What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-07-28 compared with 2026-04-29 · 100 added, 49 removed, 116 unchanged (56% of the section changed)

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

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

(in thousands, 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 principal executive offices are located in Lisle, Illinois.

We design, manufacture, and sell a broad line of sensors, connectivity components, and actuators primarily to original equipment manufacturers (“OEMs”), tier one suppliers for the aerospace and defense, industrial, medical, and transportation markets, and the U.S.

We design, manufacture, and sell a broad line of sensors, connectivity components, and actuators primarily to original equipment manufacturers (“OEMs”), tier one suppliers and distributors for the aerospace and defense, industrial, medical, and transportation markets, and the U.S.

Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world.

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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, 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.

We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and 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.

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

of our Annual Report on Form 10-K and other filings made with the SEC.

Recent Developments

On June 25, 2026 we announced the promotion of Pratik Trivedi to President and Chief Executive Officer, effective July 6, 2026.

Trivedi succeeds Kieran O’Sullivan, who will remain on the Board of Directors (the “Board”) and serve as Executive Chair.

Trivedi became a member of the Board, effective July 6, 2026.

Results of Operations:

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:

Second Quarter 2026 versus Second Quarter 2025

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2026 and June 30, 2025:

Three Months Ended

March 31, 2026

March 31, 2025

June 30, 2026

June 30, 2025

Percentage of Net Sales –

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Operating earnings

Total other income (expense), net

Total other (expense) income, net

Earnings before income taxes

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Diluted net earnings per share

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 $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 $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.

Net sales were $144,780 in the second quarter of 2026, an increase of $9,471, or 7.0%, from the second quarter of 2025.

Net sales to the diversified end markets increased $10,894, or 14.6%.

We achieved continued growth in the medical and industrial end markets, while the aerospace and defense end market declined primarily due to the timing of contract awards.

Net sales to the transportation end market decreased $1,423 or 2.3%.

Changes in foreign exchange rates increased net sales by $1,354, net of hedges.

Gross margin was $60,048 in the second quarter of 2026, an increase of $7,617, or 14.5%, from the second quarter of 2025.

Our gross margin percentage increased from 38.7% for the second quarter of 2025 to 41.5% for the second quarter of 2026 due to improved mix of sales by end market, operational improvements and the favorable impact of changes in foreign exchange rates of approximately $961, net of hedges.

Selling, general and administrative (“SG&A”) expenses were $28,390, or 19.6% of net sales, in the second quarter of 2026 versus $23,077, or 17.1% of net sales, in the second quarter of 2025.

The increase in SG&A expenses was primarily driven by higher incentive compensation expense in the second quarter of 2026 due to company performance and a reduction to an acquisition earnout liability in the second quarter of 2025.

Research and development (“R&D”) expenses were $4,763, or 3.3% of net sales, in the second quarter of 2026 compared to $6,326, or 4.7% of net sales, in the comparable quarter of 2025.

R&D expenses were lower in the second quarter of 2026 due to a $1,634 one-time customer reimbursement.

Restructuring charges were $94 or 0.1% of net sales in the second quarter of 2026 compared to $297 or 0.2% of net sales in the second quarter of 2025.

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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Other (expense) income, net

Total other expense, net

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

Total other (expense) income, net

Other (expense) income, net is due to foreign currency losses, primarily related to the Euro.

Interest expense decreased due to lower borrowings on our Revolving Credit Facility during the second quarter of 2026.

Three Months Ended

Effective tax rate

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.

Our effective income tax rate was 27.0% and 19.4% in the second quarters of 2026 and 2025, respectively.

The increase in the effective income tax rate is primarily attributable to the establishment of valuation allowance against certain tax credits.

Results of Operations:

Six Months ended June 30, 2026 versus Six Months Ended June 30, 2025

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2026, and June 30, 2025:

Six Months Ended

June 30, 2026

June 30, 2025

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 (expense) income, net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

Net sales were $284,010 in the six months ended June 30, 2026, an increase of $22,932 or 8.8% from the six months ended June 30, 2025.

Net sales to the diversified end markets increased $22,686, or 16%.

We achieved continued growth in the medical and industrial end markets, while the aerospace and defense end market declined primarily due to the timing of contract awards.

Net sales to the transportation end market increased $246, or 0.2%.

Changes in foreign exchange rates increased net sales by $4,252, net of hedges.

Gross margin was $115,034 for the six months ended June 30, 2026, an increase of $16,055 or 16.2% from the six months ended June 30, 2025.

Our gross margin percentage increased from 37.9% for the six months ended June 30, 2025 to 40.5% for the six months ended June 30, 2026 due to an improved mix of sales by end market, operational improvements, and a favorable impact of changes in foreign exchange rates had a net benefit on our gross margin of approximately $1,632 net of hedges.

SG&A expenses were $54,373 or 19.1% of net sales for the six months ended June 30, 2026 versus $46,700 or 17.9% of net sales for the six months ended June 30, 2025.

The increase in SG&A expenses was primarily driven by higher employee incentive expense for the six months ended June 30, 2026 due to company performance and a reduction to an acquisition earnout liability in the six months ended June 30, 2025.

R&D expenses were $11,398 or 4.0% of net sales for the six months ended June 30, 2026 compared to $12,515 or 4.8% of net sales for the six months ended June 30, 2025.

R&D expenses were lower in the six months ended June 30, 2026 due to a $1,634 one-time customer reimbursement.

Restructuring charges were $480 or 0.2% of net sales for the six months ended June 30, 2026 compared to $749 or 0.3% of net sales for the six months ended June 30, 2025.

The restructuring charges in the six months ended June 30, 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.

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

Six Months Ended

Interest expense

Interest income

Other (expense) income, net

Total other (expense) income, net

Other (expense) income, net is due to foreign currency losses, primarily related to the Euro.

Interest expense decreased due to lower borrowings on our Revolving Credit Facility during the second quarter of 2026.

Six Months Ended

Effective tax rate

Our effective income tax rate was 24.1% and 18.4% for the six months ended June 30, 2026 and 2025, respectively.

The increase in the effective income tax rate is primarily attributable to the establishment of valuation allowances against certain tax credits.

Liquidity and Capital Resources

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

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 and cash equivalents were $107,536 at June 30, 2026, and $82,295 at December 31, 2025, of which $97,612 and $75,943, respectively, were held outside the United States.

Total long-term debt was $55,000 as of June 30, 2026 and $57,500 as of December 31, 2025.

Cash Flow Overview

Cash Flows from Operating Activities

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

Net cash provided by operating activities was $50,735 during the six months ended June 30, 2026.

Components of net cash provided by operating activities included net earnings of $36,361, depreciation and amortization expense of $17,589, other net non-cash items of $7,329, and a net cash outflow from changes in assets and liabilities of $10,544.

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

Net cash provided by operating activities was $43,870 during the six months ended June 30, 2025.

Components of net cash provided by operating activities included net earnings of $31,891, depreciation and amortization expense of $17,045, other net non-cash items of $838, and a net cash outflow from changes in assets and liabilities of $5,094.

Cash Flows from Investing Activities

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.

Net cash used in investing activities for the six months ended June 30, 2026 was $6,689 for capital expenditures of $9,577 partially offset by the maturity of short term investments of $2,888.

Net cash used in investing activities for the six months ended June 30, 2025 was $7,745.

Cash Flows from Financing Activities

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.

Net cash used in financing activities for the six months ended June 30, 2026 was $18,704.

The net cash outflow was the result of treasury stock purchases of $11,967, net cash payments of long-term debt of $2,500, dividends paid of $2,296, and taxes paid on behalf of equity award participants of $1,941.

Net cash used in financing activities for the six months ended June 30, 2025 was $32,351.

The net cash outflow was the result of treasury stock purchases of $22,995, net cash payments of long-term debt of $4,300, taxes paid on behalf of equity award participants of $2,655, dividends paid of $2,401.

Capital Resources

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Amount available, subject to covenant restrictions

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.

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Borrowings in U.S.

dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate.

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

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.

The Revolving Credit Facility includes a swingline sublimit of $20,000, 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 March 31, 2026.

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

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.

During and as of the three and six months ended June 30, 2026, there were no significant changes in the application of critical accounting policies or estimates.

Significant Customers

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Three Months Ended

March 31, 2026

March 31, 2025

Six Months Ended

June 30, 2026

June 30, 2025

June 30, 2026

June 30, 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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pricing pressures and demand for CTS’ products;

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);

risks associated with CTS’ international operations, including trade and tariff barriers, trade pacts, including the future of the USMCA, 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 geopolitical conflicts may have on our business, results of operations and financial condition;

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

During the six months ended June 30, 2026, there have been no material changes in our exposure to market risk.

Control s and Procedures

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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 March 31, 2026, 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 June 30, 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