Executive Summary / Key Takeaways

• Strategic Transformation Delivering Results: CTS has successfully pivoted from a transportation-dependent supplier to a diversified industrial technology company, with medical, industrial, and aerospace & defense markets now representing 59% of revenue in Q3 2025, up from 52% in Q3 2024, driving structural gross margin expansion of 150 basis points year-over-year to 38.7%.

• Diversified Markets Growing 22% While Transportation Faces Cyclical Headwinds: The company's strategic end markets delivered 22% year-over-year growth in Q3 2025, with industrial (+21%), medical (+22%), and aerospace & defense (+23%) all posting strong gains, more than offsetting transportation's 7% decline and demonstrating the resilience of the diversification strategy.

• SyQwest Acquisition Validates Defense Strategy: The $128 million SyQwest acquisition is performing ahead of expectations, contributing $8.8 million in Q3 2025 revenue and securing a $5 million sole-source naval defense contract, establishing a foundation for sustained growth in the higher-margin defense segment.

• Strong Balance Sheet Supports Capital Allocation Flexibility: With $110 million in cash, manageable debt of $91 million, and a $400 million credit facility, CTS generated $73 million in operating cash flow through nine months while returning $44 million to shareholders via buybacks and dividends, providing firepower for organic investment and strategic M&A.

• Reasonable Valuation for Improving Fundamentals: Trading at 2.5x sales and 22.8x earnings, CTS trades at a discount to high-growth peers while delivering margin expansion and double-digit diversified market growth, offering attractive risk/reward as transportation headwinds abate and new products ramp.

Setting the Scene: From Telephone Parts to Precision Sensing

CTS Corporation, founded in 1896 as a telephone products provider and incorporated in Indiana in 1929, has evolved into a designer and manufacturer of sensors, connectivity components, and actuators serving four distinct end markets: transportation, industrial, medical, and aerospace & defense. This 129-year history reflects a company that has repeatedly adapted its manufacturing expertise to emerging technological waves, from early telecommunications to today's precision sensing requirements.

The company operates as a single reportable segment, but management strategically disaggregates performance across four end markets, emphasizing the "diversified end markets" of medical, industrial, and aerospace & defense as its primary growth engine. This framing signals a deliberate shift away from the cyclical, capital-intensive automotive sector toward higher-margin, more stable industrial applications where precision and reliability command pricing power.

CTS sits in a fragmented $20+ billion sensors and actuators market, competing against industrial giants like TE Connectivity (TEL), Amphenol (APH), Honeywell (HON), and STMicroelectronics (STM). Unlike these scale players with 5-10% market share in their respective niches, CTS maintains a sub-1% overall market position. This smaller scale limits purchasing power and absolute R&D spending but enables agility and focus on specialized applications where custom solutions and deep customer relationships create defensible moats.

The strategic vision is clear: become a leading provider of sensing and motion devices as well as connectivity components by diversifying into medical, industrial, and aerospace & defense markets. These sectors value performance over price, offer longer product lifecycles, and are less susceptible to the quarterly production volatility that plagues automotive. The transformation is already bearing fruit, with diversified markets growing from 52% of revenue in Q3 2024 to 59% in Q3 2025, fundamentally altering the company's earnings quality.

Technology, Products, and Strategic Differentiation

CTS's competitive moat rests on proprietary piezoelectric technology and precision manufacturing capabilities developed over decades. The company's fabricated piezo materials and substrates enable significantly higher efficiency in vibration sensing and motion control, translating to superior durability in harsh environments—a critical differentiator in aerospace and defense applications where failure is not an option. This technological edge manifests in gross margins of 38.7% in Q3 2025, well above the 35-36% range of larger competitors like TE Connectivity and Amphenol, demonstrating pricing power in specialized niches.

Product innovation is accelerating across all end markets. In transportation, the eBrake product—awarded a predevelopment contract from a premium European OEM in late 2024—offers weight and cost advantages over traditional braking systems. While the first customer's launch timing has been delayed due to EV investment recalibrations, management remains confident in a 2027-2028 revenue ramp, with initial annual potential of $5-10 million. This timeline underscores the long gestation period for automotive design wins, but also the stickiness and profitability of sole-source positions once production begins.

The COBROS technology platform , launched in Q3 2025, represents a breakthrough in electric motor control by eliminating the need for three discrete current sensors and a position sensor, enabling simplified design, weight reduction, and more precise control. This innovation directly addresses EV manufacturers' obsession with efficiency and range, positioning CTS to benefit from the hybrid and extended-range vehicle trend that remains robust even as pure EV penetration softens. The technology's value proposition is clear: it reduces component count, assembly complexity, and system weight while improving performance—exactly the type of solution that commands premium pricing.

In industrial markets, CTS is leveraging megatrends around automation, connectivity, and efficiency. The company secured multiple wins for EV charging stations in Europe and is seeing steady recovery across OEM and distribution channels. Inventory normalization is complete and new application development is driving 21% growth in Q3 2025.

The medical segment showcases CTS's ability to capture value in life-critical applications. Products for minimally invasive surgery, diagnostic ultrasound, pacemakers, and cochlear implants command "good margins" that are "pretty decent" and approaching transportation-level profitability. Therapeutic products saw 60% year-over-year demand growth in Q2 2025, while diagnostic ultrasound faces temporary softness from Asian capital spending delays and tariff-related issues. This bifurcation highlights the segment's resilience: even as one sub-market pauses, another accelerates, providing stability.

The SyQwest acquisition, completed in July 2024 for $128 million, exemplifies CTS's M&A strategy. SyQwest designs and manufactures sonar and acoustic sensing solutions for naval applications, immediately strengthening CTS's defense market position. The acquisition contributed $14 million in 2024 revenue and $8.8 million in Q3 2025 alone, demonstrating strong integration and customer acceptance. More importantly, SyQwest secured a $5 million sole-source naval defense contract in Q3 2025 with potential for additional platform awards within 12 months. This validates the thesis that defense spending on advanced sensing is a durable, high-margin growth driver less susceptible to commercial cycles.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

CTS's financial results provide clear evidence that the diversification strategy is structurally improving earnings quality. Total revenue grew 8% year-over-year in Q3 2025 to $143 million, but the mix shift tells the real story. Diversified end markets surged 22% to $84.4 million, while transportation declined 7% to $58.5 million. This divergence demonstrates the portfolio effect: growth engines are now large enough to offset cyclical weakness in the legacy automotive business.

Gross margin expansion of 150 basis points to 38.7% in Q3 2025 was explicitly attributed to "an improved mix of sales by end market and operational improvements." This is not a one-time benefit but a structural improvement reflecting higher-margin diversified sales displacing lower-margin automotive volume. The adjusted gross margin of 38.7% in Q2 2025 was up 296 basis points year-over-year, with management noting the favorable mix impact from diversification. For investors, this margin expansion is the financial validation of the strategy—selling more sensors for medical devices and defense systems simply generates more profit per dollar of revenue than selling commodity automotive components.

Segment-level performance reveals distinct trajectories. Industrial sales of $37.1 million in Q3 2025 grew 21% year-over-year, with management citing "steady and gradual recovery" as inventory levels normalize and new customer wins accelerate. This recovery suggests the industrial downturn that plagued 2023-2024 has bottomed, providing a stable foundation for continued growth.

Medical revenue of $22.0 million grew 22% in Q3 2025, driven by 60% growth in therapeutic products. While diagnostic ultrasound faces temporary headwinds from Asian capital spending, the therapeutic strength demonstrates CTS's ability to capture value in aesthetics and minimally invasive procedures. Management expects stronger medical bookings in Q4 2025, particularly for therapeutics, suggesting the segment's momentum will continue.

Aerospace & Defense revenue of $25.4 million surged 23% in Q3 2025, with SyQwest contributing $8.8 million. Excluding SyQwest, organic growth was still a robust 8-9%, indicating the legacy defense business is healthy. The $5 million sole-source contract award establishes CTS as a qualified supplier for critical naval programs, creating a multi-year revenue stream with high visibility and attractive margins.

Transportation's 7% decline to $58.5 million reflects lower commercial vehicle volumes and China market dynamics. However, the segment's products are largely agnostic to drivetrain technology, positioning CTS to benefit from the robust hybrid trend even as pure EV investments recalibrate. Management anticipates general softness in Q4 2025 and through 2025, but shipments of the next-generation smart actuator are ramping for 2026, and the COBROS platform addresses the efficiency demands of all electrified vehicles. Transportation's trough is temporary, and new products will drive recovery as OEMs finalize their EV strategies.

Cash flow generation remains robust, with $72.9 million in operating cash flow through nine months and $80.6 million in trailing twelve-month free cash flow. The company returned $44 million to shareholders in the first three quarters via dividends and buybacks, with $21 million remaining under the current authorization. This capital allocation demonstrates management's confidence in the business while maintaining financial flexibility for strategic acquisitions. The $400 million credit facility, maturing in December 2026, provides ample liquidity for opportunistic M&A, which management explicitly desires "in the next 12 months."

Outlook, Management Guidance, and Execution Risk

Management narrowed full-year 2025 guidance to $535-545 million in sales and $2.20-2.25 in adjusted diluted EPS. The sales midpoint of $540 million implies modest acceleration from the current run rate, reflecting confidence in diversified market momentum offsetting transportation headwinds. The EPS guidance, while solid, incorporates a higher effective tax rate of 21-23% going forward due to the One Big Beautiful Bill Act and earnings mix shifts. This tax headwind will constrain EPS growth even as operating performance improves, requiring investors to focus on pre-tax profitability and cash generation as truer measures of operational success.

The guidance assumptions reveal management's nuanced view of market dynamics. On the revenue front, they expect "good progress in industrial, nice momentum in aerospace and defense, strength in therapeutics" while acknowledging "headwinds on CV" (commercial vehicles). This balanced assessment shows realistic expectations rather than overpromising on transportation recovery. The company is explicitly guiding for transportation softness through 2025, making any upside from new product ramps or market share gains a potential catalyst.

SyQwest's seasonality introduces quarterly volatility, with stronger sales expected in the second half due to U.S. government funding cycles. This pattern can create temporary margin pressure in the first half as fixed costs are absorbed across lower revenues, but also sets up predictable second-half strength. Investors should expect Q4 2025 and Q1 2026 to show the strongest defense segment performance.

The tax rate increase to 21-23% is a structural change that will persist into 2026. While this reduces after-tax earnings, it reflects higher profits in jurisdictions with elevated tax rates—likely the U.S. defense business—indicating geographic mix improvement. Management expects the impact to be "smaller into Q4" than the Q3 hit, suggesting the year-over-year comparison headwind will ease in 2026.

Key execution swing factors include the pace of industrial recovery, SyQwest's contract win rate, and transportation's bottoming process. The industrial market's inventory normalization appears complete, but demand sustainability depends on broader capital spending trends. SyQwest's pipeline is robust, but defense procurement cycles can be lengthy and unpredictable. Transportation's recovery hinges on OEMs resolving their EV investment strategies and commercial vehicle demand stabilizing, which management expects in 2026.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to the diversification thesis is a prolonged transportation downturn that erodes overall profitability before diversified markets can fully offset the decline. While diversified markets now represent 59% of revenue, transportation still contributes 41% and generates "good margins" that support corporate overhead. If commercial vehicle demand remains soft beyond 2025 and EV investment recalibration delays new product launches, overall growth could stagnate despite diversified market strength. The mechanism is straightforward: fixed costs spread over lower transportation volumes compress operating margins, even as gross margins improve from mix.

Tariffs and geopolitical uncertainty present a multifaceted risk. Management acknowledges "uncertainty due to tariffs and the geopolitical environment" is impacting transportation and causing OEMs to delay sourcing decisions. While current tariff impacts have been "minimal on profitability," any escalation or changes to USMCA could materially affect the cost structure. CTS's manufacturing footprint and supply chain are optimized for current trade rules; disruptions could require costly reconfiguration or price increases that erode competitiveness.

Supply chain constraints, particularly for rare earth elements and semiconductors, could limit growth in high-margin diversified markets. China is a predominant producer of these materials, and any export restrictions would constrain CTS's ability to meet demand. While management states they are "not seeing any immediate impact," the vulnerability exists and could become acute if geopolitical tensions escalate. Diversified markets' 22% growth rate assumes uninterrupted supply; any constraints would disproportionately impact the highest-margin segments.

The environmental claim related to the Asheville Site, with estimated exposure of $5.97-8.29 million, represents a known but manageable liability. The company recorded a $5.97 million loss estimate and presented a settlement offer in October 2025. While not material relative to the company's $1.3 billion enterprise value, the risk creates uncertainty and could result in cash outflows that reduce capital available for growth investments or shareholder returns. There is "no assurance that the settlement offer will be accepted," leaving a small but persistent overhang.

Customer concentration in transportation remains a vulnerability. While the company doesn't disclose specific customer percentages, the automotive industry's consolidation means a few large OEMs and Tier 1 suppliers represent significant revenue. This amplifies the impact of any single customer's production cuts or sourcing decisions, creating revenue volatility that diversified markets are working to mitigate.

Valuation Context: Positioning in the Industrial Tech Landscape

At $45.13 per share, CTS trades at an enterprise value of $1.34 billion, representing 2.5x trailing twelve-month sales and 11.6x EBITDA. These multiples sit at a discount to high-growth peers like Amphenol (8.3x sales, 28.7x EBITDA) and TE Connectivity (4.2x sales, 17.4x EBITDA), but at a premium to more cyclical players like STMicroelectronics (1.7x sales, 8.4x EBITDA). The valuation reflects the market's uncertainty about whether CTS's transformation is durable or temporary.

The price-to-earnings ratio of 22.8x is reasonable for a company delivering margin expansion and double-digit growth in strategic markets. Honeywell trades at 20.4x earnings but with slower growth, while Amphenol commands 46.2x earnings due to its explosive 50% revenue growth. CTS's multiple suggests the market is pricing in modest growth rather than the potential for sustained outperformance as diversification accelerates.

Cash flow metrics provide a clearer picture of value creation. The price-to-free-cash-flow ratio of 16.6x and price-to-operating-cash-flow of 13.5x indicate the market is paying a fair price for cash generation. With $80.6 million in trailing free cash flow and a market cap of $1.33 billion, CTS offers a 6% free cash flow yield—solid for an industrial company in transition. The company's 0.35% dividend yield and active buyback program (returning $44 million in nine months) demonstrate commitment to shareholder returns while maintaining investment flexibility.

Balance sheet strength supports the valuation. With net debt of negative $20 million (cash exceeds debt) and a debt-to-equity ratio of just 0.22, CTS has the financial capacity to fund organic growth, make strategic acquisitions, and weather cyclical downturns without diluting shareholders. The $400 million credit facility, maturing in December 2026, provides additional firepower for opportunistic M&A, which management has explicitly prioritized.

Relative to peers, CTS's 38.2% gross margin is competitive with TE Connectivity's 35.2% and Amphenol's 36.3%, but its 14.8% operating margin trails TE's 19.8% and Amphenol's 27.5%. This gap reflects scale disadvantages and higher R&D investment as a percentage of revenue. However, the margin expansion trajectory—up 150 basis points year-over-year—suggests CTS is closing the gap as diversified markets become a larger portion of the mix.

Conclusion: A Transformation Story with Measurable Progress

CTS Corporation has engineered a quiet but profound transformation from a cyclical automotive supplier into a diversified industrial technology company with expanding margins, robust cash generation, and multiple growth drivers. The evidence is clear in the numbers: diversified markets now represent 59% of revenue and are growing at 22% year-over-year, driving structural gross margin expansion of 150 basis points. This is not a cyclical uptick but a strategic repositioning toward higher-value, more stable end markets.

The transportation segment's challenges—EV investment recalibration, tariff uncertainty, and commercial vehicle softness—are real but temporary. The company's drivetrain-agnostic product portfolio and new technologies like COBROS position it to benefit from the hybrid vehicle trend and eventual EV recovery. More importantly, transportation's decline is now offset by diversified market strength, demonstrating the portfolio effect that management envisioned.

The SyQwest acquisition validates the defense strategy, delivering immediate revenue contribution and strategic contract wins that establish CTS as a credible supplier for critical naval programs. Combined with organic innovation in medical therapeutics and industrial automation, the company has created a multi-engine growth platform less susceptible to any single market's cycles.

Financially, CTS generates strong cash flow, maintains a pristine balance sheet, and returns capital to shareholders while investing in growth. The valuation at 2.5x sales and 22.8x earnings does not fully reflect the improving earnings quality and margin expansion potential. As diversified markets continue to outgrow transportation and new products ramp in 2026, the market should re-rate the stock toward industrial tech peers with superior growth profiles.

The critical variables to monitor are the pace of industrial market recovery, SyQwest's contract win rate, and transportation's bottoming process. If these trends align as management expects, CTS offers compelling risk/reward: reasonable valuation, improving fundamentals, and multiple catalysts for margin expansion and revenue acceleration. The transformation is working; the market simply hasn't fully recognized it yet.