Q3 2026 Knowles Corporation Earning Conference Call - KNOWLES CORP

Financial Performance:

• Q3 2026 revenue reached $184 million, representing a 20% year-over-year increase and exceeding the high end of the guided range.
• Adjusted EPS was $0.38, up 15% year-over-year ($0.05 increase) and at the high end of guidance.
• Operating cash flow generated was $45 million, also at the high end of the guided range.
• MedTech and Specialty Audio (MSA) segment revenue was $67 million (up 4% YoY) with gross margins of 51.9%.
• Precision Devices (PD) segment revenue was $117 million (up 33% YoY) with gross margins of 41.6%, up 10 basis points due to volume.
• R&D expenses were $10 million (up $1 million YoY); SG&A expenses were $30 million (up $4 million YoY) driven by commissions, incentives, and hiring.
• Interest expense was $1.6 million, down $700,000 YoY due to reduced debt balances.
• Net leverage ratio stood at 0.4x based on trailing 12-month adjusted EBITDA.
• Balance sheet liquidity exceeded $330 million (cash + unused credit facility capacity); cash on hand was $47 million with $116 million in borrowings.
• Share repurchases totaled $25 million; capital spending was $7 million in Q3.

Guidance and Future Outlook:

• Q4 2026 revenue is guided to $180–$190 million (up 14% YoY at midpoint).
• Q4 2026 adjusted EBIT margin is projected at 23–25%, with EPS expected between $0.39–$0.43 (up 14% YoY).
• Full-year 2026 revenue growth is expected to be 16% at the midpoint; adjusted EBITDA growth is targeted at 24% over 2025 levels.
• 2027 outlook expects organic growth to exceed May 2025 Investor Day targets, driven by capacity additions, new design wins, and backlog fulfillment.
• Capital spending is projected to increase to 5–7% of revenues in 2027 to support capacity expansion in Precision Devices.
• Management targets a 100 basis points annual gross margin improvement and a path to 30% EBITDA margins within 2–3 years.
• New growth initiatives include launching attenuators/inductors, expanding the Micro Solutions Group (targeting >$10M revenue by 2028), and growing pulse power capacitor applications.

Business Segments and Product Lines:

• Precision Devices: Delivered 33% growth driven by demand in MedTech, Defense, Industrial, and Electrification; book-to-bill ratio was 1.5x with ~$180M in orders.
• MedTech: Pulse power film capacitors winning in defibrillator/radiotherapy; ceramic capacitors securing design wins in imaging and implantables; hearing health market showing earlier seasonal demand due to AI feature launches.
• Defense: Strong demand across RF filters, film/ceramic capacitors in munitions and communications; a $15M multi-year order for filters will deliver over 36 months.
• Industrial & Electrification: Ceramic capacitors growing in plasma generators and semiconductor equipment; EV business expected to grow with new design wins.
• Capacity Expansion: New capacity across PD lines expected to come online late Q1 2027, fully available H2 2027; a new automated facility for the energy order is fully ramped.

Market and Competitive Landscape:

• ~60% of business is in MedTech and Defense, sectors viewed as sustainable with accelerating budget increases and munition replacement cycles.
• Industrial and Electrification segments remain strong; customers are not building significant safety stock compared to 2022.
• Current lead times are driven by genuine demand rather than supply chain shortages; competitors face longer lead times.
• Distribution partners report low inventory levels, indicating organic growth rather than channel stuffing.
• Company leverages unique custom-engineered solutions and rapid scaling to maintain competitive advantages in high-barrier markets.

Risks and Challenges:

• Capacity constraints in Precision Devices may lead to flat sequential growth in Q1 2027 despite strong YoY performance.
• MSA segment faces a 2–3% revenue headwind in 2027 due to the discontinuation of a cost-plus stamping business.
• Industrial sector specific risks exist regarding sustainability of semiconductor equipment demand, though diversification mitigates this.
• Macroeconomic inflationary pressures are managed through operational efficiency, pricing power, and yield improvements.

Management Commentary and Tone:

• Management expressed high confidence, describing results as "outstanding" with strong momentum and execution.
• Tone is optimistic regarding 2027, highlighting a "Herculean effort" in ramping the energy order and a broad pipeline of design wins.
• Leadership emphasized the strategy of investing in innovative technologies, customizing solutions, and scaling volume as the primary growth engine.
• Management signaled potential for an upcoming investor day to provide more detailed numbers on new growth platforms and SAM expansion.

Analyst Questions and Answers:

• Design Activity: Confirmed extremely high design activity across sectors driven by demand for precision, output, and AI features.
• Seasonality: Q1 2027 total revenue may be slightly down sequentially due to PD capacity constraints and MSA stamping exit, though YoY growth remains strong.
• Through-Cycle Analysis: Expects growth to be sustainable, particularly in Defense and MedTech, without reliance on inventory building or safety stock.
• Energy Order: The order is fully ramped with 6–7 quarters of deliveries remaining; discussions for follow-on orders are positive, though a potential small gap in ordering may occur.
• Margin Outlook: Path to 30% EBITDA margins identified via 100 bps gross margin expansion (price, capacity, productivity) and operating leverage.
• Automation Learnings: New automated facility has revealed significant margin expansion opportunities; similar automation will be applied to other facilities to improve yields and lower overhead.
• Inflation: Company is well-positioned to handle inflation through annual price increases, value engineering, and operational efficiency.

Other Key Points:

• A $15M order for defense filters was booked early in Q3 with a 36-month delivery schedule.
• Micro Solutions Group revenue expected to grow from ~$1M in 2025 to ~$2–3M in 2026, with a clear path to >$10M by 2028.
• Management is actively seeking an acquisition in the next 1–2 years with the potential to be a "home run" similar to the former Cornell business.
• Effective tax rate guidance for Q4 is 15–19%, reflecting the absence of a discrete tax benefit present in Q4 2025.