CTS Corp. Q3 FY2024 earnings call

• Diversification strategy continues with diversified markets accounting for 52% of revenue, expected to progress further next year.
• Gross margin expanded by 416 basis points in the quarter, driven by mix change, foreign currency favorability, and factory efficiency improvements.
• SyQwest acquisition contributed $3.6 million in revenue during the quarter, integration tracking to plan, and expanding opportunity funnel.
• Medical market saw wins in ultrasound, drug delivery, and pacemaker applications but expects Q4 softness. Aerospace and defense had strong sales growth with multiple orders and RF filter wins, and solid long-term prospects with SyQwest integration. Industrial market showed gradual recovery with wins in various sectors but tempered by inventory management issues.
• Transportation sales down 17% due to market softness, but eBrake product had pre-development awards and new customer wins for accelerator modules.

Third quarter revenue was $132 million. Diversified medical, aerospace and defense, and industrial sales were up 18%, while transportation sales were down 17% from the same period last year. Diversified markets accounted for approximately 52% of overall revenue in the quarter. Third quarter adjusted diluted earnings per share were $0.63, up 17% year-over-year. Aerospace and defense sales were up 89% from the prior year period (excluding SyQwest acquisition, up 56%). Industrial sales were up 2% year-over-year. Medical sales were up 3% from the same period in 2023 but expected to be soft in Q4.

• Full-year 2024 sales guidance updated to $515 million to $525 million (previously $525 million to $540 million).
• Adjusted diluted EPS guidance reiterated in the range of $2.05 to $2.25.
• Expect diversification to continue improving, with industrial demand expected to improve in Q4, medical market to grow next year, and aerospace/defense to remain solid with backlog.

• Transportation market softness and regional demand challenges.
• Inventory burn down and inventory management tightening impacting industrial demand.
• Near-term softness in medical market due to customer inventory adjustments.
• Uncertainties in the light vehicle market including China dynamics and Euro 7 emission changes.

Q: Can you talk about the puts and takes in the gross margin profile?

A: Mix change from diversification strategy, foreign currency favorability of ~$1.5 million, and factory efficiency improvements contributed to gross margin expansion.

Q: Regarding SyQwest, how much did it contribute and is it accretive?

A: SyQwest contributed $3.6 million in revenue. EPS is slightly dilutive this year but expected to be accretive in the second half of next year.

Q: Thoughts on 2025 markets?

A: Diversification is doing well, industrial expected to continue improving, medical has overall growth but Q4 softness, defense has strong backlog, transportation hard to predict much at this stage but eBrake and electrification progress is positive.

Q: Opportunities in China transportation market with local OEMs?

A: Working selectively with OEMs in the long run, seeing opportunities in electrification with faster development periods possible.

Q: Interest expense rate for debt?

A: Internally, the interest rate is in the range of 5% to 6%.