CTS Corporation 2026 Q3 Earnings Call

Good morning, and thank you for joining us. We delivered a strong third quarter with revenue growing 5% to $150 million. Our diversified end markets increased 7% year-over-year and represented 60% of total sales. Strong execution drove record profitability and robust cash generation with gross margin of 42.2%, adjusted EBITDA margin of 24.7%, and adjusted diluted EPS of $0.77. While transportation sales increased modestly, continued growth across our diversified end markets enabled strong financial results and improved the quality of our earnings. As announced last Friday, we are excited about the acquisition of Millar, a highly complementary business that strengthens our position in diversified end markets, primarily medical, and expands our portfolio in advanced pressure sensing technologies. Ashish Agrawal, our CFO, will take us through the safe harbor statement.

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 today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and the supplemental slide presentation, which can be found in the Investors section of the CTS website. I will now turn the discussion back over to Pratik.

Thank you, Ashish. We finished the third quarter with sales of $150 million, representing a 5% increase compared to the third quarter of 2025 and up 3% sequentially from the second quarter. Our diversified end markets were up 7% year-over-year, while transportation sales were up 2%. Diversified end market sales were 60% of overall company revenue in the quarter, up from 59% in the prior year period. For 2026 year to date, diversified sales were up 12% and transportation sales remained flat over the same period last year. Our book-to-bill ratio for the third quarter was 1.18, reflecting sustained customer demand across our portfolio. Diversified bookings were particularly strong with a book-to-bill of 1.3. We added one new customer in the industrial end market and one in the transportation end market.

The strength of our operational execution and favorable product mix was evident as we expanded gross margin to a record 42.2%, up 330 basis points compared to the third quarter of 2025. Adjusted EBITDA margin reached 24.7%, an improvement of approximately 90 basis points year-over-year. Third quarter adjusted diluted earnings were a record $0.77 per share, up from $0.60 in the third quarter of 2025. We maintained strong cash generation, supporting our balanced capital allocation approach that includes strategic investments in growth and returning cash to shareholders. Ashish will add further color on our financial performance later in today's call. The recently completed acquisition of Millar represents another important step in our strategy to reshape CTS towards a more diversified portfolio of high-value, differentiated technologies serving attractive end markets.

The acquisition meaningfully increases our exposure to medical and industrial markets while expanding our capabilities into pressure, chemical, and electrochemical sensing, and differentiated catheter-based technologies. Millar's vertically integrated capabilities spanning design, microfabrication, and precision manufacturing enable differentiated solutions for demanding applications. Beyond the strategic fit, we see compelling opportunities to accelerate growth by leveraging complementary technologies, expanding customer relationships, and bringing CTS's broader engineering and commercial capabilities to the Millar platform. We expect Millar to generate revenues of approximately $30 million on an annual basis. The acquisition is expected to be accretive in the second half of 2027. The medical end market continued to be a significant growth driver in the third quarter, generating revenue of $27 million, an increase of 21% year-over-year, and decrease of 4% sequentially, mainly due to timing of orders.

Performance was fueled by broad-based demand across our sensing and actuation technologies, particularly in applications supporting advanced diagnostics and therapeutic treatments. New business wins were impacted by timing of orders in the quarter, resulting in a book-to-bill ratio of 0.66. During the quarter, we had key wins in implantable pacemaker applications, ultrasound diagnostics, and therapeutic applications across all regions. We continue to partner with leading global medical OEMs on next generation programs across diagnostic imaging therapeutics and several emerging applications. These opportunities, combined with favorable demographics and continued medical innovation, reinforce our confidence in the long-term growth of the market. Aerospace and Defense sales were $24 million in the third quarter, 7% below prior year, but 30% higher quarter-over-quarter, reflecting the flow of program funding and government contract orders. Orders remained very healthy, as reflected in our 1.91 book-to-bill ratio, providing strong support for future growth.

We continue to move up the value chain, expanding from components to higher value sensing solutions and integrated subsystems for naval sonar, undersea warfare, and secure communications applications. During the quarter, we achieved an important win by successfully scaling production of a critical sensing solution for a US Navy undersea warfare application. Increasing investments in traditional defense infrastructure, as well as our customer engagements in modern warfare applications, position us well for the long-term growth in this end market. Our industrial end market continued its strong momentum in the third quarter, with sales of $40 million increasing 7% year-over-year and 1% sequentially, further extending the recovery trend that began in 2025. Growth was broad-based across OEM customers and distribution partners, and bookings remained healthy with a book-to-bill ratio of 1.36.

During the quarter, we secured multiple design wins across a diverse set of applications, including distribution components, industrial printing, data center applications, refrigeration, HVAC systems, and industrial automation. We added one new customer during the quarter, expanding our presence for temperature sensing in industrial steam and condensate systems. Looking ahead, we expect industrial demand to remain healthy, supported by favorable secular trends including data center applications, automation, connectivity, digitalization, and the increasing focus on energy efficiency. These trends continue to expand the addressable market for our industrial portfolio, positioning us well for sustained growth. Transportation sales in the third quarter were $60 million, up 2% versus the prior year and up 1% sequentially. We secured important new business wins across our transportation portfolio, particularly in foot controls and sensing applications.

These wins expand our presence across global vehicle platforms, establish our entry into the seat track market with Japanese OEMs, and extend our floor-hinged pedal business into China, creating additional opportunities for future growth. Total booked business was approximately $1.2 billion at the end of the quarter. We added one new tier one customer during the quarter. We continue to build momentum around our eBrake technology with multiple customer opportunities progressing across future hybrid and electric vehicle platforms. Positive customer feedback, continued product development, and upcoming vehicle demonstrations are building customer momentum and positioning eBrake for broader adoption. Turning to the outlook for 2026. For our diversified end markets, demand is expected to remain solid. In medical, we see continued momentum, especially with the acquisition of Millar. In A&D, revenue is expected to remain strong in the fourth quarter given our robust order backlog.

In industrial, OEM and distribution demand is expected to remain healthy. Across transportation markets, global light vehicle production volumes are forecasted to be flat to modestly down given ongoing tariff, geopolitical, and consumer demand uncertainties. We continue to closely monitor and evaluate the tariff and geopolitical environment. Our focus remains on agility in adapting to cost and price adjustments in close collaboration with our customers and suppliers. Assuming the continuation of current market conditions for the full year 2026, we are raising our guidance with sales now expected in the range of $580 million to $590 million, and adjusted diluted EPS in the range of $2.78 to $2.88. Now I'll turn it over to Ashish, who will walk us through the financial results in more details.

Thank you, Pratik. Third quarter sales were $149.6 million, up 5% compared to the third quarter of 2025, and up 3% sequentially from the second quarter of 2026. Sales to diversified end markets increased 7% year-over-year, while sales to transportation customers were up 2%. Foreign currency changes impacted sales favorably by approximately $0.5 million in the quarter. Our adjusted gross margin was a record 42.2%, up 330 basis points compared to the third quarter of 2025, and up approximately 70 basis points sequentially. The year-over-year improvement was driven by operational execution, a favorable impact of approximately $1.4 million from foreign currency changes, and an above normal favorable impact of end market mix driven by timing of certain projects. We expect some normalization in profitability in the next few quarters.

Gross margin from the Millar acquisition is expected to be accretive to our overall gross margin. Adjusted EBITDA margin was 24.7%, an improvement of approximately 90 basis points versus the prior year period. Our effective tax rate for the quarter was 18.9%, excluding discrete items. For the full year, we continue to expect our tax rate to be in the range of 20%-22%, excluding discrete items. Adjusted earnings for the third quarter were a record $0.77 per diluted share, up from $0.60 per diluted share in the third quarter of 2025. Our EPS this quarter includes foreign currency favorability of approximately $0.04. Moving to cash generation and the balance sheet, we generated strong operating cash flow of $44 million in the third quarter. Capital expenditures were $2.4 million in the quarter, and free cash flow was approximately $41 million.

Our balance sheet strengthened further with a cash balance of $144 million and borrowings of $55 million at the end of the quarter. in October, we deployed approximately $50 million in cash towards the acquisition of Millar. During the quarter, we repurchased 57,000 shares of CTS stock for approximately $3.4 million. We have $75 million remaining under our current share repurchase program. We remain focused on strong cash generation and disciplined capital allocation and will continue to support organic growth, strategic acquisitions, and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time.