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Item 2. Management’s Discussion and Analysis

2026-04-29 compared with 2025-10-28 · 52 added, 123 removed, 113 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Fin ancial Condition and Results of Operations (“MD&A”)

(in thousands, except percentages and per share amounts)

(in thousands of dollars, except percentages and per share amounts)

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2025.

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Our success is dependent on the ability to execute our strategy to support these trends.

We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, as well as the ability to add new customers, launch new products or penetrate new markets.

We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, geopolitical conflicts, availability and cost of rare earth elements, minerals, and metals, as well as the ability to add new customers, launch new products or penetrate new markets.

Many of these, and other risks and uncertainties relating to the Company and our business, are discussed in further detail in Item 1A.

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Results of Operations:

Third Quarter 2025 versus Third Quarter 2024

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2025 and September 30, 2024:

First Quarter 2026 versus First Quarter 2025

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2026 and March 31, 2025:

Three Months Ended

September 30, 2025

September 30, 2024

March 31, 2026

March 31, 2025

Percentage of Net Sales –

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Diluted net earnings per share

Net sales were $142,970 in the third quarter of 2025, an increase of $10,586 or 8.0% from the third quarter of 2024.

Net sales to the diversified end markets increased $15,070 or 21.7%.

SyQwest accounted for $8,772 in sales in the third quarter of 2025, compared to $3,575 in the third quarter of 2024.

We achieved growth in the aerospace & defense and medical end markets and saw continued recovery in the industrial end market.

Net sales to the transportation end market decreased $4,484 or 7.1%, primarily driven by lower volumes of our commercial vehicle related products.

Changes in foreign exchange rates had a net benefit on sales of $1,005, primarily due to the U.S.

Net sales were $139,230 in the first quarter of 2026, an increase of $13,461 or 10.7% from the first quarter of 2025.

Net sales to the diversified end markets increased $11,792 or 17.5% while net sales to transportation markets increased $1,669 or 2.9%.

Changes in foreign exchange rates increased net sales by $2,898, net of hedges, due to the U.S.

Dollar depreciating compared to the Euro.

Gross margin was $55,341 in the third quarter of 2025, an increase of $6,152 or 12.5% from the third quarter of 2024.

Our gross margin percentage increased from 37.2% for the third quarter of 2024 to 38.7% for the third quarter of 2025 due to improved mix of sales by end market and operational improvements.

Amortization of the inventory step-up related to the SyQwest acquisition also adversely impacted gross margin in the third quarter of 2024.

See Note 3 “Business Acquisitions” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Selling, general and administrative (“SG&A”) expenses were $27,222 or 19.0% of net sales in the third quarter of 2025 versus $22,509 or 17.0% of net sales in the third quarter of 2024.

The increase in SG&A expenses was primarily driven by increased environmental expense in the third quarter of 2025.

See Note 10 “Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Research and development (“R&D”) expenses were $6,901 or 4.8% of net sales in the third quarter of 2025 compared to $5,031 or 3.8% of net sales in the comparable quarter of 2024.

The increase during the three months ended September 30, 2025 is due to the timing of certain spend and recoveries from customers.

Gross margin was $54,986 in the first quarter of 2026, an increase of $8,437 or 18.1% from the first quarter of 2025.

The increase in gross margin was driven by improved mix of sales to our diversified end markets as well as efficiency improvements.

Changes in foreign exchange rates increased gross margin by $672, net of hedges, due to the U.S.

Dollar depreciating compared to the Euro.

See Note 11, “Derivative Financial Instruments” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

As a result, our gross margin percentage increased from 37.0% for the first quarter of 2025 to 39.5% for the first quarter of 2026.

Selling, general and administrative (“SG&A”) expenses were $25,984 or 18.7% of net sales in the first quarter of 2026, versus $23,623 or 18.8% of net sales in the first quarter of 2025.

The increase in SG&A expenses is primarily related to an increase in incentive compensation expense.

Research and development (“R&D”) expenses were $6,634 or 4.8% of net sales in the first quarter of 2026 compared to $6,190 or 4.9% of net sales in the first quarter of 2025.

Our R&D expenses are in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $280 or 0.2% of net sales in the third quarter of 2025 compared to $773 or 0.6% of net sales in the third quarter of 2024.

The restructuring charges in the quarter ended September 30, 2025 were primarily related to changes to adjust our business in response to demand changes across certain locations and products.

Restructuring charges were $386 or 0.3% of net sales in the first quarter of 2026 compared to $451 or 0.4% of net sales in the first quarter of 2025.

The restructuring charges in the quarter ended March 31, 2026 were primarily related to efficiency enhancements.

See Note 7, “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

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Three Months Ended

September 30,

Interest expense

Interest income

Other income (expense), net

Other (expense) income, net

Total other expense, net

Other (expense) income, net is due to foreign currency losses, primarily related to the Chinese Renminbi, Euro and Mexican Peso.

Interest income decreased due to lower investments of available cash as a result of the SyQwest acquisition in the third quarter of 2024.

Interest expense decreased due to lower borrowings in the first quarter of 2026 compared to the first quarter of 2025.

Three Months Ended

September 30,

Effective tax rate

Our effective income tax rate was 30.6% and 16.8% in the third quarters of 2025 and 2024, respectively.

The increase in the effective income tax rate is primarily attributable to a change in mix of earnings taxed at higher rates and the impact of the OBBBA.

See Note 17 “Income Taxes” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Results of Operations:

Nine Months ended September 30, 2025 versus Nine Months Ended September 30, 2024

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2025, and September 30, 2024:

Nine Months Ended

September 30, 2025

September 30, 2024

Percentage of Net Sales –

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Total operating expenses

Operating earnings

Total other income (expense), net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

Net sales were $404,047 in the nine months ended September 30, 2025, an increase of $15,751 or 4.1% from the nine months ended September 30, 2024.

Net sales to the diversified end markets increased $31,810 or 16.4%.

SyQwest accounted for $16,650 in sales for the nine months ended September 30, 2025 compared to $3,575 for the nine months ended September 30, 2024.

We achieved growth in the aerospace & defense and medical end markets and saw continued recovery in the industrial end market.

Net sales to the transportation market decreased $16,059 or 8.3%, primarily driven by lower volumes of our commercial vehicle related products.

Changes in foreign exchange rates had a net benefit on sales of approximately $1,082 primarily due to rate changes between the U.S.

Dollar and Euro.

Gross margin was $154,320 for the nine months ended September 30, 2025, an increase of $13,669 or 9.7% from the nine months ended September 30, 2024.

Our gross margin percentage was 38.2% for the first nine months of 2025, an increase from 36.2% in the first nine months of 2024 due to improved mix of sales by end market and operational improvements.

Amortization of the inventory step-up related to the SyQwest acquisition also adversely impacted gross margin in the third quarter of 2024.

See Note 3 “Business Acquisitions” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $2,061 primarily due to rate changes between the U.S.

Dollar, Mexican Peso and Euro.

SG&A expenses were $73,922 or 18.3% of net sales for the nine months ended September 30, 2025 versus $66,100 or 17.0% of net sales for the nine months ended September 30, 2024.

The increase in SG&A expenses was primarily driven by higher depreciation and amortization expense in 2025 from the SyQwest acquisition and increased environmental expense in the third quarter of 2025.

See Note 10 “Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

R&D expenses were $19,416 or 4.8% of net sales for the nine months ended September 30, 2025 compared to $17,718 or 4.6% of net sales for the nine months ended September 30, 2024.

The increase during the nine months ended September 30, 2025 is due to the pursuit of growth opportunities in the transportation end-market and lower recoveries from customers.

Restructuring charges were $1,028 or 0.3% of net sales for the nine months ended September 30, 2025 compared to $3,657 or 0.9% of net sales for the nine months ended September 30, 2024.

The restructuring charges in the nine months ended September 30, 2025 were primarily related to changes to adjust our business in response to demand changes across certain locations and products.

See Note 8 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Other income and expense items are summarized in the following table:

Nine Months Ended

September 30,

Interest expense

Interest income

Other income (expense), net

Total other (expense) income, net

Interest income decreased due to lower investments of available cash into short-term, cash equivalent, high-yield deposit accounts as a result of the SyQwest acquisition in the third quarter of 2024.

Interest expense increased due to higher borrowings to fund the SyQwest acquisition.

Other income (expense), net is driven by foreign currency gains primarily related to the Chinese Renminbi, Euro and Mexican Peso.

Nine Months Ended

September 30,

Effective tax rate

Our effective income tax rate was 22.5% and 17.4% for the nine months ended September 30, 2025 and 2024, respectively.

The increase in the effective income tax rate is primarily attributable to a change in mix of earnings taxed at higher rates and the impact of the OBBBA.

See Note 17 “Income Taxes” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Our effective income tax rate was 20.7% and 17.1% in the first quarters of 2026 and 2025, respectively.

The increase in the effective income tax rate is primarily attributed to a change in mix of earnings taxed at higher rates.

Liquidity and Capital Resources

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility (as defined below).

We historically have funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility (as defined below).

We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, investments, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter.

However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Cash and cash equivalents were $110,296 at September 30, 2025, and $94,334 at December 31, 2024, of which $109,426 and $92,944, respectively, were held outside the United States.

Total long-term debt was $90,700 as of September 30, 2025 and $92,300 as of December 31, 2024.

Cash and cash equivalents were $90,851 at March 31, 2026, and $82,295 at December 31, 2025, of which $89,576 and $75,943, respectively, were held outside the United States.

Total long-term debt was $62,500 as of March 31, 2026 and $57,500 as of December 31, 2025.

Cash Flow Overview

Cash Flows from Operating Activities

Net cash provided by operating activities was $72,893 during the nine months ended September 30, 2025.

Net cash provided by operating activities was $17,295 during the three months ended March 31, 2026.

Components of net cash provided by operating activities included net earnings of $17,197, depreciation and amortization expense of $8,810, other net non-cash items of $2,940, and a net cash outflow from changes in assets and liabilities of $11,652.

Net cash provided by operating activities was $73,335 during the nine months ended September 30, 2024.

Net cash provided by operating activities was $15,518 during the three months ended March 31, 2025.

Components of net cash provided by operating activities included net earnings of $13,367, depreciation and amortization expense of $8,494, other net non-cash items of $1,339, and a net cash outflow from changes in assets and liabilities of $7,682.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2025 was $12,542 for payments on capital expenditures.

Net cash used in investing activities for the nine months ended September 30, 2024 was $134,455, driven by payments for the SyQwest acquisition of $121,912 and payments on capital expenditures of $12,543.

Net cash used in investing activities was $2,109 for the three months ended March 31, 2026, driven by capital expenditures of $4,997 partially offset by the maturity of short term investments of $2,888.

Net cash used in investing activities was $4,465 for the three months ended March 31, 2025, driven entirely by capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2025 was $47,404.

The net cash outflow was the result of treasury stock purchases of $39,546, net cash payments of long-term debt of $1,600, taxes paid on behalf of equity award participants of $2,675, and dividends paid of $3,583.

Net cash used in financing activities for the nine months ended September 30, 2024 was $7,494.

The net cash outflow was the result of treasury stock purchases of $34,787, net cash cash borrowing of long-term debt of $35,200, taxes paid on behalf of equity award participants of $3,154, dividends paid of $3,677, and payments of contingent consideration of $1,076.

Net cash used in financing activities for the three months ended March 31, 2026 was $6,441.

The net cash outflow was the result of treasury stock purchases of $8,558 (net of excise taxes unpaid), dividends paid of $1,151, taxes paid on behalf of equity award participants of $1,732, partially offset by net cash borrowed on long-term debt of $5,000.

Net cash used in financing activities for the three months ended March 31, 2025 was $15,900.

The net cash outflow was the result of treasury stock purchases of $6,465 (net of excise taxes unpaid), dividends paid of $1,201, taxes paid on behalf of equity award participants of $2,634, and net cash used in the paydown of long-term debt of $5,600.

Capital Resources

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Long‑term debt is comprised of the following:

September 30,

Total credit facility

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Amount available, subject to covenant restrictions

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sub limits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.

This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.

On November 24, 2025, we entered into a five-year revolving credit agreement (the “Revolving Credit Facility”) with a group of banks for a total credit facility availability of $300,000, which may be increased by at least $125,000 pursuant to the Revolving Credit Facility subject to administrative agent's approval.

The Revolving Credit Facility is unsecured and replaced the prior $400,000 revolving credit facility, which would have expired on December 15, 2026.

The Revolving Credit Facility matures on November 24, 2030 and modified the financial and non-financial covenants to provide the Company additional flexibility.

Borrowings in U.S.

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The contractual rate of these arrangements ranges from 2.45% to 3.36%.

The Revolving Credit Facility includes a swing-line sublimit of $20,000 and a letter of credit sublimit of $20,000.

The Revolving Credit Facility includes a swingline sublimit of $20,000 and a letter of credit sublimit of $20,000 and an alternative currency sublimit of $150,000.

We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.

The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio.

We were in compliance with all debt covenants at September 30, 2025.

We were in compliance with all debt covenants at March 31, 2026.

Critical Accounting Policies and Estimates

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S.

generally accepted accounting principles.

In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures.

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The critical accounting policies and estimates are consistent with those discussed in Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

During and as of the three and nine months ended September 30, 2025, there were no significant changes in the application of critical accounting policies or estimates.

Refer to Note 1, “Basis of Presentation” for updates to the Company’s critical accounting policies and estimates during the three months ended March 31, 2026.

Significant Customers

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Three Months Ended

Nine Months Ended

September 30, 2025

September 30, 2024

September 30, 2025

September 30, 2024

March 31, 2026

March 31, 2025

Toyota Motor Corporation

No other customer accounted for 10% or more of total net sales during these periods.

We continue to focus on broadening our customer base to grow our non-transportation end market exposure at a faster rate.

Forward ‑ Looking Statements

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Examples of factors that may affect future operating results and financial condition include, but are not limited to:

supply chain disruptions (including, but not limited to, the availability of rare earth elements, minerals and metals);

changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, and in respect to the business in which CTS operates;

unanticipated issues in integrating acquisitions including, without limitation the integration of SyQwest;

supply chain disruptions (including, but not limited to, the availability and cost of rare earth elements, minerals and metals);

changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, and in respect to the businesses in which CTS operates;

unanticipated issues in integrating acquisitions;

the funding of contracts by the U.S.

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risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the impact of tariffs on China, Canada and Mexico, and other nations);

the potential impact of U.S./China relations and the impact of the conflicts in Ukraine, and the Middle East may have on our business, results of operations and financial condition;

the potential impact of U.S./China relations and the impact of geopolitical conflicts may have on our business, results of operations and financial condition;

write offs of goodwill on our balance sheet;

the amount and timing of any share repurchases;

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Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A.

of CTS’ most recent Annual Report on Form 10-K and other filings made with the SEC.

of CTS’s most recent Annual Report on Form 10-K and other filings made with the SEC.

CTS undertakes no obligation to publicly update CTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

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See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2025.

During the nine months ended September 30, 2025, there have been no material changes in our exposure to market risk.

During the three months ended March 31, 2026, there have been no material changes in our exposure to market risk.

Control s and Procedures

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Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended September 30, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2026, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHE R INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis