CTS Corp: Form 10-Q for the period ended Jun 30, 2025

(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, 2024.

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 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, 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.

Results of Operations: Second Quarter 2025 versus Second Quarter 2024

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

Net sales were $135,309 in the second quarter of 2025, an increase of $5,147 or 4.0% from the second quarter of 2024. Net sales to the diversified end markets increased $8,694 or 13.2%. SyQwest added $4,468 in sales during the quarter. We achieved growth in the medical end market and saw continued recovery in the industrial end market. Net sales to the transportation end market decreased $3,547 or 5.5%, primarily driven by lower volumes of our commercial vehicle related products and lower sales to customers in China. Net sales increased $952 year-over-year related to changes in foreign exchange rates, primarily due to the U.S. Dollar depreciating compared to the Euro.

Gross margin was $52,431 in the second quarter of 2025, an increase of $6,059 or 13.1% from the second quarter of 2024. Our gross margin percentage increased from 35.6% for the second quarter of 2024 to 38.7% for the second quarter of 2025 due to improved mix of sales by end market and operational improvements. Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $959 primarily due to rate changes between the U.S. Dollar and the Mexican Peso.

Selling, general and administrative (“SG&A”) expenses were $23,077 or 17.1% of net sales in the second quarter of 2025 versus $21,332 or 16.4% of net sales in the second quarter of 2024. The increase in SG&A expenses was primarily driven by higher depreciation and amortization expense in the second quarter of 2025 from the SyQwest acquisition.

Research and development (“R&D”) expenses were $6,326 or 4.7% of net sales in the second quarter of 2025 compared to $6,086 or 4.7% of net sales in the comparable quarter of 2024. 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 $297 or 0.2% of net sales in the second quarter of 2025 compared to $1,190 or 0.9% of net sales in the second quarter of 2024. The restructuring charges in the quarter ended June 30, 2025 were primarily related to headcount reductions in response to softening demand in the transportation end market. 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:

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 increased due to higher borrowings to fund the SyQwest acquisition.

Our effective income tax rate was 19.4% and 17.2% in the second quarters of 2025 and 2024, respectively. The increase in the effective income tax rate is primarily attributable to a mix of earnings taxed at higher rates.

Results of Operations: Six Months ended June 30, 2025 versus Six Months Ended June 30, 2024

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

Net sales were $261,078 in the six months ended June 30, 2025, an increase of $5,166 or 2.0% from the six months ended June 30, 2024. Net sales to the diversified end markets increased $16,741 or 13.4%. SyQwest added $7,878 in sales during the first half of the year. We have good growth momentum in the medical end market and the industrial end market continues to recover. Net sales to the transportation market decreased $11,575 or 8.9%, primarily driven by lower volumes of our commercial vehicle related products and lower sales to customers in China.

Gross margin was $98,979 for the six months ended June 30, 2025, an increase of $7,517 or 8.2% from the six months ended June 30, 2024. Our gross margin percentage was 37.9% for the first six months of 2025, an increase from 35.7% in the first six months of 2024 due to improved mix of sales by end market and operational improvements. Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $2,026 primarily due to rate changes between the U.S. Dollar and the Mexican Peso.

SG&A expenses were $46,700 or 17.9% of net sales for the six months ended June 30, 2025 versus $43,591 or 17.0% of net sales for the six months ended June 30, 2024. The increase in SG&A expenses was primarily driven by higher depreciation and amortization expense in 2025 from the SyQwest acquisition.

R&D expenses were $12,515 or 4.8% of net sales for the six months ended June 30, 2025 compared to $12,687 or 5.0% of net sales for the six months ended June 30, 2024.

Restructuring charges were $749 or 0.3% of net sales for the six months ended June 30, 2025 compared to $2,884 or 1.1% of net sales for the six months ended June 30, 2024. The restructuring charges in the six months ended June 30, 2025 were primarily related to headcount reductions in response to softening demand in the transportation end market. 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:

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.

Our effective income tax rate was 18.4% and 17.8% for the six months ended June 30, 2025 and 2024, respectively. The increase in the effective income tax rate is primarily attributable to a 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 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 $99,440 at June 30, 2025, and $94,334 at December 31, 2024, of which $98,785 and $92,944, respectively, were held outside the United States. Total long-term debt was $88,000 as of June 30, 2025 and $92,300 as of December 31, 2024.

Cash Flow Overview

Cash Flows from Operating Activities

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 $5,904.

Net cash provided by operating activities was $37,940 during the six months ended June 30, 2024. Components of net cash provided by operating activities included net earnings of $25,826, depreciation and amortization expense of $14,651, other net non-cash items of $629, and a net cash outflow from changes in assets and liabilities of $3,166.

Cash Flows from Investing Activities

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

Net cash used in investing activities for the six months ended June 30, 2024 was $8,672 for payments on capital expenditures.

Cash Flows from Financing Activities

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, and dividends paid of $2,401.

Net cash used in financing activities for the six months ended June 30, 2024 was $32,059. The net cash outflow was the result of treasury stock purchases of $22,892, net cash used in the paydown of long-term debt of $2,500, taxes paid on behalf of equity award participants of $3,131, dividends paid of $2,460, and payments of contingent consideration of $1,076.

Capital Resources

Revolving Credit Facility

Long‑term debt is comprised of the following:

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.

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. 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 1.49% to 2.45%.

The Revolving Credit Facility includes a swing-line sublimit of $20,000 and a letter of credit sublimit of $20,000. 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, 2025.

Critical Accounting Policies and Estimates

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. 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, 2024. During and as of the three and six months ended June 30, 2025, 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:

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 diversify our non-transportation end market exposure.

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; 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; the funding of contracts by the US 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, 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 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’ 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.

See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2024. During the six months ended June 30, 2025, there have been no material changes in our exposure to market risk.

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 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. 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, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Uncertainty over global tariffs and trade policies, or the financial impact of tariffs and trade policies, may negatively affect our results.

In the first half of 2025, there were significant changes to tariffs by the U.S. and other countries. The tariff modifications are at various rates, with exemptions applicable to some categories of imports and exports. While we are attempting to mitigate tariff-related impacts with a focus on agility in adapting to cost and price adjustments, there can be no assurance our mitigation efforts will be successful. The Company’s management continues to monitor and evaluate the ongoing situation, with plans formulated to respond to a varied range of potential market scenarios. Additional tariffs or future changes to the U.S.’s or other countries’ trade relations could further impact our business and negatively affect our results of operations.

There have been no other changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2024.