Q3 2026 Knowles Corporation Earning Conference Call - KNOWLES CORP

Hello, everyone. Thank you for joining us and welcome to the third quarter Knowles Corporation Earnings Conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Sarah Cook, Vice President of Investor Relations. Sarah, please go ahead. Thank you and welcome to our third quarter 2026 call. I'm Sarah Cooke, Vice President of Investor Relations and presenting with me today are Jeffrey New, our President and CEO and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for NOLS, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal security laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses, and profits, and involve a number of risks and uncertainties that could cause results to differ materially from current expectations. The company urges investors to review the risks and certainties in the company's SEC filings, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31st, 2025, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and NOLS disclaims any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at nols.com and in our current report on Form 8K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis with the exception of cast from operations or unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the investor relations section of our website. With that, let me turn the call over to Jeff, who will provide details on our results. Jeff? Thanks, Sarah, and thanks to all of you for joining us today. To start out, I would like to take a moment to thank the Knowles team for delivering an outstanding third quarter. We had strong performance across our business as demonstrated by our key financial metrics. Revenue was $184 million, up 20% year-over-year and above the high end of our guided range. EPS was $0.38, and cash generated from operations was $45 million, both at the high end of our guided range. These results reflect the strength of our execution and the positive momentum across our business. I believe our results continue to demonstrate that our focus on markets and products, where we have significant competitive advantages, is paying dividends and positions as well for future growth. In Q3, MedTech and Specialty audio revenue was $67 million, up 4% year-over-year, hearing how OEM customers typically launch new products annually in Q4. This year, however, we believe our customers' new products, which are implementing AI features, drove demand slightly earlier than usual. While this change in seasonality accelerated sales to earlier in the year, we continue to expect the hearing health market to grow at historical rates in 2026 precision devices delivered q3 revenue of 117 million dollars up 33 percent year-over-year with strong demand across every major product line and end market we serve medtech defense industrial and left electrification our close collaboration with customers continues to drive a robust pipeline of design wins as customers continue to choose our innovative and differentiated solutions. I believe our year-over-year growth demonstrate the strength of our strategy and the momentum across the business. On a base of strong revenue growth, orders remain robust. Precision Devices had a book to bill of 1.5 in Q3, with broad-based order strength across our key and markets, both among OEMs and with our distribution partners. Q3 orders in PD's segment were nearly $180 million, well above Q2 orders, reinforcing my confidence in continued growth. As noted on the Q2 earnings call, there was a $15 million order early in Q3 for our filters for a defense customer that will be delivered over the next 36 months. I will now provide a little more color on the revenue and order strength across our PD and markets. In MedTech, our pulse power film capacitors continue to win in defibrillator and radiotherapy applications, while our ceramic capacitors are securing strong design winds and next-generation medical imaging and implantables. In defense, demand remains strong across all our product categories. Our RF filters, film, and ceramic capacistors are in high demand in munitions and communications applications. We also serve a broad range of applications in industrial markets. As an example, our ceramic capacitors and capacitor assemblies are growing in use for plasma generators and semiconductor equipment. With strong borders, a healthy backlog, and continued design wins, we are in the process of adding capacity across most of our precision devices product lines to support the demand. I expect this additional capacity to begin to come online in late Q1 with it being fully available in the second half of 2027. Our ability to continue to expand and meet increasing demand for our products is supported by our strong cash generation from operations. We have the ability to invest in growth while returning capital to shareholders and reducing debt. In the third quarter, we repurchased $25 million in shares and reduced outstanding bank firings by $15 million in addition to funding organic growth initiatives. Our strong balance sheet positions us well to support organic growth through disciplined capital investment and still pursue strategic accretive acquisitions. Before turning the call over to John to cover our financial results and provide our Q4 guidance, I would like to share my initial perspectives on 2027. Our strategy of combining unique technologies to create custom-engineered solutions and then quickly ramping them at scale with a world-class operational capability is driving revenue growth in our core products and markets, margin expansion, and strong cash flow. In 2027, as we add capacity, new design wins ramp, and we fulfill our healthy backlog within our PD segment, and our NMSA segment continues to perform at historical growth levels, we expect organic growth to continue to exceed the revenue targets presented at our May 2025 Investor Day. I also believe we will be entering the next phase of revenue growth beyond our core, where we expect to have meaningful expansion of our SAM through the growth initiatives we outlined at our investor day. By following the same playbook we used in our core of investing in innovative technologies, using these technologies to develop customized solutions to solve our customers' problems, and then scaling into high-volume production, we expect three fundamental paths to supplementing our core growth. First, we are developing new products, such as attenuators and inductors, for our existing markets. This is a great opportunity to provide a wider array of solutions to the markets and customers we already serve. Second, we are utilizing existing technologies and capabilities for new customers and markets as we are doing with our micro solutions group and with pulse power capacitors. The breadth of opportunities we are pursuing that leverage our core competencies continues to expand with limited expansion of OpEx to support this new business. Lastly, we are seeing the opportunity to meaningfully grow content with existing products and technologies at current customers, as we have discussed in hearing health and with integrated capacitor solutions. All these initiatives are expected to meaningly expand our SAM, while complementing our strong core, and I look forward to providing a more detailed outlook and updates on these initiatives and others in 2027. Now, let me turn the call over to John for our financial results and our Q4 guidance. Thanks, Jeff. We reported third quarter revenues of $184 million, up 20% from the year-ago period and above the high end of our guidance range. EPS was $0.38 in the quarter, up $0,05 or 15% from year-ego period and at the high end of guidance range, and cash provided by operating activities was $45 million, also at the high end of our guidance range. In the med tech and specialty audio segment, Q3 revenue was $67 million, up 4% compared with the year-ago period. Gross margins were 51.9%. The precision devices segment delivered third quarter revenues of $117 million, of 33% from the year ago period. Increased demand from both OEM customers and our distribution channel partners resulted in strong growth in the four major markets we serve medtech defense industrial and electrification segment gross margins were 41.6 percent up 10 basis points from the third quarter of 2025 on higher volume partially offset by unfavorable inventory adjustments on a total company basis r d expense in the quarter was 10 million up 1 million compared to q3 2025 on higher project spending in both msa and pd segments sgna expenses were 30 million up 4 million from prior year levels driven primarily by higher sales commissions higher incentive compensation expense and increased head count as we pulled forward hiring primarily to support increased customer demand and new product initiatives initiatives interest expense for the quarter was 1.6 million down 700 000 from the third quarter of 2025 due to lower average debt balances now i'll turn to our balance sheet and cash flow in the third quarter we generated 45 million in cash from operating activities and capital spending was 7 million during the third quarter we repurchased 695 000 shares at a total cost of 25 million we exited the quarter with cash of 47 million and 116 million of borrowings under our revolving credit facility lastly our net leverage ratio based on trailing 12 months adjusted ebitda was 0.4 times and we have liquidity of more than 330 million as measured by cash plus unused capacity under our evolving credit facility. Moving to our Q4 guidance. For the fourth quarter of 2026, revenues are expected to be between $180 and $190 million, up 14% year-over-year at the midpoint. R&D expenses are expected to be Between $10 and $12 million. Selling and administrative expenses are expected to be within the range of $29 to $31 million. We're projecting adjusted EBIT margin for the quarter to be within the range of 23% to 25%. Interest expense in Q4 is estimated at $1.5 million, and we expect an effective tax rate of 15% to 19%. We're projecting EPS to be within the age of 39% to 43 cents per share, up 5 cents or 14% year-over-year at the midpoint, driven by a 20% increase in adjusted EBITDA, partially offset by the absence of a 3-cent discrete tax benefit which was included in q4 2025. this assumes weighted average shares outstanding during the quarter of 87 million on a fully diluted basis we're projecting cash from operating activities to be within the range of 60 to 70 million capital spending is expected to be 8 million we expect full year capital spending to be approximately five percent of revenues Looking ahead, we expect capital spending to be above our historic range of 3-5%, increasing to 5-7% of revenues in 2027 as we continue to make investments in capacity to support increased customer demand in the precision device segment. The strong growth and financial results we've achieved through the first three quarters of 26, combined with a robust backlog and increased order activity, give me confidence in our ability to deliver 2026 revenue growth of 16% at the midpoint of our guidance range and adjusted EBITDA growth of 24% over 2025 levels, with both metrics well above the high end of the target ranges that we provided at our May 2025 investor day. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator? We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. please stand by while we compile the q a roster your first question from the line of anthony stoss with craig helen anthony your line is open please go ahead great thank you uh congrats again on just solid and continued execution um jeff i'd love to hear your thoughts you gave a little bit of a preamble on 2027 maybe you can expand on that a little bit uh in terms of order visibility kind of entering into the first half of 2027 then i have a couple of follow-ups yeah so let me just say at a top level if you look sector by sector or market by market that we're we're in what we're seeing is just extremely high design activity and whether whether it be for faster more precision uh getting more output new innovative features, all the applications we're involved in, people are asking for more customized stuff. It's a trend that we're just clearly seeing now. And our product portfolio is well positioned to take advantage of this. I mean, it's very well positioned. Now, to take it to 27, let me break it down by the segments, right? First, MSA. MSA, you know, we expect next year the hearing health business is going to perform at historical levels again. We will have a little bit of a headwind I'd say primarily in the first half. I think we mentioned this before on stamping that we had this, when we sold a consumer business, we have a supplier. We're at the last time by at the end of this year. There'll be no revenue. And that's about, I had one about 2% to 3% next year, especially more in the front half. I would say in the back half. But the microsolutions business, as we talked about, should start accelerating in the black half. So overall, we'll still probably be in that 2% to 4% for the full year, although it may be down a little bit in the first half. Now, PD, let's say the book to bill, again, in the second quarter was very strong. But the orders we're taking now, it was 1.5 in Q3. The orders we'RE taking in Q2 are already being scheduled into the first half of next year. But we are at a point where we are pretty close to capacity constraint. So while we're going to have very strong year-over-year growth in the first half with PD, I think sequentially it's going to be relatively flat because of capacity constraints. And so I think, you know, that's probably the one thing. And what I say, I take on, just to be clear on the MSA thing, yes, it may be a little bit of a headwind, the stamping. But remember that stamping was on a cost-plus basis. It doesn't generate a lot of EBIT, so it won't affect the EBIT. The margin should be better. Yeah, I mean, gross margins, Tony, this year we've talked about. kind of for MSA in that low 50% range, I'd expect that maybe a little, you know, a percent or so higher in 27 over 26. Yeah, so bottom line is on this, we expect strong year-over-year growth in the first half. But sequentially, it's probably going to be, especially in the 1st quarter, might be slightly down, like PD being flat sequentially because of capacity constraints, with MSA being slightly down. Just to be clear, and maybe this is a better question for John, last year, and it seems like seasonal, your March quarter was typically down 5% sequentially. Are you saying it's only going to be down a little bit, like 1%, 2% sequitionally? I think that's a fair guess, somewhere in that it's slightly down sequentially based on the guide that we have. Tony, were you talking about the MSA segment or total nulls? Total, total null. Yeah. It'll be down slightly sequentially, but still, if you look at the year-over-year number, it's way up. And, again, MSA being slightly down, right, because of the stamping business going away, PD being flat, capacity constrained, because we're pretty much running all out. Got it. No, it is a good problem to have. And then my last question, Jeff, I'd love to hear kind of an update on the energy order, the trajectory, and what you're seeing from that customer. Yeah. I mean, the business is fully ramped. We're outputting like as expected, you know, and so, you know, now we've got about six, seven more quarters of delivery of this order. You know, I think if I look at the numbers, you know, it's performing in terms of the margins and the output as expected. You know I really put a really call out to the team. I mean this was like a Herculean effort to ramp this speed and this amount of volume. but it's going very well. Perfect. Great job, guys. Thank you. Thanks, Tony. Your next question from the line of Christopher Rowland with Susquehanna. Christopher, your line is open. Please go ahead. Hi, guys, congrats, and thank you for the question. Mine is around looking at NOLS kind of through the cycle here. I think everybody is benefiting from the cycle, longer lead times, longer bookings, people worrying about short capacity and perhaps even safety stock building. How much do you think this is a part of your business? Or conversely, do you Think what we're seeing here is really more represent representatives of something through cycle? Maybe if you could put the larger picture in focus for us. So let me just first say it based on the markets. If I think about the markets that we participate in, and I think I've said this, in medical, I do not see that there's safety stock or that this is going to grow through a cycle. We've got a lot of great new design wins. I think it's sustainable. we're not seeing in medical that there's a concern here then I go to defense I would argue that there's probably an opportunity for an acceleration from even where we are in terms of defense in the next 12 to 18 months as budgets around the world are increasing for both you know the U.S. as well as allies the replacement of munitions there's lot of things going on here that says that this is going to continue to maybe even accelerate. And so that's about 60% of our business or so right there as a company. The electrification is what it is. And I would say we still expect growth next year. We have some EV business. We expect that to be up again next year, we've got a lot of great design wins, as well as the energy order. I don't see a lot of concerns there. So you really come back down to industrial. And if you look at it, there are some pockets here where I would sit there and say, okay, maybe this isn't sustainable, like semiconductor equipment, how long will that last? But we are not really overly reliant on one market. And I can tell you, when I look at our distribution partners, they do not have a lot of inventory. They're not holding excess inventory like we saw happen in 22. And, and I think this goes back to kind of the discussion of what's different between back then and 22. In 22, we had lead times of 15 weeks. And some of the competitors, like, say, ceramic capacitor guys had 60-week lead times. Our lead times are now long, not driven by AI. They're driven by our demand in our core markets. And so I think, generally speaking, we're going to be pretty good going forward, you know, through the cycle. Yeah, Chris, just to clarify, too, and that Jeff mentioned roughly 60% of our business is med and defense, and med includes the hearing health business. Yeah. Yeah? Okay. Perfect. And then as I look at some of the implied fourth quarter stuff around gross margin, it looks like that's up nicely. Maybe any puts and takes into next year as well. That would be appreciated. Yeah, Chris, you're right. I mean, in terms of gross margin, if you kind of take the guidance, the components of the guidance that I gave, you can back into gross margin and it's just above 46% of the midpoint of the guidance that i gave. I think there's room to continue to expand gross margins. Our target is, you know, 100 basis points a year, but kind of exiting this year, again, the guidance I provided is just a touch above 46 percent but there is room to increase that next year okay excellent thank you guys i i yeah i just have one more thing chris on that is i'm kind of looking at the numbers here you know i think you know we're going to exit you know above well above 25 percent on ebitda margins this year and you know I think john said this before but I mean we clearly see the path over the midterm now to get to 30 percent even dot margins yeah if you do if you take what i said the gross margin alone we think there's a hundred basis points of improvement annually and then we're going to get operating leverage of 50 to 100 basis points uh with the growth that we have so yeah you can see a path there within two to three years going from you know where we are just a little north of 25 this year to 30 percent your next question from the line of tristan jara with baird tristan your line is open please go ahead hi this is tyler for tristan thanks for taking the questions looking into 2027 could you give us a sense of uh which of the newer growth growth platforms that you outlined in the paragraph are closest to contributing meaningful revenue are you starting to get production orders that give you better visibility on the timing of across those different platforms yeah and so here's what i'd say is i'll give you a little bit of color on this but i think this is going to be a great topic for an investor day sometime next year right as we kind of move forward but let me kind of talk about it a littlebit um you know first i'd take if you look at our micro solutions group from msa i mean we really have now a list as long as my arm of opportunities we're really starting to actually have to kind of push back on customers you know we talked about this we had about a million dollars worth of revenue in 2025 we'll have a two to three probably going to push closer to three this year i see a clear path north of five next year and then if you look in a you know in 28 you know it should be north of 10 and maybe even more and so i'd say that one is really coming along well um i would sit there and say you know the pulse power opportunity you know i it's a matter now of really about of our execution there's so many new applications you know whether it be downhole uh applications uh a lot there's all different types of things you know in terms of you know even beyond the energy that we've discussed kind of a lot so i say and that's ready to go and we i mean it's the question of when the customers we'll start ordering in some of these new applications. You know, I'm really encouraged. I mean, like, we have not talked about this at all. We introduced a line of attenuators. Now, this is primarily for defense. Takes some time, but super encouraged by the initial reaction we're getting from attenuwaters. I'm super encouraged via inductors. So a lot of good stuff coming here. You know? I think I would just say this. what we're seeing is a meaningful expansion of our sam with all these things we're doing beyond the core that will supplement that growth and that's why we're feeling more and more compelled to kind of call that out and people lay some numbers around that probably sometime in in the new year great well looking forward to that um with the from our follow-up with the energy order now fully ramped are you seeing discussions around follow-on orders or similar applications with different customers that could sustain growth beyond this initial 75 million dollar order let me give you the short answer yes uh let me give you a little more color a little bit longer answer you know i think we're still six to seven quarters out from completing this order you know I think um I think there's you know a possibility you know that we we get another order like that follows right on but there may be a small gap i think from my perspective we have so many growth opportunities um that are even beyond this energy order um you know i think not that i don't want to focus on this because this could be a big upside to our numbers in 28 29 and beyond um uh but but i mean it's it's a great opportunity for us and hopefully um you will as we get further along in delivering this order we'll be able to talk more about what what the next what the what comes beyond Great. Well, thanks again for the questions. Your next question from the line of Bob Lubeck with CJS. Bob, your line is open. Please go ahead. Thanks. Congratulations on really strong results. Thank you. Also exciting news that you're adding capacity here due to all the demand and that you are kind of bumping up. And obviously, we've talked about the energy order on the call already. You've stood up a fully automated production facility recently, kind of state-of-the-art for this energy order. What have you learned from that process, and how can you apply that to the incremental capacity you want to add, and also just to other Knowles facilities already in the footprint of manufacturing? That's a great question, Bob. I think what we've learned from the whole ramp-up of this automation is that we have a lot of margin expansion opportunity within that factory i think that's that's what we've learned um i think you know part of that you know john's kind of alluded to that you know within the the the cornell uh former cornell business that we acquired the especially film business we think they're great opportunities for margin expansion i don't know if it applies as much because we really are applying these kind of learnings to every one of our facilities as we go along but for sure in uh this area we're going to be adding more automation in order to improve yields uh uh lower our overhead uh and make the cornell business you know more profitable i think you know we've alluded this when we bought that business it was in the you know 27 28 gross margin it's exiting the year in the mid 30s now with a clear path above 40. and you know it And so we're seeing all the things that we expected from that. I think what we're hoping is we can find another acquisition that is a one plus one equals three and be a real home run that is like another Cornell over the next year or two that really makes sense for us. Okay, great. And then obviously you gave a nice initial look to 2027. And in general, in the economy and kind of the macro, there's obviously a lot of inflationary pressures right now. How is Knoll's position, you know, based on the kind of current inflationary market? And how would this project into 2027 for you, if at all? I think we're positioned very well. I think, you Know, just to face first day off, we have an excellent operation team globally that focused on value creation every year. So they're looking for a way to, you Now, reduce costs, reduce, improve yields. we have that going on that's an ongoing thing i think we've alluded to this you know i think the pricing environment is positive and the direction we're heading with the customers with generally speaking we are a critical piece of the bill of materials but we're not an overly large portion of our bill of material to our customers and so you know moderate pricing every year uh increases you know are pretty much what we do you know I wouldn't say we do it with every customer across you know every single segment but we are looking at this on a continual basis and i think generally speaking we're in a very good position to to be able to handle inflationary pressures i don't yeah bob just to add to that i mean i talked about you know the potential to increase gross margins 100 basis points the levers are really price capacity utilization and productivity on the factory floor those are the three components and there's a piece of both of those that will benefit us in in 2027. okay great stuff thank you very much thank you there are no further questions at this time this concludes today's call thank you for attending you may now Now disconnect.