Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial 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, distributors and the U.S. Government for the aerospace and defense, industrial, medical, and transportation markets. 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.

Millar Acquisition

On October 23, 2026 we acquired Millar Holdings, Inc. ("Millar") for $50,000, net of cash acquired and debt assumed, with up to $20,000 in additional contingent consideration payable subject to the achievement of specified financial performance targets. The acquisition was funded using cash on hand. Millar specializes in the design, development, and manufacturing of advanced pressure sensing technologies for medical devices, life sciences, and industrial applications. The acquisition strengthens CTS's position in advanced sensing technologies and expands its presence in diversified end markets.

Results of Operations: Third Quarter 2026 versus Third Quarter 2025

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

Net sales were $149,583 in the third quarter of 2026, an increase of $6,613, or 4.6%, from the third quarter of 2025. Net sales to the diversified end markets increased $5,601, or 6.6%. 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 increased $1,012 or 1.7%.

Gross margin was $63,152 in the third quarter of 2026, an increase of $7,811, or 14.1%, from the third quarter of 2025. Our gross margin percentage increased from 38.7% for the third quarter of 2025 to 42.2% for the third 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 $1,404.

Selling, general and administrative ("SG&A") expenses were $30,812, or 20.6% of Net sales, in the third quarter of 2026 versus $27,222, or 19.1% of Net sales, in the third quarter of 2025. The increase in SG&A expenses was primarily driven by higher incentive compensation expense in the third quarter of 2026 due to company performance.

Research and development ("R&D") expenses were $6,333, or 4.2% of Net sales, in the third quarter of 2026 compared to $6,901, or 4.8% of Net sales, in the comparable 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 $468 or 0.3% of Net sales in the third quarter of 2026 compared to $280 or 0.2% of Net sales in the third 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.

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

During the three months ended September 30, 2026, Other income (expense), net is driven by the receipt of a $12,500 representations and warranties insurance claim related to a prior acquisition. Interest expense decreased due to lower borrowings on our Revolving Credit Facility during the third quarter of 2026.

Our effective income tax rate was 53.5% and 30.6% in the third quarters of 2026 and 2025, respectively. The increase in the effective income tax rate is primarily attributable to the establishment of reserves related to an uncertain tax position. See Note 16 "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, 2026 versus Nine Months Ended September 30, 2025

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

Net sales were $433,593 in the nine months ended September 30, 2026, an increase of $29,546 or 7.3% from the nine months ended September 30, 2025. Net sales to the diversified end markets increased $28,288, or 12.5%. 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 $1,258, or 0.7%. Changes in foreign exchange rates increased Net sales by $4,703.

Gross margin was $178,186 for the nine months ended September 30, 2026, an increase of $23,866 or 15.5% from the nine months ended September 30, 2025. Our gross margin percentage increased from 38.2% for the nine months ended September 30, 2025 to 41.1% for the nine months ended September 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 benefit on our gross margin of approximately $3,036.

SG&A expenses were $85,185 or 19.6% of Net sales for the nine months ended September 30, 2026 versus $73,922 or 18.3% of Net sales for the nine months ended September 30, 2025. The increase in SG&A expenses was primarily driven by higher employee incentive expense for the nine months ended September 30, 2026 due to company performance and a reduction to an acquisition earnout liability in the nine months ended September 30, 2025.

R&D expenses were $17,730 or 4.1% of Net sales for the nine months ended September 30, 2026 compared to $19,416 or 4.8% of Net sales for the nine months ended September 30, 2025. R&D expenses were lower in the nine months ended September 30, 2026 due to a $1,634 one-time customer reimbursement.

Restructuring charges were $948 or 0.2% of Net sales for the nine months ended September 30, 2026 compared to $1,028 or 0.3% of Net sales for the nine months ended September 30, 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.

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

During the nine months ended September 30, 2026, Other income (expense), net is driven by the receipt of a $12,500 representations and warranties insurance claim related to a prior acquisition. Interest expense decreased due to lower borrowings on our Revolving Credit Facility during the nine months ended September 30, 2026.

Our effective income tax rate was 37.2% and 22.5% for the nine months ended September 30, 2026 and 2025, respectively. The increase in the effective income tax rate is primarily attributable to the establishment of reserves related to an uncertain tax position. See Note 16 "Income Taxes" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

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 $143,880 at September 30, 2026, and $82,295 at December 31, 2025, of which $89,829 and $75,943, respectively, were held outside the United States. Total long-term debt was $55,000 as of September 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 $94,257 during the nine months ended September 30, 2026. Components of net cash provided by operating activities included net earnings of $54,118, depreciation and amortization expense of $26,330, other net non-cash items of $15,457, and a net cash outflow from changes in assets and liabilities of $1,648.

Net cash provided by operating activities was $72,893 during the nine months ended September 30, 2025. Components of net cash provided by operating activities included net earnings of $45,581, depreciation and amortization expense of $25,880, other net non-cash items of $1,873, and a net cash outflow from changes in assets and liabilities of $441.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2026 was $9,077 for capital expenditures of $11,965 partially offset by the maturity of short-term investments of $2,888.

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

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2026 was $23,177. The net cash outflow was the result of treasury stock purchases of $15,230, dividends paid of $3,439, net cash payments of long-term debt of $2,500, and taxes paid on behalf of equity award participants of $2,008.

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, taxes paid on behalf of equity award participants of $2,675, dividends paid of $3,583, and net cash payments of long-term debt of $1,600.

Capital Resources

Revolving Credit Facility

Long-term debt is comprised of the following:

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 September 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. 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 nine months ended September 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:

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

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; changes in existing tax laws or adoption of new tax laws; 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.