CTS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Fin ancial Condition and Results of Operations (“MD&A”) (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. Overview CTS is a global manufacturer of sensors, connectivity components, and actuators. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. 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 and distributors for the aerospace and defense, industrial, medical, and transportation markets, and the U.S. Government. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies, and talent within these categories. We operate manufacturing facilities in North America, Asia, and Europe. Sales and marketing are accomplished through our sales engineers. We also utilize independent manufacturers' representatives and distributors to extend our sales capability. There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. 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, 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. Mr. Trivedi succeeds Kieran O’Sullivan, who will remain on the Board of Directors (the “Board”) and serve as Executive Chair. Mr. Trivedi became a member of the Board, effective July 6, 2026. 25 Results of Operations: 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 June 30, 2026 June 30, 2025 Percent Change Percentage of Net Sales – 2026 Percentage of Net Sales – 2025 Net sales $ 144,780 $ 135,309 7.0 % 100.0 % 100.0 % Cost of goods sold 84,732 82,878 2.2 58.5 61.3 Gross margin 60,048 52,431 14.5 41.5 38.7 Selling, general and administrative expenses 28,390 23,077 23.0 19.6 17.1 Research and development expenses 4,763 6,326 (24.7 ) 3.3 4.7 Restructuring charges 94 297 (68.4 ) 0.1 0.2 Total operating expenses 33,247 29,700 11.9 23.0 21.9 Operating earnings 26,801 22,731 17.9 18.5 16.8 Total other (expense) income, net (563 ) 251 (324.3 ) (0.4 ) 0.2 Earnings before income taxes 26,238 22,982 14.2 18.1 17.0 Income tax expense 7,074 4,455 58.8 4.9 3.3 Net earnings $ 19,164 $ 18,527 3.4 % 13.2 % 13.7 % Earnings per share: Diluted net earnings per share $ 0.66 $ 0.62 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. 26 Other income and expense items are summarized in the following table: Three Months Ended June 30, June 30, 2026 2025 Interest expense $ (704 ) $ (1,121 ) Interest income 571 622 Other (expense) income, net (430 ) 750 Total other (expense) income, net $ (563 ) $ 251 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 June 30, June 30, 2026 2025 Effective tax rate 27.0 % 19.4 % 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 Percent Change Percentage of Net Sales – 2026 Percentage of Net Sales – 2025 Net sales $ 284,010 $ 261,078 8.8 % 100.0 % 100.0 % Cost of goods sold 168,976 162,099 4.2 59.5 62.1 Gross margin 115,034 98,979 16.2 40.5 37.9 Selling, general and administrative expenses 54,373 46,700 16.4 19.1 17.9 Research and development expenses 11,398 12,515 (8.9 ) 4.0 4.8 Restructuring charges 480 749 (35.9 ) 0.2 0.3 Total operating expenses 66,251 59,964 10.5 23.3 23.0 Operating earnings 48,783 39,015 25.0 17.2 14.9 Total other (expense) income, net (872 ) 86 (1114.0 ) (0.3 ) — Earnings before income taxes 47,911 39,101 22.5 16.9 15.0 Income tax expense 11,550 7,210 60.2 4.1 2.9 Net earnings $ 36,361 $ 31,891 14.0 % 12.8 % 12.2 % Earnings per share: Diluted net earnings per share $ 1.26 $ 1.06 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. 27 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 June 30, June 30, 2026 2025 Interest expense $ (1,412 ) $ (2,289 ) Interest income 1,051 1,068 Other (expense) income, net (511 ) 1,307 Total other (expense) income, net $ (872 ) $ 86 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 June 30, June 30, 2026 2025 Effective tax rate 24.1 % 18.4 % 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 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 $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 $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. 28 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 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 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 Revolving Credit Facility Long‑term debt is comprised of the following: As of June 30, December 31, 2026 2025 Total credit facility $ 300,000 $ 300,000 Balance outstanding 55,000 57,500 Standby letters of credit 1,540 1,640 Amount available, subject to covenant restrictions $ 243,460 $ 240,860 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 the 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. 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, 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 June 30, 2026. 29 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. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements. 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 six months ended June 30, 2026, there were no significant changes in the application of critical accounting policies or estimates. Significant Customers Our net sales to customers representing at least 10% of total net sales is as follows: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 Toyota Motor Corporation 8.1 % 12.0 % 8.3 % 12.0 % 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. 30 Forward ‑ Looking Statements Readers are cautioned that the statements contained in this document regarding expectations of our performance or other matters that may affect our business, results of operations, or financial condition are, or may be deemed to be, “forward-looking statements” as defined by the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995. Such statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included or incorporated in this document, including statements regarding our strategy, financial position, guidance, funding for continued operations, cash reserves, liquidity, projected costs, plans, projects, awards and contracts, and objectives of management, among others, are forward-looking statements. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “continued,” “project,” “plan,” “goals,” “opportunity,” “appeal,” “estimate,” “potential,” “predict,” “demonstrates,” “may,” “will,” “might,” “could,” “intend,” “shall,” “possible,” “would,” “approximately,” “likely,” “outlook,” “schedule,” “on track,” “poised,” “pipeline,” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements are not guarantees of future performance, conditions or results. Forward-looking statements are based on management’s expectations, certain assumptions, and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties, and other factors, which could cause CTS’ actual results, performance, or achievements to differ materially from those presented in the forward-looking statements. 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 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. Government; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect CTS’ intellectual property; pricing pressures and demand for CTS’ products; 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; write offs of goodwill on our balance sheet; the amount and timing of any share repurchases; and the effect of any cybersecurity incidents on our business. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. 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. Item 3. Quantitative and Qualita tive Disclosures About Market Risk 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 six months ended June 30, 2026, there have been no material changes in our exposure to market risk. 31 Item 4. Control s and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 errors 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected. Changes in 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