Q3 2026 Knowles Corporation Earning Conference Call - KNOWLES CORP

Explicit Guidance:

• Q4 2026 Revenue: $180–$190 million (midpoint implies 14% YoY growth).
• Q4 2026 Margins: Adjusted EBIT margin 23%–25%.
• Q4 2026 EPS: $0.39–$0.43 per share (midpoint implies 14% YoY growth).
• Q4 2026 Expenses: R&D $10–$12 million; SGA $29–$31 million; Interest $1.5 million.
• Q4 2026 Tax Rate: 15%–19% (effective rate excluding one-time tax benefit).
• Q4 2026 Cash Flow: Operating cash flow $60–$70 million; Capital spending ~$8 million.
• FY 2026 Full Year Expectation: Revenue growth of 16% (midpoint) and Adjusted EBITDA growth of 24% vs. 2025.
• 2027 Capex: Expected to increase to 5%–7% of revenues (up from historic 3%–5%) to support capacity expansion in Precision Devices.

Business-Segment Outlook:

• MedTech & Specialty Audio (MSA):
  • Full-year 2027 growth expected at 2%–4%; first half impacted by the discontinuation of a low-EBIT "stamping" supplier (loss of ~2%–3% revenue).
  • Micro Solutions Group: Revenue projected to grow from ~$2–3M in 2026 to >$5M in 2027 and >$10M in 2028.
  • Hearing Health: Expected to grow at historical rates in 2026; AI-driven demand previously shifted seasonality to Q4/Q1.
• Precision Devices (PD):
  • Revenue growth remains strong YoY in H1 2027, though sequential growth may be flat (Q1/Q2 2027) due to near-capacity constraints.
  • Book-to-bill remains robust at 1.5x; Q3 orders ($180M) and a $15M defense filter order (delivered over 36 months) support a healthy backlog.
  • Targeting gross margin expansion of 100 bps annually in 2027; exiting 2026 above 46% gross margin.
  • New product launches: Attenuators (defense focus) and Inductors; pulse power capacitors for downhole/industrial applications.
• Segments & Markets:
  • MedTech and Defense combined represent ~60% of business; expected to sustain growth or accelerate in Defense due to munition replacements and global budget increases.
  • Electrification/Energy: Existing "energy order" (approx. $75M) fully ramped with 6–7 quarters of delivery remaining; follow-on orders or similar applications considered possible.

Market and Competitive Outlook:

• Demand Trends: "Extremely high" design activity across sectors driven by demand for customized, higher-performance solutions (faster processing, precision); inventory levels among distribution partners are low, indicating organic demand rather than destocking/restocking cycles.
• Pricing & Margins: Pricing environment expected to be positive with moderate annual price increases; Gross margin expansion driven by pricing, capacity utilization, and productivity.
• Capacity Constraints: PD segment near full capacity in H1 2027; new capacity for precision devices begins late Q1 2027, with full availability expected in H2 2027.
• Long-term Margin Target: Management sees a path to 30% EBITDA margins within 2–3 years (currently just north of 25%) via 100 bps gross margin improvement and 50–100 bps operating leverage.

Macro / Industry Outlook:

• Defense: Budget increases in the U.S. and allied nations expected to accelerate demand over the next 12–18 months.
• Inflation: Company positioned to handle inflationary pressures via global operational efficiency, yield improvement, and cost reduction initiatives.
• Cyclicality: Belief that current growth is "through-cycle" and sustainable, contrasting with 2022 inventory distortions; not reliant on safety stock building.

Strategic Initiatives:

• Capacity Expansion: Adding capacity across most PD product lines; leveraging learnings from the automated "energy order" facility (improved yields, lower overhead) to upgrade other facilities, specifically the former Cornell film business (targeting >40% gross margin).
• M&A: Targeting one to two accretive acquisitions in the next 1–2 years that offer "1+1=3" synergy (similar to the Cornell acquisition profile).
• Organic Growth: Three paths to expand Serviceable Addressable Market (SAM): 1) New products (attenuators/inductors) for existing markets; 2) New customers using existing tech (Micro Solutions, Pulse Power); 3) Increased content per customer (hearing health, integrated capacitors).
• Capital Allocation: Continued share repurchases and debt reduction alongside organic investment.

Risks and Headwinds to Outlook:

• Sequential Growth: Potential for sequential revenue flattening (PD) and slight declines (MSA) in Q1 2027 due to capacity constraints and the discontinuation of the stamping business.
• Capacity: PD segment is "pretty close to capacity constraint," limiting sequential ramp potential in early 2027.
• Customer Concentration: While not overly reliant on single markets, specific pockets (e.g., semiconductor equipment) carry sustainability questions, though exposure is diversified.
• Supply Chain/Lead Times: Lead times are long but driven by demand rather than AI disruption; competitors report longer lead times, but Knowles is managing capacity via organic investment and acquisitions.

Management Tone on the Future:

• Confidence Level: High confidence in 2026 delivery (above prior targets) and 2027 organic growth (exceeding May 2025 Investor Day targets).
• Strategic Narrative: Strong momentum in "core" markets with a transition into a "next phase" of growth via SAM expansion and new product categories (attenuators, inductors).
• Hedges: Management explicitly notes capacity constraints will limit sequential growth in early 2027 despite strong YoY performance; acknowledges the "stamping" headwind will impact MSA revenue but not EBIT.

Miscellaneous:

• Share Count: Assumes 87 million fully diluted shares for Q4 2026 EPS guidance.
• Debt: Net leverage ratio at 0.4x (Trailing 12-month Adjusted EBITDA); liquidity >$330 million (cash + revolver capacity).
• Q2/Q3 Context: Q3 book-to-bill of 1.5x and orders of ~$180M reinforce confidence in the outlook; Q3 revenue ($184M) and EPS ($0.38) beat high-end guidance.