NOTE I — Retirement Plans

Defined Benefit and Other Postretirement Benefit Plans

CTS has a number of noncontributory defined benefit pension plans (“Pension Plans”) covering approximately 13% of its active employees. Pension Plans covering salaried employees provide pension benefits that are based on the employees´ years of service and compensation prior to retirement. Pension Plans covering hourly employees generally provide benefits of stated amounts for each year of service.

CTS provides postretirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain domestic union employees are eligible for life insurance benefits upon retirement. CTS funds life insurance benefits through term life insurance policies and intends to continue funding all of the premiums on a pay-as-you-go basis.

The Company recognizes the funded status of a benefit plan in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the projected benefit obligation. The Company also recognizes, as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost.

The measurement dates for the Pension Plans for the Company’s domestic and foreign locations was December 31, 2013 and 2012. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the Pension Plans domestic and foreign locations plan at that measurement dates.


	Domestic Pension Plans						Foreign Pension Plans
($ in thousands)	2013			2012			2013			2012

Accumulated benefit obligation	$	264,828		$	269,657		$	15,150		$	15,207

Change in projected benefit obligation:
Projected benefit obligation at January 1	$	274,497		$	253,574		$	16,220		$	14,335
Service cost		2,435			2,735			110			125
Interest cost		11,046			11,935			536			571
Benefits paid		(13,526	)		(17,106	)		(1,297	)		(661	)
Actuarial (gain)/ loss		(5,473	)		23,359			295			1,190
(Gain)/loss due to curtailment		(4,151	)		—			—			—
Foreign exchange impact and other		—			—			163			660

Projected benefit obligation at December 31	$	264,828		$	274,497		$	16,027		$	16,220

Change in plan assets:
Assets at fair value at January 1	$	265,622		$	248,630		$	13,369		$	11,476
Actual return on assets		62,012			30,067			209			456
Company contributions		103			4,031			2,307			1,563
Benefits paid		(13,526	)		(17,106	)		(1,297	)		(661	)
Foreign exchange impact and other		—			—			279			535

Assets at fair value at December 31	$	314,211		$	265,622		$	14,867		$	13,369

Funded status (plan assets less projected benefit obligations)	$	49,383		$	(8,875	)	$	(1,160	)	$	(2,851	)

The measurement dates for the other post retirement plan were December 31, 2013 and 2012. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the other post retirement plan at that measurement dates.


	Other Postretirement Benefit Plan
($ in thousands)	2013			2012

Accumulated benefit obligation	$	4,916		$	5,665

Change in projected benefit obligation:
Projected benefit obligation at January 1	$	5,666		$	5,366
Service cost		7			9
Interest cost		223			255
Actuarial (gain)/loss		(798	)		226
Benefits paid		(182	)		(190	)

Projected benefit obligation at December 31	$	4,916		$	5,666

Change in plan assets:
Assets at fair value at January 1	$	—		$	—
Actual return on assets		—			—
Company contributions		182			190
Benefits paid		(182	)		(190	)
Other		—			—

Assets at fair value at December 31	$	—		$	—

Funded status (plan assets less projected benefit obligations)	$	(4,916	)	$	(5,666	)

The components of the prepaid (accrued) cost of the domestic and foreign pension plans, net are classified in the following lines in the Consolidated Balance Sheets at December 31:


	Domestic Pension Plans						Foreign Pension Plans
($ in thousands)	2013			2012			2013			2012


Prepaid pension asset	$	55,839		$	—		$	557		$	—
Other accrued liabilities		(4,814	)		(967	)		—			—
Other long-term obligations		(1,642	)		(7,908	)		(1,717	)		(2,851	)

	$	49,383		$	(8,875	)	$	(1,160	)	$	(2,851	)

The components of the prepaid (accrued) cost of the other postretirement benefit plan, net are classified in the following lines in the Consolidated Balance Sheets at December 31:


	Other Postretirement Benefit Plan
($ in thousands)	2013			2012

Other accrued liabilities	$	(341	)	$	(361	)
Other long-term obligations		(4,575	)		(5,305	)

	$	(4,916	)	$	(5,666	)

CTS has also recorded the following amounts to Accumulated Other Comprehensive Loss for the domestic and foreign pension plans, net of tax:


	Domestic Pension Plans									Foreign Pension Plans
($ in thousands)	Unrecognized Loss			Prior Service Cost			Total			Unrecognized Loss			Prior Service Cost		Total

Balance at January 1, 2012	$	110,801		$	1,046		$	111,847		$	3,632		$	—	$	3,632
Amortization of retirement benefits, net of tax		(3,684	)		(367	)		(4,051	)		(236	)		—		(236	)
Settlements and curtailments		(171	)		—			(171	)		—			—		—
Net actuarial gain/(loss)		8,987			—			8,987			922			—		922
Foreign exchange impact		—			—			—			174			—		174

Balance at January 1, 2013	$	115,933		$	679		$	116,612		$	4,492		$	—	$	4,492
Amortization of retirement benefits, net of tax		(4,509	)		(277	)		(4,786	)		(298	)		—		(298	)
Settlements and curtailments		(428	)		(402	)		(830	)		—			—		—
Net actuarial gain/(loss)		(31,778	)		—			(31,778	)		451			—		451
Foreign exchange impact		—			—			—			(3	)		—		(3	)

Balance at December 31, 2013	$	79,218		$	—		$	79,218		$	4,642		$	—	$	4,642

CTS has also recorded the following amounts to Accumulated Other Comprehensive loss for other postretirement benefit plan, net of tax:


	Other Postretirement Benefit Plan
($ in thousands)	Unrecognized (Gain)			Prior Service Cost		Total

Balance at January 1, 2012	$	(423	)	$	—	$	(423	)
Amortization of retirement benefits, net of tax		24			—		24
Net actuarial gain/(loss)		138			—		138

Balance at January 1, 2013	$	(261	)	$	—	$	(261	)
Amortization of retirement benefits, net of tax		—			—		—
Net actuarial gain/(loss)		(494	)		—		(494	)

Balance at December 31, 2013	$	(755	)	$	—	$	(755	)

CTS expects to recognize, on a pre-tax basis, approximately $5.9 million of losses in 2014 related to its Pension Plans. CTS does not expect to recognize any significant amounts of the Other Postretirement Benefit Plan unrecognized amounts in 2014.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with accumulated benefit obligation in excess of fair value of plan assets at December 31 is shown below:


($ in thousands)	2013		2012

Projected benefit obligation	$	10,098	$	22,471
Accumulated benefit obligation		4,807		21,022
Fair value of plan assets		1,923		13,369

Net pension expense/(income) for the years ended on December 31 include the following components:


	Domestic Pension Plans									Foreign Pension Plans
($ in thousands)	2013			2012			2011			2013			2012			2011

Service cost	$	2,435		$	2,735		$	2,749		$	110		$	125		$	141
Interest cost		11,046			11,935			12,246			536			571			598
Expected return on plan assets ⁽¹⁾		(20,217	)		(21,506	)		(23,665	)		(474	)		(445	)		(573	)
Amortization of unrecognized:
Prior service cost		498			605			611			—			—			—
Loss/(gain)		7,245			6,062			4,164			378			296			275
Additional cost due to early retirement		692			282			670			—			—			—
Curtailment loss		651			—			—			—			—			—


Net expense/(income)	$	2,350		$	113		$	(3,225	)	$	550		$	547		$	441


Weighted-average actuarial assumptions ⁽²⁾
Benefit obligation assumptions:
Discount rate		4.84	%		4.06	%		4.91	%		3.85	%		3.46	%		3.93	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%		0.56	%		0.69	%		0.77	%
Pension expense/(income) assumptions:
Discount rate		4.06	%		4.91	%		5.51	%		3.46	%		3.86	%		4.38	%
Expected return on plan assets ⁽¹⁾		7.75	%		8.00	%		8.50	%		3.10	%		3.00	%		3.60	%
Rate of compensation increase		3.00	%		3.00	%		4.18	%		0.69	%		0.72	%		0.72	%

⁽¹⁾

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

⁽²⁾

During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

Net postretirement expense for the years ended on December 31 include the following components:


	Other Postretirement Benefit Plan
($ in thousands)	2013			2012			2011

Service cost	$	7		$	9		$	15
Interest cost		223			255			287
Amortization of unrecognized:
Loss/(gain)		—			(40	)		(5	)


Net (income)/expense	$	230		$	224		$	297


Weighted-average actuarial assumptions ⁽¹⁾
Benefit obligation assumptions:
Discount rate		4.84	%		4.06	%		4.91	%
Rate of compensation increase		0	%		0	%		0	%
Pension income/postretirement Expense assumptions:
Discount rate		4.06	%		4.91	%		5.51	%
Rate of compensation increase		0	%		0	%		0	%

(1)

During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

In the fourth quarter of 2013, a modification was made to the CTS Corporation Domestic Pension Plans freezing benefits for all salaried and non-bargaining unit hourly participants effective December 31, 2013. We recorded a curtailment charge of $0.7 million for the year ended December 31, 2013 in conjunction with the freeze.

The discount rate utilized to estimate CTS’ pension and postretirement obligations is based on market conditions at December 31, 2013, and is determined using a model consisting of high quality bond portfolios that match cash flows of the plans’ projected benefit payments based on the plan participants’ service to date and their expected future compensation. Use of the rate produced by this model generates a projected benefit obligation that equals the current market value of a portfolio of high quality bonds whose maturity dates match the timing and amount of expected future benefit payments.

The discount rate used to determine 2013 pension income and postretirement expense for CTS’ pension and postretirement plans is based on market conditions at December 31, 2012 and is the interest rate used to estimate interest incurred on the outstanding projected benefit obligations during the period.

CTS utilizes a building block approach in determining the long-term rate of return for plan assets. Historical markets are reviewed and long-term relationships between equities and fixed-income are preserved consistent with the generally accepted capital market principle that assets with higher volatility generate a greater return over the long-term. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to ensure for reasonableness and appropriateness.

CTS´ pension plan asset allocation at December 31, 2013 and 2012, and target allocation for 2014 by asset category are as follows:


	Target Allocations			Percentage of Plan Assets at December 31,
Asset Category	2014			2013			2012


Equity securities ⁽¹⁾		60	%		67	%		62	%
Debt securities		25	%		20	%		24	%
Other		15	%		13	%		14	%

Total		100	%		100	%		100	%

(1)

Equity securities include CTS common stock in the amounts of approximately $29.0 million (9% of total plan assets) at December 31, 2013 and approximately $15.8 million (6% of total plan assets) at December 31, 2012.

CTS employs a total return on investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. The investment portfolio primarily contains a diversified mix of equity and fixed-income investments. The equity investments are diversified across U.S. and non-U.S. stocks. Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.

The following table summarizes the fair values of CTS’ pension plan assets at December 31:


($ in thousands)	2013		2012


Equity securities — U.S. holdings⁽¹⁾	$	175,293	$	143,215
Equity securities — non-U.S. holdings ⁽¹⁾		16,866		29,153
Equity funds — International LP ⁽¹⁾		15,711		—
Equity funds — U.S. LP ⁽¹⁾		12,454		—
Corporate Bonds ⁽²⁾		50,199		51,009
Cash and cash equivalents ⁽³⁾		9,994		10,827
Debt securities issued by U.S., state and local governments ⁽⁵⁾		10,487		10,117
Partnerships ⁽⁷⁾		9,010		6,330
Long/short equity-focused hedge funds⁽⁶⁾		11,147		9,937
International hedge funds ⁽⁴⁾		10,958		10,395
Mortgage-backed securities ⁽⁸⁾		5,176		6,139
Fixed annuities ⁽⁹⁾		1,620		1,681
Other asset-backed securities		163		188


Total fair value of plan assets	$	329,078	$	278,991

The fair values at December 31, 2013 are classified within the following categories in the fair value hierarchy:


($ in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total


Equity securities – U.S. holdings⁽¹⁾	$	175,293	$	—	$	—	$	175,293
Equity securities – non-U.S. holdings⁽¹⁾		16,866		—		—		16,866
Equity funds – International LP ⁽¹⁾		—		15,711		—		15,711
Equity funds – U.S. LP⁽¹⁾		—		12,454		—		12,454
Corporate Bonds ⁽²⁾		—		50,199		—		50,199
Cash and cash equivalents ⁽³⁾		9,994		—		—		9,994
Debt securities issued by U.S. and U.K., state and local governments ⁽⁵⁾		—		10,487		—		10,487
Partnerships ⁽⁷⁾		—		—		9,010		9,010
Long/short equity-focused hedge funds ⁽⁶⁾		—		—		11,147		11,147
International hedge funds ⁽⁴⁾		—		—		10,958		10,958
Mortgage-backed securities ⁽⁸⁾		—		5,176		—		5,176
Fixed annuity contracts⁽⁹⁾		—		—		1,620		1,620
Other asset-backed securities		—		163		—		163

Total	$	202,153	$	94,190	$	32,735	$	329,078

The fair values at December 31, 2012 are classified within the following categories in the fair value hierarchy:


($ in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total


Equity securities – U.S. holdings⁽¹⁾	$	143,215	$	—	$	—	$	143,215
Equity securities – non-U.S. holdings⁽¹⁾		29,153		—		—		29,153
Corporate Bonds ⁽²⁾		—		51,009		—		51,009
Cash and cash equivalents ⁽³⁾		10,827		—		—		10,827
International hedge fund ⁽⁴⁾		—		—		10,395		10,395
Debt securities issued by U.S., state and local governments ⁽⁵⁾		—		10,117		—		10,117
Long/short equity-focused hedge fund ⁽⁶⁾		—		—		9,937		9,937
Partnerships ⁽⁷⁾		—		—		6,330		6,330
Mortgage-backed securities ⁽⁸⁾		—		6,139		—		6,139
Fixed annuity contracts⁽⁹⁾		—		—		1,681		1,681
Other asset-backed securities		—		188		—		188


Total	$	183,195	$	67,453	$	28,343	$	278,991

⁽¹⁾

Comprised of common stocks in various industries. The Pension Plan fund manager may shift investments from value to growth strategies or vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan’s investment objectives, which are to provide for a reasonable amount of long-term growth of capital without undue exposure to volatility, and protect the assets from erosion of purchasing power.

⁽²⁾

Comprised of investment grade securities in various industries.

⁽³⁾

Comprised of investment grade short-term investment funds.

⁽⁴⁾

This hedge fund allocates its capital across several direct hedge-fund organizations. This fund invests with hedge funds that employ “non-directional” strategies. These strategies do not require the direction of the markets to generate returns. The majority of these hedge funds generate returns by the occurrence of key events such as bankruptcies, mergers, spin-offs, etc.

⁽⁵⁾

Comprised of investment grade securities that are backed by the U.S., state or local governments.

⁽⁶⁾

The hedge fund manager utilizes fundamental research and invests in equities both long (seeking price appreciation) and short (expectation that the stock will fall) instruments.

⁽⁷⁾

Comprised of partnerships that invest in various U.S. and international industries.

⁽⁸⁾

Comprised of investment grade securities in which approximately $1.1 million and $4.9 million are backed by the U.S. government for the years ended December 31, 2013 and December 31, 2012, respectively, and the remainder by commercial real estate.

⁽⁹⁾

Comprised of fixed annuity contracts purchased at market value when plan participants retire.

The Pension Plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below:

•

Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that the pension plan trustees have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

•

Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active or inactive markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals.

•

Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable.

The table below reconciles the Level 3 international hedge fund assets within the fair value hierarchy:


($ in thousands)	Amount


Fair value of Level 3 hedge fund assets at December 31, 2011	$	—
Capital contributions		10,000
Realized and unrealized gain		395


Fair value of Level 3 hedge fund assets at December 31, 2012	$	10,395
Capital contributions		—
Realized and unrealized gain		563


Fair value of Level 3 hedge fund assets at December 31, 2013	$	10,958

The table below reconciles the Level 3 long/short equity-focused hedge fund assets within the fair value hierarchy:


($ in thousands)	Amount


Fair value of Level 3 hedge fund assets at December 31, 2011	$	—
Capital contributions		10,000
Realized and unrealized loss		(63	)


Fair value of Level 3 hedge fund assets at December 31, 2012	$	9,937

Capital contributions		4,650
Capital distributions		(4,697	)
Realized and unrealized gain		1,257


Fair value of Level 3 hedge fund assets at December 31, 2013	$	11,147

The hedge fund manager reviews the net asset values of the underlying portfolio of hedge funds and also the hedge fund positions within the portfolio. If the positions cannot be exited within one year these funds are considered level 3 investments within the fair value hierarchy.

The table below reconciles the Level 3 partnership assets within the fair value hierarchy:


($ in thousands)	Amount


Fair value of Level 3 partnership assets at January 1, 2012	$	3,586
Capital contributions		3,763
Net ordinary gain attributable to partnership assets		2
Realized and unrealized gain		688
Capital distributions		(1,709	)


Fair value of Level 3 partnership assets at December 31, 2012		6,330
Capital contributions		2,462
Net ordinary gain attributable to partnership assets		—
Realized and unrealized gain		822
Capital distributions		(604	)


Fair value of Level 3 partnership assets at December 31, 2013	$	9,010

The partnership fund manager uses a market approach in estimating the fair value of the plan’s Level 3 asset. The market approach estimates the fair value by first, determining the entity’s earnings before interest, taxes, depreciation and amortization and then multiplying that value by an estimated multiple. When establishing an appropriate multiple, the fund manager considers recent comparable private company transactions and multiples paid. The entity’s net debt is then subtracted from the calculated amount to arrive at an estimated fair value for the entity. The fund manager’s goal is to provide a conservative estimate of the fair value of such assets and to utilize conservative estimates of multiples used in establishing such fair values.

The fixed annuity contracts were purchased at market value when plan participants retire in order to provide these participants with the pension benefits under the rules of the pension plan. Once purchased, these annuities have no tradable value. Fair value has instead been assessed as the present value, using certain actuarial assumptions, of the stream of expected payments. Accordingly, these fixed annuities are classified as Level 3 under the fair value hierarchy.

The table below reconciles the Level 3 fixed annuity contracts within the fair value hierarchy:


($ in thousands)	Amount


Fair value of Level 3 fixed annuity contracts at January 1, 2012	$	1,538
Purchases		—
Benefits paid		(106	)
Net gain		249


Fair value of Level 3 fixed annuity contracts at December 31, 2012		1,681
Purchases		—
Benefits paid		(108	)
Net gain		47


Fair value of Level 3 fixed annuity contracts at December 31, 2013	$	1,620

The expected contributions to be made by CTS to the domestic and foreign pension plans during 2014 are $4.8 million and $7.1 million, respectively. The expected contributions to be made by CTS to the other postretirement benefit plan during 2014 are $0.3 million.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:


($ in thousands)	Domestic Pension Plans		Foreign Pension Plans		Other Postretirement Benefit Plan

2014	$	19,820	$	478	$	341
2015		16,033		466		340
2016		16,335		618		337
2017		16,582		470		333
2018		16,976		620		328
Thereafter		84,843		4,383		1,527

Defined Contribution Plans

CTS sponsors a 401(k) plan that covers substantially all of its U.S. employees. Contributions and costs are generally determined as a percentage of the covered employee’s annual salary. Amounts expensed for the 401(k) plan and the other plans totaled $4.7 million in 2013, $5.1 million in 2012, and $4.5 million in 2011.