation you listed new customers and then targeted end-markets. So based on the picture of your current backlog and business awards will your end-markets be quite different in 2017 versus today?

Okay. I think in '17 you'll see some small changes but it will take a longer period of time to get to that rebalancing that we're looking at.

Some of that rebalancing will be towards 2020.

Okay, as you know, and we go back to the SG&A question. Traditionally you had first quarter high, second and third quarter's lower and then a uptick in fourth quarter in dollar terms, not as a percentage of revenue.

Are we going to see that pattern again, or does SG&A look more like the third quarter number?

So Ian, there is, some certain expenses during the year that have different timing when we have to record them based on accounting requirements. So you will see similar trends to prior years.

Okay. Is there any one customer in the disk drive market that is causing a problem, I know there aren't too many producers, but anymore particularly in this country.

Is that to some weakness in any particular customer in that market?

Ian I think there's general weakness out there in that market, we're working very closely with our customer. I would tell you, that's not the biggest concern for us what we look at is five-10 years, what's happening with hard disk drives versus what's happening with solid state devices.

So it's powered by strategy and evolution obviously making plans to adapt for that as we go ahead. That's really the more important thing for us.

Yes because the way I have seen it, solid state drives are always more expensive. Do you think that their cost gets down far enough so that they will compete with more traditional architecture?

Well what we're getting from our customers on the cost base is, they like what they're doing, it's really driving their market and solid state solutions are more expensive but from a reliability and quality perspective there's a lot of advantages there, and there's going to be a cut over point in the future. And that transition will happen and we've built that into our plans and forecast going forward.

Have you filed the 10-Q yet?

I think later today, Ashish.

Later today, yes.

I may have missed it, a lot of companies reporting earnings today. Did you talk about M&A pipeline, things like that as you talk about diversifying the business mix overtime?

No, we didn't really touch in the script or in the questions so far, Rob. But I would tell you we're working the area very diligently and we've nothing to report.

We've seen some assets being very expensive out there. We’re not coming off our strategy, there’s certain things from a technology basis that are very much of interest to us and we’re pursuing in that direction as we just balance out what we need for the different parts of the portfolio going forward.

So, nothing to report but we’re working it hard.

So if I were to summarize your thoughts, the internal operations are much stronger today, it’s more a function of price, timing and have to willing sellers et cetera?

Say that again?

I guess what I was saying was that you feel good about the internal operations, and it’s more a function of price and/or finding a willing seller than it is needing to improve the underlying operations, is that fair?

We feel very good about the fundamentals of the business everything we’re managing and obviously we want to keep improving. But finding the right fit for the strategy at a fair market value is what we’re working on.

And there are things we can still do and that’s why we’re still why we’re working hard on.

Yes just sticking with some of the SG&A thoughts, you’d previously kind of communicated that some of your cost savings would be up by higher spending on resources to kind of drive the sales profile. Are you satisfied now with your SG&A structure, do you think you have the sales team intact that can drive the revenue lines the way you envision it Kieran?

Yes, we mean SG&A overall we said closer to 15%, at 14%-15% range. We’ve obviously been expanding on the sales and marketing, we’ve still some things to do and the progress that we made, and obviously the R&D side of it too from an investment for organic growth moving that needle along.

So we’re still committed to both of those areas John going forward.

Those two buckets, where do you think you’d be putting more dollars into, are you going to put more dollars into the R&D or the salesforce?

We’ve actually been really -- the last few years, is understanding the portfolio a little bit deeper, on the R&D side, getting the focus right. So we’ve expanded a little bit fast around the sales side in the last few years.

I think you could expect to see some expansion there but more on the R&D going forward.

And John we have also talked about as we expect R&D to be in the 6% range going forward and as volume starts to pick up in the out years then we would expect a little bit of leverage on the SG&A. We wouldn’t expect it to expand at the same rate.

Hi Kieran I have a follow-up questions on hard disk drive market. Do you have any idea on how much inventory the customer have or how long it may take to burn the inventory?

From an inventory perspective, we see that usually take a quarter or two to correct and we’re seeing similar signals again. So that’s roughly how we see it Hendi.

And then second question, if I am not mistaken I think your Piezo hard disk drive product is in the traditional hard disk drive format. And then we know that solid state drive is a growing market.

So how should we think of your product roadmap forward addressing the growth in the solid state drive?

Well first of all, we see the solid state as being an headwind in the out years. We don’t think that’s a headwind that’s going to really hit hard in the next two-three years.

We think it takes a longer period of time because we’re launching new products, giving new cost initiatives to the area. But obviously if you look out to the customers, they’re doing some acquisitions they’re positioning themselves for the future.

The other thing that we’re doing is and I haven’t mentioned this so far on the call but we have one technology and both processing we’ve been developing in-house another technology take past when we said we wanted to acquire some other things. And that will give us some other new verticals in end-markets to help keep that diversification going within that product line.

So will it address the solid state drive area also, just...?

No, we would expect in several years that there’ll be some erosion there that could be more significant, but we have other plans to offset that.

In the same hard disk drive area or it’s like outside of hard disk drive?

We still will have products in the hard disk drive area but we will actually look to bring products into other end-markets as well.

Okay.

We’re already working that at the moment.

Just back on the automotive side, you mentioned you have about a 4% or so drop if we exclude the currency and I know you’ve mentioned some of the older product lines sales decline. Was that an inventory type tightening, is that -- and I know there has been some a little bit of pressure on suppliers of automotive parts and stuff.

So are you just feeling that pressure or is it something specific to you guys? And then also how much of China had been impacted?

Thanks.

Yes I think Larry if you just go back in time we’re in that transition in the automotive space where the markets have been strong and we’ve been had -- we're rebuilding from smaller order intake in the earlier years that we’ve corrected now with the order backlog we’re generating and on the flip side, we did have some products in position again an example of bell tension sensors…

Right.

Whether changing the safety system to a more advanced safety system going forward, good thing is we’re in those new products as well and foresee track position sensing and we did see some impact in China, we have a plant actually in Tianjin. And the market was down in China overall for the quarter when you look at the unit volume, but also we suffered a week or two of production impact when we had some of our customers impacted in that area, obviously we picked up from that already and back running and so there were some other things happening, but we’re excited by products in the portfolio, we’ve got a chasse ride height sensor that's Gen2, we’re already working on Gen3, we’re winning with several customers, our actuator product is gaining traction, we are looking at expanding that going forward.

Obviously we’ve got the resource that we can get it moving in the right directions, but we’re happy that we’re doing the fundamental things right for the future.

Great, thank you Paula. Thank you all for joining on the call today.

We’re going to remain focused and committed to our strategy around products that sense, connect and move. Thank you all for joining us today.

And we’ll talk to you in the weeks and quarter ahead. Thank you.