CTS Corp. Q3 FY2026 earnings call

• Strong Financial Execution: Delivered record profitability with adjusted diluted EPS of $0.77 and robust cash generation of $44 million in operating cash flow.
• Strategic Acquisition of Millar: Completed acquisition to expand presence in medical and industrial markets, adding advanced pressure sensing and catheter technologies; expected to generate ~$30 million annual revenue and be accretive by H2 2027.
• Diversified Market Growth: Diversified end markets grew 7% YoY, driven by strong performance in Medical (+21%), Industrial (+7%), and sequential recovery in Aerospace & Defense (+30%).
• Operational Efficiency: Expanded gross margin by 330 basis points due to favorable product mix, operational execution, and foreign currency benefits.
• Book-to-Bill Strength: Overall book-to-bill ratio was 1.18, with particularly strong ratios in Diversified bookings (1.3) and Aerospace & Defense (1.91).
• New Business Wins: Secured wins in implantable pacemakers, ultrasound diagnostics, US Navy undersea warfare applications, data center components, and entry into Japanese OEM seat track market.

Total revenue was $150 million, representing a 5% year-over-year increase. Diversified end markets contributed 60% of total sales, growing 7% year-over-year, while transportation sales accounted for the remaining 40%, growing 2% year-over-year. Specific segment revenues were: Medical ($27 million, +21% YoY), Aerospace and Defense ($24 million, -7% YoY but +30% sequentially), Industrial ($40 million, +7% YoY), and Transportation ($60 million, +2% YoY). Gross margin reached a record 42.2% (up 330 basis points YoY), and adjusted EBITDA margin was 24.7%.

• Raised full-year 2026 sales guidance to $580–$590 million (previously implied lower range based on prior trends).
• Raised full-year 2026 adjusted diluted EPS guidance to $2.78–$2.88.
• Assumed continuation of current market conditions, noting flat to modestly down global light vehicle production forecasts due to tariff and geopolitical uncertainties.

• Tariff and Geopolitical Uncertainty: Ongoing risks from tariffs and geopolitical tensions impacting global trade and supply chains.
• Customer Concentration: While Millar has some customer concentration, management states it will not materially change CTS's overall risk profile.
• Volatility in Aerospace & Defense: Revenue recognition is lumpy due to program funding cycles and order timing, leading to potential quarter-to-quarter volatility.
• Currency Fluctuations: Foreign exchange impacts can favorably or unfavorably affect reported margins and earnings.

Q: Analyst asked about Millar’s EBITDA margin accretion and historical growth drivers.

A: CFO clarified that while gross margin is accretive, EBITDA may not be immediately accretive but is expected to become healthy post-synergies, with EPS accretion targeted for H2 2027. He emphasized Millar’s strong position in advanced medical treatment as the primary growth driver. / Q: Analyst inquired about the financing structure of the Millar deal and integration plans.

A: CFO confirmed the acquisition was entirely cash-funded without additional borrowing. Management stated they expect no drastic changes to Millar’s standalone operations or R&D spend, focusing instead on leveraging talent and gradual cultural/systems integration. / Q: Analyst questioned the sustainability of the record 42.2% gross margin given favorable mix effects.

A: CFO acknowledged an unusually favorable end-market mix and project timing contributed to the peak, expecting normalization in coming quarters though mid-to-long-term expansion remains the goal. CEO added that turbo smart actuator volumes depend on competitor sourcing mixes, delaying direct volume translation until critical approvals around mid-2027. / Q: Analyst sought clarity on the rebound in Transportation sales and whether it was broad-based.

A: CEO explained the moderate growth was a combination of commercial vehicle segment gains, while the light vehicle market remained flat to slightly down, indicating the recovery was not solely driven by passenger cars.