Welcome to the 28th Annual Needham Growth Conference. Our next presentation will be from CTS Corp, a leading supplier of sensors, actuators, and electronic components, other engineered products, serving customers in a wide variety of markets: aerospace and defense, industrial, medical, and transportation. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham. We're pleased to have with us today from the company, the CEO, Kieran O'Sullivan. Welcome, Kieran. Thanks for joining us.
Kieran, thank you, and good afternoon. I'll take you through some slides, but maybe upfront, just a few points. If you look at us over the last two years, I would say what people notice is the transportation market has been a tough market for us. On the one hand, we've had dynamics in China where the Chinese OEMs were taking share from our Japanese transplant in the Chinese market. We feel like we've bottomed out in that area at this point in time, obviously watching it closely, and we're bringing out some new products. I'll touch on some of those, and then the other side is on the commercial vehicle market where we had a second source come into the area. We launched a new product last year. We will take that new product later this year and put in a cost-reduced version of that.
Everybody wants to know what's the share of the business now. While we think we were in a stabilized form, we'll tell you probably more accurate on the share in the second half of this year, 2026, when all the engine platforms have been sorted. We're working well with that customer. We expect to have business there for many years to come. I expect everybody understands the safe harbor statement, so I'm going to step through this pretty quickly. If you look at our revenue profile and financials over the last 12 months, you can see here revenue $531 million on an LTM basis, diversified markets now up to 56% of the overall company, EBITDA margins in 23%, and you can see the EPS as well.
I will come back to the transportation side here because for those of you who have known us over a longer period of time, our transportation was closer to 70%, then closer to 60%, and now you can see here closer to 44%. So again, to give you the larger view here, transportation has been tough, stabilizing, bringing out new products, expect to grow here in the years ahead. Electrification has slowed down, but we still believe in electrification longer term. And then the other side of it is our diversified businesses in medical, aerospace, and defense, and industrial growing at double digits with a nice high quality of earnings in that area as well. When it comes to the growth rates, we're targeting 5% organically and 5% through acquisitions. The last acquisition was in SyQwest in defense. I'll touch on that again later.
But to be clear, we're having higher growth rates in the diversified businesses, the larger part of the company now, and flat to small single increases in the transportation markets as we move forward. M&A is a large strategic focus for us. We have net cash positive on the balance sheet. We will deploy capital primarily for diversification, but selectively for some agnostic products on the transportation side of it as we go forward as well as the company. Good global footprint. We've done a lot of rationalization of footprint on the transportation side over the last 10 years to the point where we have one plant in Asia, one plant in Europe, and one plant in North America to support our customers.
On the diversified businesses, we have a lot more facilities globally because we're dealing with three different technologies in the piezo space: bulk processing, tape casting, and single crystal, and we have foundries here in America, foundries in two locations in Europe as well for that side of the business. We have been rationalizing some footprint there, but we haven't actually talked about it very, very much. It's us as a company. We're always focused on being more efficient as well, doing the right strategic steps forward for the company as we go forward. When we look at the secular themes and trends here, what's on our mind is automation, IoT with Industry 4.0, factory automation where our products can be used for predictive maintenance, passenger safety primarily on the passive safety side, not the active safety side, and then autonomous underwater vehicles primarily with the U.S. Navy.
And then in healthcare, diagnostic ultrasound, both the standard diagnostics, but also intravascular, getting into the arteries, measuring the thickness of the plaque buildup as one example, or delivering drug to the infected area, drugs to the infected area. Therapeutics has been a growing business for us, especially since 2023, 2024. We're seeing a good step up there. You might find it hard to believe. People ask me sometimes, why therapeutics? Well, skincare is becoming more important. Maybe it's because of all the Teams and Zoom calls, but I'm not using it myself, as you can tell. But I will tell you, this business is ramping up at a nice rate for us with our customers in this space and expanding in the applications as well as we go forward. And then patient experience, which could be anything from temperature to other products we provide in the space as well.
And then finally, on sustainability, electrification, reducing harmful emissions in terms of diesel applications, and then measuring scarce resources like water where our sensors are using fly-by-wire in terms of replacing mechanical impeller systems using the ultrasonic sound and the ultrasonic technology, which is core to our diversification business as well. People look at us and say, you're a very simplified company, but we're a little bit more complicated because we've been around for 129 years. So those of you that know us longer know we sold off some business and product lines over the last decade. But it's best to describe our company in two ways. On one side, we're a magnetics company, and that means we're focused on highly engineered sensors, actuators for safety-critical and harsh environments. And that really applies mostly to our transportation products.
And then on the diversified side of the business, which is closer to 60% of our overall revenues, we're basically a materials business. It's the quality of our material formulations that our customers work with us. So bulk processing, tape casting, and single crystal. So to give you a sense of that, on bulk processing, we're taking materials and compounds, mixing them together, refining them, making a slurry, then baking it into shapes and finishing and forming that for the applications, which could be anything from a medical ultrasound probe that goes on your body to a sonar array that goes into the ocean for the Navy with forward-looking sonar arrays or hydrophones as well. Tape casting is more the same materials, but stacked in layers so that we're more precise about micro-actuation as one example in that space.
Then single crystal, where we take a seed in a crucible and we grow it over a period of three to four weeks, probably at 1200-1400 degrees Fahrenheit, and we grow it into a ball, which is a few inches in diameter and several inches long, and we slice it into wafers, just like you'd see in semiconductors, and then form it into the form factors that we have for the different customers there. I'll come back to some of those customers as we go through the presentation, but just wanted to give you an insight in terms of who we are and the technologies that drive the business. The one thing I want to point out here is you can see the path on our end markets. We love our transportation business, but it's becoming a smaller part of the company as we deploy capital. Why?
Because we get a higher quality of earnings in medical, aerospace, and defense, and industrial. You can see here in the last 12 months, transportation coming down now to 44%, which was closer to 60%. Would we like to accelerate that a little bit further while keeping our transportation business healthy? Absolutely. It's got to be done in a very careful, thoughtful way to move the business forward with our customers so that we're providing valuable solutions and executing well as a company. Just touching down on each of the end markets, industrial, you can see here the SAM addressable market at $3.6 billion, growing at 10%.
If you go back two or three years, those of you that know us a longer time know that we took a hit in this market because, like our peers, there was an overpurchase of inventory and it had to be let off. And now we're back to growth. We've had several quarters of sequential growth. And to give you an example, some of the applications are HVAC. Some of the applications are micro-actuation in the semiconductor, in the satellites. Water metering is another example. Pool and spa just as another example as well, and industrial printing. So this is a solid business for us, and we're continuing to grow here and expect to move in a solid trend as we move forward as well. Next end market is medical. You can see here the applications minimally invasive is the overall theme.
You know if you're having a surgery or procedure, if it's not getting invasive into your body, it's a lot quicker to heal and less intrusive to the body. Highly precise diagnostics from medical ultrasound. Customers here would be customers like GE, Philips, Siemens, Samsung, Mindray is just some examples. We're into wireless pacing with pacemakers, cochlear implants also, and then medical therapeutics from a cosmetic perspective, but also around cosmetic surgery where you need tightening of the skin as part of the recovery procedure as well. In this market, good growth, 13%. You can see here a $1.5 billion TAM. This has been a solid, steady growth business for us. We've talked very openly about the diagnostic side in the last year, been a little more low single digits growth versus the higher single digits growth as people adjusted coming out of tariffs.
On the flip side, the therapeutics growing at a much more robust rate and ramping up volumes there last year. We were very clear in our last earnings call that it would be happening in 2026 as well. Moving into aerospace and defense, $1.5 billion. There's the traditional business that we've always had here as a component supplier, but also what we've added through the SyQwest acquisition, which is well over a year at this stage, getting into taking our components that we're going into sonar, now going up into the subsystems of forward-looking sonar, towed sonar arrays, hydrophones, unmanned applications, and also getting into some aspects of torpedo applications as we go forward as well. Business is growing at a very high double digit rate here. You can see the number yourself. We've always been very clear too with the SyQwest acquisition.
There'll be more seasonality in the business, lighter in the first half of the year, heavier in the second half of the year, and one of the things we're watching carefully is the Department of Defense. We're primarily with the Navy underwater applications and also with some friendly navies as well internationally, but the big thing for us is the pace of decision-making with the Navy and the funding of programs. There's a lot of talk out there about many things that are happening. I'd like to see the funding and the decision-making match that pace as well. We've won some programs in the last year. We've talked about some new naval platforms, so we're making good progress. Just expect some of them to come at a faster pace than they are.
And we've got a strong pipeline of new products and products that we're working on ourselves and with partners in this space as we go forward too. Transportation. Everybody's got a good story and a tough story. This has been our tough story. But as I said at the very start, we've been in decline because of China and because of competition and CV. We think this aspect of the market has stabilized. We know much more on the share mix and what that looks like in the second half of 2026 with our new products being launched there and qualified on engines. You can see here also we're adding new products into the portfolio, current sensing, not just for EVs, but also for hybrid applications. We've been very clear on our desire to own the footwell in the vehicle.
Traditionally, we've always been in accelerator modules, but with the electrification and by-wire applications coming into braking, over time getting into maybe dry braking, if you look out five, 10 years and electrification there, we see that we need to own both parts as we go forward. And as we do that, we actually bring in other products into the portfolio that are sensors that are built around the footwell within the vehicle as well. We also have other new pedals. You've got both hanging and floor hinge, but also flush designs that go into the footwell that we're working on with our customers. We don't believe these types of products will generate revenue in 2026 or 2027, but we see them as products that will carry us into the next decade as well.
But just to be very clear here, it's been a tough road for the last year or two, and we're starting to move in a more solid direction as we go forward. Strong execution capabilities. We view ourselves and our culture as a company to be very results-oriented, focused on collaboration and innovation. But you can see the improvements in the margin profile of the company. Obviously, we'd like to get a higher growth rate overall that helps us scale on the SG&A within the company at our size. We've got a strong balance sheet. You can see that really good cash flow conversion rate here at 85% of adjusted net earnings. And you can see free cash flow returned to shareholders, $282 million over the last several years. And we've got a solid balance sheet. As I said, we're cash positive.
We would lever up to about 3x times for the right acquisition. We'd like to be more in that 2%-2.5% range because with the geopolitical environment overall, it's nice to be a little bit conservative, but we'd like to deploy that on the right acquisitions. I would tell you that we're active on M&A. You've seen that we've done nine acquisitions over the last few years. We'd like to move to larger acquisitions as we go forward, more in the line of instead of being in the 20 million revenue range to be in the 50-100 million range, but as you do that, it's very important that we have a discipline and we know what we're acquiring and we have an expertise in the area, and that's something we're very focused on as well.
We're spending a lot of time on the front end of the business, the go-to-market, how we work with our sales teams, and obviously very targeted investments in R&D. We are very disciplined about what programs we invest in, what programs we say, "Hey, this one's going to sit on the shelf for a few years. It doesn't need heavy investment yet." So you'll expect to see a rigor in terms of how we operate the business overall, and then when you look at the capital allocation framework here, you can see again, the biggest vote here is M&A. We have an open buyback. We've been buying back stock opportunistically over the last few years, but our biggest focus is on M&A, so you can see here cash flow at 16%-20%. We'd like to be leveraged in that 1%-2.5% range. We're underleveraged at the moment.
And then the growth, CapEx has been pretty consistently at 4%. It did spike up in the last few years when we put in an SAP system to 16 or 17 sites. We have one more site to convert. That's the SyQwest acquisition. We will convert that over to SAP in the next six months as we go forward. And again, the return to shareholders in terms of dividend and repurchases in that 20%-40% range overall as well. And then when it comes to M&A, you can see the framework here, but without going through every point, what are the big things for us? First of all, is it the right technology? Does it bring new product lines to the customer? How does it help us regionally with our customers and globally with our customers? And then also, is it accretive within 12 months?
Does it give a return on invested capital within three to five years that we can go to you and say, "We feel good about this investment in terms of what it's going to do for the company, not just in that time period, but longer term?" And then looking for synergy opportunities. Obviously, you can get synergies on growth. They're always the hardest ones to get. But getting the synergies on the cost side of it has been something we've executed on well as a company as well. And then it's important for us as well to maintain balance sheet strength as we go forward as a company. Moving along here, you can see the guidance here for the year. We'll have our earnings call coming up in the early February timeframe.
I'm not going to get into too much here, but you can see where we had that spike in growth in 2022 coming out of COVID, like a lot of our peer companies went down because of the inventory burn-off, but now starting to come back in terms of growth and in terms of earnings growth, not just sales growth as well. And again, as I mentioned at the start, transportation hitting a trough now and starting to come out of that. Strong growth in the diversified markets, increase in the margin profile of the company. And being very clear, we have decent margins in transportation, but the real strength in the margins comes in our diversified end markets across industrial, defense on the naval side, and also on the medical sides of the market as well.
Then maybe finally moving into, by the way, tax rate, you can see what we're showing here. We're always focused as well as a company looking at how we're structured, how we can improve the tax rate of our company as we go forward. Then finally, I've moved along at a pretty good clip here, but finally just looking at the financial framework. Those of you who've known us know that our EBITDA margins over the last decade have gone from 10% now to 23%. Our margin profile has gone from the sub 30% range or 30% range. If you were looking at this gross margin profile a quarter or two ago, it would have said 36%- 38%. Now we're saying 36% to 40%. The way we operate as a company, we're signaling that we see the opportunity to further enhance the margin profile.
And as we prove that, we'll move up that lower end. So that would have been over the years 30%-34%, 34%-36%, 36%-38%, now 36%-40%. We'd like to move that over time here to 38%-40% to show our confidence in this as we execute over time. And that's also primarily driven by the diversification of the business, increasing those higher margin products in the portfolio. CapEx, you can expect us to stay in that 4% range. With the ERP conversions behind us, we should be getting some scale and efficiency out of that. R&D expense in the 4%-6% range. It did spike up at 7%. We tend to be very disciplined about our R&D. We're an engineering company. We're a technology company. We've got great engineers. They want to work on products. They want to spend more.
It's our job to be disciplined and directed in terms of where we deploy that capital as well. And then I think this is the last slide. Let me go back here. So over the last 10, 13 years, we've had three internal initiatives. We don't talk about them a lot because they're our compass and direction internally. Our first program was back in 2014. It was called The Road to 2020. We had 20 initiatives by 2020. And I would tell you, as a company, we were largely very successful. Our second initiative was Focus 2025, which was much more directed at growth and gross margins improvement. And I would tell you, we did execute well on the gross margins, but we were mediocre on the growth.
Now, part of that was impacted by what happened with COVID, and it happened to our peer companies as well. But as I say, let's call it what it was. It was mediocre, and that's not what we're here for. We're here to perform. And now our next initiative, which we kicked off at the end of last year, is Evolution 2030, focused primarily on growth. That's our primary focus. How do we grow this company at a faster rate both organically and through acquisitions? And we feel like we've positioned ourselves well to do that with the portfolio and what we've been doing. Secondly is operational excellence. We've executed well, but there's always things to do. And one of the things I worry about with our company is, as you come out of COVID, keeping that culture of collaboration, innovation, and execution.
There's been remote work, and there's been different things. We're in office. We're in the factory. We want to see your face. We want to look you in the eye just like you want to look at us in the eye when you're having investor meetings. Because that's where the real things happen. It's those sidebar conversations. It's how we operate. You might call us old-fashioned. We can flex and do different things, but that's who we are. We're a manufacturing company. We're an engineering company. We need to be together. So that's collaboration. And that's back to the engagement. It's really working with our teams and our employees to be, number one, results-driven, but to help our teams grow, develop our associates and leadership. We have our own internal leadership programs.
We like to develop our training internally versus externally, very deliberate about how we onboard and what we do. So this Evolution 2030 is our compass as we go forward. You won't hear a ton about it, but you should see it in the results and the key metrics on the company as well. So with that, I'm going to pause here, and happy to answer any question you have.
Can you talk a little bit about M&A priorities? You did have a slide in there that outlined that. But I'm thinking more in terms of the market verticals that interest you the most, and how active is that pipeline?
So we're very active on that pipeline. I would tell you the priority for us is much more around industrial, medical, aerospace, and defense, and then very selectively on transportation.
Even though electrification is not as popular now at the moment, if you go outside of the U.S., electrification is still very important. And in the long term, we believe strategically that will come. So as an example, we invested in current sensing technology in Switzerland in the last few years. So we will be selective there, but the larger capital deployment will go towards acquisitions in industrial, medical, aerospace, and defense.
And would you anticipate it has a gross margin profile? You talked about maybe moving up the lower end of the gross margin. Is that a requirement in what you look at?
Yes, it is. We're not looking for fixer-ups or businesses. We spend 10 years fixing our business. We want to add good quality assets as we go forward, and that'll accelerate the growth. Absolutely right.
Maybe just to follow up on that question, M&A. Maybe can you talk about the M&A valuation that you're seeing based on end markets? Do you see some end markets being a bit overvalued or too expensive? Or do you see like I mean,
I got your full list of M&A. Yeah. No, we've done some acquisitions. We've stepped away from some acquisitions, and that's a hard thing to do, but you got to be disciplined about what you're doing. When we see multiples, we're comfortable 12%-13% for the right asset that's really good quality. If we could make sure we get a return on invested capital, we may go marginally higher, but when we see them at 16%-17%, we just can't make sense of it. We honestly can't, and we've got to come back to you and show how that's accretive and hard to be that.
The other thing I'd say that we're looking at is, as well as standalone businesses, obviously we've worked a lot with private companies and brought them into the CTS tent. We're also looking at carve-outs in terms of what can be done in carve-outs. We tend to see a little bit more things happening in that space as of late.
Is there more risk with a carve-out?
I think if it's a public company with a management team that's been around it for a long time with good knowledge and capability, what we tend to see is in a larger company may be neglected, and it just finds its home with us because it's more relevant. So we think that can be a little less risk, providing that transition services period is done fairly because you're carving out and your system's got to be able to transition.
That's the risk I would be worried about.
Yes, Andy?
In the commercial vehicle where your major customer is bringing a second supplier, do you have any competitive advantage in terms of end products? Is it like Apple to Apple, or do you have some differentiated features?
Andy, what I would say on that commercial vehicle side, first of all, our company, the competitor company, is a good company. They're well-run. I have great respect for them. But we've been in this space like they have for many, many years. When I look at our designs, when they're out in the market, you can get them torn down. We certainly do things differently. What I would say is we've got a track record of executing well. We've got a track record of engineering being close to the customer.
Our customer's in Indiana as well, so it's not a mile away from us and we have a roadmap of where we want to go with the products and what we want to do. To me, in any market like this in automotive, you know they're always going to have a second source. So what's your job? Your job is to have excellent quality, low warranty impact because their focus is on protecting and servicing their customer well. You got to be cost competitive, and you got to innovate on the next generations to make sure you're going to be able to provide them the features they need, the compatibility they need, but also make sure you've got a healthy business to fund the future yourself. Yeah, there's some differentiation, but the OEMs tend to try and guide it in a certain direction.
But we're pretty pleased with what we're doing. And we offer other products in the portfolio maybe that they can't offer over time as things get integrated because you know that's a game in transportation. Things get integrated over time, and we feel like there's some things we can do differently there.
In the past, you talked about some design wins in automotive. Yeah. In which the new products will come in 2027, 2028. Can you remind us?
Yeah. So on that, Andy, some are already coming out at the moment. Current sensing in transportation is now already out there on a premium vehicle in Europe. We have more current sensing products that are in the works. We have the E-Brake product, and you know that got delayed. And we're staying close with our customer. We're executing on time on that.
It's a matter of when that customer goes to market with that product. We've got some new sensor things in the portfolio we talked about last quarter. And we haven't done the fourth quarter call. I'll talk about some other things. We've been very clear about owning the footwell. So you can tell there's a content story that we're pushing there pretty hard.
Thank you. Yes. I know you briefly mentioned Navy torpedoes just on the aerospace and defense side of things. Are you guys supplying by any chance missiles, robotics, drones, or any of those types of capabilities?
We're not in drones. Not our space. On missiles, no. Torpedoes, yes, part of that. The other thing we do that I think is very relevant in that space is anti-jamming. So we work with OEMs.
We have some nice large product lines in that area that we'd like to expand further, mostly built on our ceramic technology.
Okay. I just want to thank everybody for your time, for your investment in our company. And we'll have our earnings call in February, and we look forward to giving you an update on how the year ended and what we're looking at for 2026. And again, we're excited about what we're doing in electrification and the diversification of our company. We believe we have the right strategy, and our goal is to get that higher growth rate as we go forward as a company. Thank you for your time. Thank you.