Knowles Corporation (KN) Earnings

Management highlights

- Overall Company Performance • The company delivered total Q2 2026 revenue of $167 million, up 14% year-over-year, exceeding the high end of management's guided range. • Non-GAAP EPS was $0.33, up 38% year-over-year, also above the high end of guidance. • Operating cash flow was $28 million, near the high end of guidance. Total gross margin improved more than 200 basis points year-over-year in H1 2026. • The company repurchased 416,000 shares for $15 million in Q2, ending the quarter with $50 million cash, $131 million in outstanding revolving credit borrowings, a 0.5x net leverage ratio, and over $315 million in total liquidity. - End Market & Strategic Execution • Management's long-term growth strategy, focused on high-value products for markets with strong secular growth, is delivering on targets, with new growth platforms showing early positive momentum for 2027 and beyond. • MedTech: Secular growth trends from aging populations and rising healthcare spending remain intact, and Knowles is outpacing general market growth via next-generation product design wins; the hearing health sub-market is tracking for 2-4% annual growth, in line with historical trends. • Defense: Growth is significantly faster than management's 2025 investor day expectations, driven by rising global conflicts, increased defense spending on electronic warfare, and demand for stock replenishment. Knowles holds sole-source supplier positions on many key programs, with growing customer demand for multi-year capacity-securing orders. • Industrial: Growth is also outpacing prior expectations, with broad-based demand across OEMs and distribution partners, and robust design wins for custom capacitor solutions supporting automation and product optimization. • The large energy sector order in Precision Devices reached full ramp in Q2 with better-than-planned yields, with over $5 million shipped in Q2 as expected.

Guidance

- Full year 2026 revenue growth guidance is raised significantly to 10-12% organic growth, up from the prior 4-6% target set at the 2025 investor day. - Q3 2026 guidance calls for total revenue of $177 million at the midpoint, representing 12.5% year-over-year growth. EPS is expected to be in the range of $0.34 to $0.38, up 9% year-over-year at the midpoint. - R&D expense is projected between $9 million and $11 million, while SG&A expense is projected between $29 million and $31 million. Adjusted EBIT margin is expected between 22% and 24%. - Q3 2026 operating cash flow guidance is $35 million to $45 million, with capital spending of $10 million. Full year 2026 capital spending is expected to equal ~5% of total revenue, to add capacity for growing Precision Devices demand. - Management expects Precision Devices gross margins to expand further in H2 2026, reaching the low 40% range, driven by favorable pricing, product mix, and higher capacity utilization. - Management projects full year 2026 adjusted EBITDA margins will exceed 25%, with a clear path to approach 30% adjusted EBITDA margins over the next 2-3 years via gross margin expansion and operating leverage.

Segment performance

1. MedTech and Specialty Audio: Q2 2026 revenue was $69 million, up 2% year-over-year. This segment contributed 41.3% of total company revenue. Segment gross margin was 53.1%, up 250 basis points year-over-year, driven by factory productivity gains. 2. Precision Devices: Q2 2026 revenue was $98 million, up 25% year-over-year. This segment contributed 58.7% of total company revenue. All end markets (MedTech, defense, industrial, electrification) grew year-over-year. Segment gross margin was 40.1%, up 140 basis points year-over-year, driven by increased production volume and factory capacity utilization. Book-to-build for the segment was 1.4, marking the seventh consecutive quarter above 1, with Q2 orders reaching nearly $140 million.

Risks & headwinds

- All forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from expectations, with key risks detailed in the company's periodic SEC filings. - Strong current order growth could include some transient demand from customers shifting business due to longer lead times at other suppliers, which may not be sustainable long-term, so management is being cautious about adding capacity for non-sustained demand. - New proposed U.S. defense budget increases and allied defense spending growth will not impact revenue until late 2027 or 2028, so near-term gains from this trend are not guaranteed.

Analyst Q&A

• Q: Analyst Christopher Rowland asked to explain the moving parts of full year 2026 guidance, specifically slower expected Q4 growth versus his model, and how sequential growth will unfold through the end of the year. /

  A: Management confirmed sequential growth from Q3 to Q4 2026. The slower relative growth in Q4 for the MedTech and Specialty Audio (MSA) segment is due to outsized growth pulled forward into Q1, but the full year MSA growth will still hit the 2% to 4% target, and recent industry data suggests MSA could land near the 4% upper end of the range. The Precision Devices (PD) segment will maintain its current strong growth rate through the end of the year, and the 10-12% full year guidance remains comfortable.

• Q: Rowland also asked if broad industry pricing tightness in the passive components market is spilling over to Knowles, and if the company can capture additional pricing in H2 2026. /

  A: PD demand is stronger across all end markets (especially defense and industrial) in H2 than initial projections. Unlike commodity passive component producers, Knowles holds mostly sole-source positions and raises prices annually rather than cyclically. While pricing is not volatile downward, the pricing environment is stronger than last year, and the company will capture more price increases in 2026 than in prior years.

• Q: Analyst Bob Lebec asked for the core drivers of PD growth excluding the large energy order, and the cadence of energy versus core PD business through the end of 2026. /

  A: After removing the over $5 million in Q2 energy shipments, core PD bookings remained very strong at nearly $140 million in Q2, up from just over $100 million in Q1. Growth is broad-based across all end markets, customer channels, and product lines, with strong bookings continuing into July 2026. Most of the current order growth is sustainable long-term business, not transient demand from other suppliers' long lead times.

• Q: Lebec also asked about M&A strategy given strong organic growth, and how management is approaching deals currently. /

  A: Management is not stepping back from M&A, but remains selective, targeting deals that are additive to existing platforms and deliver 1+1=3 value, similar to the successful Cornell acquisition. While strong organic growth is the current priority, the company maintains a dedicated M&A team, generates strong cash flow, and will move forward with the right opportunity if it arises. Capital allocation will also continue to prioritize share repurchases and remaining debt paydown, which delivers EPS benefits.

• Q: Analyst Anthony Stoss asked for additional color on the faster-than-expected defense growth, including product split and visibility into future growth. /

  A: Total defense revenue is roughly $120-$130 million annually, with ~$80 million from RF filters (90% of Knowles' filter business goes to defense) and ~$40-$50 million from defense capacitors. Management sees three drivers of potential mid-term acceleration: larger proposed U.S. defense budgets that will impact results from late 2027, stock replenishment for missile and munition programs that could double to quadruple current volumes in 1-2 years, and increased allied defense spending that has not yet hit order books but is showing rising inquiry and design activity. A large $15 million multi-year radar order booked in July 2026, shipping from 2027 over 36 months, exemplifies this trend.