CTS raises 2026 profit guide again but warns record margins will cool

CTS makes sensors, connectivity components and actuators for aerospace and defense, industrial, medical and transportation customers.¹ More than 90% of its revenue comes from custom-engineered parts.² It had 3,492 employees at the end of 2025, spread across North America, Asia and Europe.³ Sales over the past year, through September 30, were $570.9 million, and in 2025 it earned $2.23 a share on an adjusted basis and $2.19 as reported.⁴

The company has spent years shifting away from cars. Transportation fell to 43% of sales in 2025, from 49% in 2024. Industrial, aerospace and defense, and medical, which CTS calls its diversified markets, grew from 35% of revenue in 2017, when total sales were $423 million, to 59%.¹ Big car customers matter less: Toyota was 7.8% of third-quarter sales, down from 10.5% a year earlier, and Cummins fell to 8.4% of 2025 sales.² Cars still matter, and the guide assumes light vehicle production will be flat to slightly down, partly offset by commercial vehicles.³ The company lists the supply and cost of rare earth elements and metals, and tariffs on China, Canada and Mexico, among its risks. In 2026 it signed new agreements to buy platinum it uses to make some products.⁴

This is the year's third raise. CTS began 2026 guiding to $2.30-$2.45 of adjusted earnings per share, then lifted the low end to $2.35 in April and moved to $2.55-$2.70 in July.

Pratik Trivedi became chief executive on July 6, 2026.¹ On October 23, 2026 CTS closed its purchase of Millar Holdings, which designs and makes pressure sensors for medical devices, life sciences and industrial uses.² On October 27, 2026 CTS reported the quarter and held its webcast.³

The shares had drifted lower before results. In our price data CTS closed at $56.79 on September 15, peaked at $61.69 on October 5 and fell to $53.01 on October 23. Our price data begins in mid-September, so we could not confirm the stock's high and low for the past year.

Third-quarter sales rose 4.6% to $149.6 million.¹ Medical led, up 21% from a year earlier to $26.6 million, and industrial grew 7% to $39.8 million.² Aerospace and defense fell 7% to $23.6 million, which CTS blames on the timing of contract awards, though it rose 30% from the second quarter.³ Transportation, still the largest market, grew 2% to $59.6 million.⁴

Book-to-bill, the ratio of new orders to sales shipped, hints at where sales are heading. It was 1.18 for the whole company and 1.9 in aerospace and defense, where bookings rose 102%.¹ Medical is the soft spot: its ratio was 0.66 and bookings fell 5%, which management puts down to order timing.² Transportation also reported about $1.2 billion of total booked business at quarter end, a measure the company notes is not defined by accounting rules.³

Adjusted gross margin, the share of sales left after production costs, rose 330 basis points to 42.2%.¹ Part of that may not repeat: the finance chief credited about $1.4 million from currency moves and an above-normal benefit from product mix tied to project timing.² He said gross margins should stay good, 'but maybe not quite at the same level as the 42%.'³ Overhead rose too. Selling and administrative costs climbed to $30.8 million from $27.2 million, mostly on higher incentive pay.⁴ Adjusted EBITDA, which is profit before interest, taxes, depreciation and amortization with one-off items removed, was $37.0 million, or 24.7% of sales.⁵

Two large one-offs sit in the reported numbers. CTS collected $12.5 million on a representations and warranties insurance claim tied to an earlier acquisition.¹ It also booked a $12.7 million tax charge after tax authorities challenged positions taken by some subsidiaries.² The year's discrete tax items also include a new reserve against foreign tax credits the company may not be able to use.³ The tax charge pushed the quarter's tax rate to 53.5%.⁴ Adjusted earnings remove both one-offs: the insurance gain is worth $0.43 a share before tax and the tax items $0.44, and all pretax adjustments together came to minus $10.6 million, or $0.37 a share.⁵ The tax charge may become real cash. Accrued income taxes rose to $18.2 million from $7.2 million at year-end, and CTS says it cannot estimate when the matter will be resolved.⁶

Cash flow was strong. Operating cash flow was $43.5 million in the quarter, and free cash flow, which is operating cash flow minus capital spending, was $41.1 million. Management said that was 184% of adjusted net earnings, but the quarter's cash included the $12.5 million insurance payment that adjusted earnings leave out, so the ratio flatters recurring cash generation.¹ So far this year free cash flow was $82.3 million, up from $60.4 million a year earlier.² Low spending helps: third-quarter capital spending was $2.4 million against $4.8 million a year earlier, and it ran at 2.7% of sales over the past year against a target of about 4%.³ Working capital is also climbing, with inventory at $62.4 million from $52.9 million at year-end and controllable working capital at 17.5% of annualized sales, from 16.1% a year earlier.⁴

The new guide calls for 2026 sales of $580-$590 million, up from $565-$585 million, and adjusted earnings per share of $2.78-$2.88, up from $2.55-$2.70.¹ Both now include Millar and assume current market conditions continue. The midpoint rose about 7.8%, to $2.83.² That leaves $0.65 to $0.75 of adjusted earnings per share for the fourth quarter, against $0.77 in the third quarter and about $0.62 in the fourth quarter of 2025.³ On sales, the range implies $146.4 million to $156.4 million in the fourth quarter, up from $137.3 million a year earlier, with Millar owned from October 23.⁴ The guide assumes a tax rate of 20-22% before discrete items.⁵ CTS gives no reported-earnings version of its guide, so readers cannot see what deal costs or tax items the reported figure will carry.⁶

CTS paid $50 million for Millar, net of the cash acquired and debt assumed, using cash on hand, and may pay up to $20 million more if performance targets are met.¹ In return it gets about $30 million of expected annual revenue and a business that management says will lift the overall gross margin.² That is about 1.7 times Millar's expected revenue, or about 2.3 times if the full earnout is paid, while CTS trades near 3 times its own sales at $59.24.³ The deal is small next to CTS: the price is about 3% of its market value before results, and Millar's revenue is about 5% of CTS's sales over the past year.⁴ Profit comes slowly. Management said Millar's EBITDA will be positive 'but maybe not quite accretive at the beginning,' and expects it to add to earnings per share in the second half of 2027.⁵ Millar has some customer concentration, which management says will not look materially different at the level of CTS as a whole.⁶

The balance sheet carries the deal easily. On September 30 CTS held $143.9 million of cash and owed $55.0 million, about $88.9 million of net cash.¹ Paying $50 million for Millar leaves roughly $39 million, before October's cash flow.² One caveat is location: $89.8 million of that cash sat outside the United States.³ The debt is drawn on an unsecured $300 million revolving credit line, a facility CTS can borrow from and repay as needed, which matures on November 24, 2030.⁴ Another $243.5 million was available subject to covenant limits, and the weighted interest rate was 4.74%, with swaps fixing the rate on $50 million until December 2030.⁵ Lenders require a maximum net leverage ratio and a minimum interest coverage ratio, and CTS was in compliance on September 30.⁶ Debt is about 0.4 times adjusted EBITDA of roughly $138 million over the past year, below the 1.0 to 2.5 times the company targets. Third-quarter operating earnings covered interest about 40 times.⁷

One known bill is already set aside. CTS, other parties and the Environmental Protection Agency agreed in principle on a $7.61 million settlement over a site, and CTS has raised its estimated share to $6.746 million.¹ Its recorded liability for the Asheville, North Carolina site was $6.575 million at the end of 2025. The settlement still needs final agency approval after a notice and comment period.²

Dilution is modest. CTS had 28,497,611 shares on October 20, and 572,746 restricted stock units were outstanding, about 2% of that count.¹ It bought back 297,730 shares for $15.5 million so far this year and has $74.9 million left under its program.² Its monthly average buyback prices in the third quarter ran from $57.86 to $59.70, close to the October 27 price.³ The dividend is $0.04 a quarter, and dividends of $3.4 million so far this year used about 4% of free cash flow.⁴ The credit line limits buybacks and dividends. It is unsecured, so no assets are pledged, but its lenders still rank ahead of shareholders.⁵

Two governance moves came just before results. On October 22 the board's pay committee adopted change-in-control severance agreements that pay two times salary plus bonus, with an extra payment for Trivedi tied to his non-compete.¹ They pay mainly if an executive is let go within three years after a takeover, though some firings just before one also count.² On October 26 the board restated the company's bylaws.³

The market cheered. CTS moved up 9.9% from its $53.92 close on October 26 to $59.24 at the October 27 close, while the S&P 500 fund moved up 0.6%.¹ At $59.24 the company is worth about $1.69 billion.² That price is about 21 times the guide's $2.83 midpoint, about 21.5 times the $2.75 of adjusted earnings per share over the past year, and about 23.4 times the $2.53 reported over the same span.³

The bull case is momentum with a cushion. CTS has raised its guide three times this year, aerospace and defense bookings more than doubled, and management expects strong fourth-quarter revenue in that market from its backlog.¹ Free cash flow ran well ahead of adjusted earnings in the quarter, helped by the $12.5 million insurance payment, net cash survives the Millar payment, and the company's plan sends 60-80% of free cash flow to acquisitions.² And the bottom of the implied fourth-quarter range, $0.65, still sits above the roughly $0.62 earned in the same quarter of 2025.³

The bear case, ranked by weight. First, the record margin leaned on currency and an unusual product mix, and management itself expects profitability to ease. Second, medical, the market Millar is meant to build, booked orders at only 0.66 times sales.¹ Third, Millar costs $50 million now, may cost up to $20 million more, and is expected to add to earnings per share only from the second half of 2027.² Fourth, the tax dispute behind the $12.7 million charge has no date for resolution.³ Fifth, after the 9.9% jump the stock trades near 21 times this year's guided adjusted earnings, which leaves little room for a soft fourth quarter.⁴

The company's own goals reach further, and they are goals, not results. Its investor deck targets 10% yearly revenue growth, about half from acquisitions, and an adjusted EBITDA margin of 23-26%.¹ Management is targeting approvals on more engine platforms for its turbo smart actuator by mid-2027, with deliveries a quarter or two after that.²

What would prove the bullish read wrong is a fourth quarter below $0.65 of adjusted earnings per share, the bottom of what the guide implies, or fourth-quarter sales under $146.4 million, which would leave the year below the $580 million low end.¹ Another quarter of medical orders well below sales would also hurt. We will know when CTS reports fourth-quarter and full-year results in February 2027.² Later tests follow: Millar's expected first boost to earnings per share in the second half of 2027, the turbo actuator approvals around mid-2027, final approval of the Asheville settlement, and the tax dispute, which has no date.³

CTS has not given Millar's past sales growth or its profit in dollars; on the call management said it generally does not discuss acquired companies' historical sales.

The performance targets and timing behind the earnout of up to $20 million are not given in the 10-Q or the deal release.

The guide includes Millar, but CTS does not say how much revenue, cost or deal expense Millar adds to the fourth quarter, or how the price will be split between goodwill and assets that are amortized.

Which countries challenged the subsidiaries' tax positions, how much cash a loss would cost, and when it ends are not known; CTS says it cannot estimate the timing.

Our price data begins in mid-September 2026, so the stock's high and low for the past year could not be confirmed.