CTS (CTS) Q3 2025: Diversified End Markets Surge 22%, Offsetting Transportation Weakness

October 28, 2025 | By EarningsIQ Research

CTS delivered a quarter defined by robust 22% growth in diversified end markets, led by medical, aerospace and defense, and industrial segments, which now make up nearly 60% of total revenue. Transportation sales fell, but strategic wins and product launches in sensors and actuators position CTS for future content gains. Management’s focus on diversification, margin expansion, and disciplined capital allocation underpins resilience amid tariff and macro uncertainties.

Summary

• Diversification Momentum: Medical, aerospace and defense, and industrial now drive the majority of CTS revenue.
• Margin Expansion: Gross margin improvement reflects operational discipline and favorable mix shift.
• Strategic Positioning: New platform wins and technology launches strengthen long-term growth levers despite near-term headwinds.

Performance Analysis

CTS’s third quarter results illustrate a clear pivot toward higher-value, diversified end markets, with medical, aerospace and defense, and industrial collectively growing 22% year over year and now representing 59% of total company revenue—up from 52% a year ago. This mix shift is material, as these segments consistently deliver stronger margins and more resilient demand, supported by secular trends in automation, healthcare technology, and defense spending.

Transportation, historically a core revenue driver, saw sales decline 7% amid continued softness in commercial vehicle demand and uneven light vehicle production. However, CTS secured $130 million in new transportation business, including a notable brake sensing application and smart actuator awards, underscoring its ability to win content even in a down cycle. Gross margin expanded by 66 basis points, reflecting both improved operational execution and the favorable impact of a richer end-market mix. Operating cash flow was solid, supporting ongoing share repurchases and strategic M&A capacity.

• Medical Segment Acceleration: Sales rose 22% YoY, with strong bookings in therapeutics and new ultrasound customer wins.
• Aerospace and Defense Surge: Sales up 23% YoY, SideQuest, naval defense business, contributed $8.8 million and is expected to maintain momentum.
• Industrial Recovery: Segment sales climbed 21% YoY, buoyed by OEM and distribution channels, and multiple wins in industrial printing and sensing.

Despite a modest decline in adjusted EPS, driven by tax legislation and higher environmental reserves, underlying business health and strategic capital deployment remain intact. CTS’s book-to-bill above 1 signals forward demand strength, especially in its growth markets.

Executive Commentary

Strategic Positioning

1. Diversification as a Margin Lever

CTS’s deliberate expansion into medical, aerospace and defense, and industrial end markets is transforming its revenue base and margin profile. The company’s diversified businesses, which now comprise the majority of sales, consistently deliver higher margins than legacy transportation, reducing exposure to cyclical automotive swings. Management is prioritizing next-generation medical diagnostics, defense subsystems, and industrial automation, all supported by secular demand and multi-year project pipelines.

2. Transportation Content Growth Amid Demand Softness

While transportation sales are down, CTS continues to win new platform content, including brake sensing, smart actuators, and powertrain-agnostic products like COBRIS, electric motor control technology. These wins position CTS to expand its content per vehicle, regardless of the ICE (internal combustion engine) versus EV (electric vehicle) mix, and provide a buffer against short-term volume headwinds.

3. SideQuest and Defense Pipeline Expansion

SideQuest, acquired defense business, delivered $8.8 million in Q3 revenue and secured a $5 million sole-source naval contract, with additional platform awards expected over the next 12 months. This underscores CTS’s strategy to move up the value chain, from component supplier to integrated sensor and subsystem provider in defense, with seasonality tied to US government funding cycles.

4. Operational Discipline and Tariff Mitigation

CTS’s regional manufacturing footprint, where production for Asia, Europe, and North America largely stays within each geography, has been key to mitigating tariff impacts. The company also continues to pass through cost increases when necessary, demonstrating pricing power and supply chain agility.

5. Capital Allocation and Shareholder Returns

Strong cash generation supported $44 million in shareholder returns year-to-date, through dividends and repurchases. The balance sheet remains healthy, with ample liquidity for both organic growth and strategic M&A, reinforcing management’s disciplined capital allocation approach.

Key Considerations

This quarter highlights CTS’s evolution into a more diversified, higher-margin business, but also surfaces the complexity of managing through macro, regulatory, and end-market volatility.

Key Considerations:

• End-Market Mix Shift: The shift toward diversified markets is structurally improving margin and resilience, but requires continued innovation and customer engagement to sustain momentum.
• Transportation Volatility: Ongoing softness in commercial vehicles and mixed signals from OEMs suggest near-term caution, though content wins provide a foundation for recovery.
• Tax and Regulatory Headwinds: Recent US tax legislation and environmental reserves weighed on EPS, with tax rate expected to stay in the low 20% range into 2026.
• Operational Agility: Regional manufacturing and proactive pricing strategies are successfully mitigating tariff and supply chain risks, but exposure remains if USMCA (United States-Mexico-Canada Agreement) is not renewed.
• Seasonality in Defense: SideQuest’s revenue cadence will be influenced by government funding cycles, introducing quarterly variability.

Risks

CTS faces ongoing risks from transportation market softness, especially in commercial vehicles, and potential supply chain disruptions in rare earths, aluminum, and semiconductors. Tariff and trade policy uncertainty, particularly around USMCA, could impact cost structure and competitiveness. Tax legislation changes and environmental liabilities have already pressured EPS and may persist into 2026. Seasonality in defense revenues and delays in government funding introduce additional variability.

Forward Outlook

For Q4 2025, CTS guided to:

• Sales in the range of $535 to $545 million for the full year
• Adjusted diluted EPS in the range of $2.20 to $2.25

Management highlighted several factors that will shape results:

• Continued growth in medical therapeutics and defense bookings
• Industrial recovery and healthy distribution demand
• Persistent softness in transportation, especially commercial vehicles
• Potential impact from tariffs and supply chain disruptions, though not currently material

Takeaways

CTS’s Q3 performance validates its diversification strategy, delivering both growth and margin improvement even as legacy transportation remains challenged. Capital returns and a strong balance sheet support further investment and shareholder value creation.

• Margin and Mix Shift: Higher-margin diversified segments are now the growth engine, structurally improving profitability and lowering earnings volatility.
• Transportation Content Resilience: New product wins and powertrain-agnostic solutions position CTS for share gains once automotive demand rebounds.
• Defense and Industrial Upside: SideQuest pipeline and industrial recovery offer multi-year growth levers, but investors should monitor for defense seasonality and funding timing.

Conclusion

CTS’s Q3 results underscore the success of its diversification strategy, with robust growth in medical, aerospace and defense, and industrial markets offsetting transportation headwinds. Margin expansion, disciplined capital allocation, and a healthy pipeline position CTS for continued resilience, though near-term risks in transportation and regulatory costs warrant close attention.

Industry Read-Through

CTS’s results signal a broader industry trend: suppliers with diversified end-market exposure and value-added technology are better positioned to navigate automotive cyclicality and macro headwinds. Medical device, industrial automation, and defense suppliers may see outsized growth as secular demand persists, while traditional automotive suppliers face continued volume and margin pressure. Tariff mitigation through regional manufacturing footprints is increasingly essential for global suppliers, and the SideQuest defense win highlights the value of moving up the subsystem value chain. Investors should watch for continued consolidation and strategic M&A as companies seek scale and resilience across end markets.

CTS Industrials Electronic components Diversification Medical Defense Transportation Margin expansion