CTS Corporation Q1 FY2026 earnings call

Good morning and thank you for joining us today. Finished first quarter with sales of 139 million, 11% increase vs first quarter of 2025. Diversified end markets up 18%, transportation sales grew 3%. Book-to-bill ratio for first quarter was 1.1, up 4% vs first quarter of 2025. Operational execution evident as expanded gross margin by 250 basis points in first quarter. Maintained strong cash flow generation. Turning to outlook for 2026, for diversified end markets, demand expected to be solid. For transportation markets, production volumes expected to be down given geopolitical uncertainties. Narrowing sales guidance for full year 2026 in range of 560 to 580 million and adjusted diluted EPS to be in range of $2.35 to $2.45. Prateek walked through end market performance including medical, aerospace and defense, industrial, transportation

Medical end market: Sales of 25 million in first quarter, up 28% vs prior year; bookings up 18% vs prior year; book-to-bill ratio 1.2. Aerospace and defense: Sales of 17 million in first quarter, up 11% vs prior year; book-to-bill ratio less than 1. Industrial: Sales of $37 million in first quarter, up 14% year-over-year; bookings up 28% vs same period last year; book-to-bill ratio 1.29. Transportation: Sales of 60 million in first quarter, up 3% over same period last year and 7% sequentially quarter over quarter

Assuming continuation of current market conditions for full year 2026, narrowing sales guidance in the range of 560 to 580 million and adjusted diluted EPS to be in the range of $2.35 to $2.45

Potential economic impact of current geopolitical conflicts for second half of the year. Supply chain issues related to petroleum products, especially resin, and other components such as rare earth, metals, and semiconductors. Monitoring impact of Section 232 tariff changes. Cost pressures related to precious metals and higher oil prices

Q: The revenue was better than I expected. I was curious if any jobs revenue got pulled forward into the first quarter from the second. Did anything like that happen in the period?

A: No, John. It was a really good quarter. Nothing pulled forward.

Q: I'm curious if the gross margin profile differential between some of the diversified end markets, and I guess we can include the transportation end market. Is it significant that we should really be something cognizant of if medical is sizeably better versus A&D? And how should we think about the puts and takes by end market?

A: In previous discussions, we have talked about our margin profile. In the diversified end markets, we have much better margin profile compared to transportation. Um, and we, you know, as we've talked about, um, we have a pretty good margins on the transportation side as well, but the diversified markets are better, uh, within the diversified markets. Um, it's more, I would say less evenly. It's not as widely spread. Medical is definitely the strongest end market in terms of margin profile, but we do good in pretty much all the diversified end markets.

Q: It looks like debt picked up in the quarter. Why was that the case?

A: In the first quarter, we typically have lower operating cash flow as we do incentive comp payments and those types of things. We also continued our buybacks in the first quarter. So, the combination of those two things and a slightly higher capex than we were normally Those were the key drivers. The debt was up by about $5 million, but compared to where we are overall, we are continuing to make good progress. We have almost fully paid down the borrowings from the CyQuest acquisition at this point.

Q: You mentioned capacity expansion in medical. And I would like to get more color in terms of, uh, how much more, and if there's any, uh, statistics like, um, up to, um, how much like cells you can take, that would be, I think that would be helpful.

A: The capacity in our medical end market primarily refers to what aesthetics application. and we've got strong partnership with some of the customers here where they give us a long-term forecast, and we are able to install capacity ahead of the demand here. We continue to see strong momentum in this end market, and we are expecting a double-digit growth year over year.

Q: There's some mixed benefit and the non the. Non transportation or the diversified air market is a favorable tailwind. On the other hand, there's also the challenge of high oil prices, component costs. How sustainable is the strong gross margin that we are seeing in Q1? Should we expect some headwinds because of those challenges, or do you anticipate that a Q1 gross margin can serve as a baseline that is sustainable?

A: That's a good question. You know, that's something that we look at very, very carefully. In addition to the topics that you mentioned, we also had a slight impact from favorable currency changes, which was about $700,000. So, you know, the currency can go in multiple different directions. So we'll just continue watching the markets for that. We are experiencing cost pressures related to precious metals. That has been going on since late last year and we have been working closely with our customers to manage through the impact of that with pricing changes, with material substitutions, those types of things. More recently, we are also seeing inflation related to oil derived products like resin, epoxy, transportation costs, those types of things, that we are expecting to see more margin or, sorry, cost pressures to, you know, late Q1 going into Q2. And our teams are already working with customers to manage through that and as well as suppliers to manage through that. So we will see some headwinds, but at the same time, we are very, very focused on making sure that um we can make the impact cost neutral on our margins now there can be some timing differences which could impact margins in the short term but we expect to be able to work through it as we have in the past several years Q: The aerospace and defense expectations of funding of various programs will improve in the second half. Booking will pick up. And then considering that the government fiscal calendar of, let's say like end of September, how should we expect, let's say like new bookings, new funding to materialize in sales? I assume there would be some lack. I don't know whether Q4 starting point is somewhat a reasonable expectation.

A: handy. I mean, if you look at for the aerospace and defense and market, and just looking at the broader macro trend, right, overall, the defense spendings will continue to remain elevated due to the current geopolitical unrest, as well as investments in the infrastructure, primarily around the naval side of defense. What we are seeing right now is we are actively engaged in multiple platform discussions with a wide range of customers. However, what we've experienced in the first quarter is a delay in the government funding. But towards the end of the quarter, with the passage of the appropriations bill, we expect that funding pace to pick up in the second half of this year. The other point to note here is that we usually also have a bit of a lumpiness in terms of how we get the orders on the defense side. So you could potentially have a quarter where our book to build might be less than one. However, then it makes it up in the remainder of the year.

Q: Any update on the smart actuator and then potential change in allocation by the customer?

A: Hendi, we continue to be on track with launching the the revised version of the actuator with our customer. And we expect, you know, normalized modest growth in that particular product line for this year.

Q: I'm actually curious about the growth that you saw in the transportation market in the first quarter. I guess, firstly, were you surprised by that?

A: John, I would say we were pleased with how we performed in the light vehicle demand and saw a little bit more positiveness in the commercial vehicle. And we think, as Prateek said, that's going to extend into the second half of the year. As I'm sure you've seen, the commercial truck market has seen a strong bookings profile over the last few months. A lot of people are suggesting that the benefits from those order profiles are a second half event. I'm curious if that's how you see it playing out, or does it affect you in any different way?

A: No, we do see it playing out the same way, John. As you can, you know, in the market right now, we are seeing cautious optimism here, primarily related to the rising freight rates, you know, just improved pricing. And then we've got in the second half of the year, the pre-buy event due to EPA 2027. So we expect it to play out in a very similar manner.

Q: So the expectation for the transportation to be down for the full year, I'm gathering that suggests you expect the global vehicle market to be continually to weaken for the balance of the year. Is that also a fair assessment?

A: John, what we would say on the light vehicle market, it's performing well so far, but in our prepared remarks, we said IHS had forecasted some softness in the second half of the year. And with the geopolitical situation, that's how we're thinking about it at the moment, that some softness in the light vehicle, but strength on the commercial vehicle side, so balancing it out a little bit.

Q: One last question about capital allocation. You're buying back stock. As Ashish pointed out, you are paying down debt, albeit there was working capital needs in the first quarter. What is the outlook right now on the M&A side of the business? Are you in a period of consolidation and working on organic growth, or are you still looking at acquisitions? Can you kind of discuss maybe the size of the markets that you're looking at?

A: Yeah, John, just the key points for us from a capital allocation, first of all, is the supporting the organic growth investments, which we have some nice opportunities, which Prateek touched on as well in medical. We're still pursuing strategic acquisitions to advance our diversification and quality of earnings. And while we have nothing to report today, we're very active in that area. And then returning cash to shareholders is how we're approaching it