Q2 2026 Knowles Corporation Earnings Conference Call

Sarah, please go ahead.

Thank you, and welcome to our second quarter 2026 earnings call. I'm Sarah Cook, 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 securities 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 actual results to differ materially from current expectations the company urges investors to review the risks and uncertainties and 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 NILS displays any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measure 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 8-K 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 cash from operations 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. Thanks to all of you for joining us today. Before getting into the specifics of the Q2 results and the commentary on what we are seeing in our end markets, let me say I'm very pleased with our performance. We had another quarter of strong broad-based organic growth as we continued to build on the momentum we saw in the first quarter. In our core products and markets, we continue to execute on the strategy detailed last year at our investor day of providing high-value products to markets with strong secular growth trends. Additionally, we are beginning to see positive momentum in some of our new growth platforms and markets that bodes well to drive additional growth in 2027 and beyond. Now on to our results. In the second quarter, we delivered revenue of $167 million, up 14 percent year-over-year, exceeding the high end of our guided range. EPS of 33 cents was up 38 percent year-over-year, above the high end of our guided range, and cash generated and operations was 28 million, above the midpoint of the guided range. In Q2, MedTech and specialty audio revenue was 69 million, slightly better than expected, up 2 percent year-over-year. We continue to believe the hearing health market will grow at historical rates in 2026. Beyond 2026, we are well positioned to win next generation designs for MEMS microphones and balanced armature speakers. I remain confident in our prospects to increase our content per device in next generation hearing health products as NOLS continues to demonstrate our ability to deliver unique solutions with superior technology and reliability our customers have come to depend on. This coupled with our micro solutions group ability to expand our reach as a new platform we expect an increase in growth above historical rates for this segment in the precision device segment q2 revenue was 98 million up 25 percent year-over-year with all end markets we serve medtech defense industrial and electrification growing on a year-over-year basis medtech growth was supported by strong sales across a number of applications including defibrillators and mri machines in the defense market our rf microwave product continues to support strong growth across many communications applications we are seeing more defense customers coming us coming to us wanting to place multi-year orders to secure capacity as an example early in july we received a 15 million dollar plus order for a radar application that is expected to ship over 36 months starting in 2027. We intend to continue to call out these large multi-year orders as we receive them. In the industrial market, sales grew significantly again this quarter. Demand was broad-based at both our distribution partners and OEMs, as our capacitor products support a multitude of applications and industries. We continue to see robust design wins in the industrial space. As an example, this quarter we saw strong sales with a new product introduction in the HVAC repair space. And lastly, I'm happy to report we delivered more than $5 million against our previous announced energy order and are fully ramped, as we expected, heading into Q3 with yields better than planned. Overall, book-to-build in precision devices was 1.4. This marked the seventh consecutive quarter with a book-to-build greater than one. order strength was across all our end markets both at the oems and with our distribution partners it is worth emphasizing the strength of bookings in our core products as the book to build was 1.4 even with extremely strong shipments in q2 including over 5 million dollars of shipments on the energy order orders in the pd segment were nearly 140 million dollars in q2 well above Q1 bookings and providing you the confidence in continued growth in the future. I continue to be excited by the strength of our business and the momentum we built in the first half of the year. We are well positioned for continued strong organic revenue growth and margin expansion. As I've said on previous calls, I believe Knowles has entered a period of accelerated organic growth. With a very healthy backlog of existing orders, strong secular trends in the markets we serve, and an accelerating book-to-bill, we now expect our revenue growth in 2026 to be between 10 and 12 percent, well above the high end of our organic revenue growth target of 4 to 6 percent that we provided at our investor day in May of last year. Before I turn the call over to John to cover our financial results and provide our Q3 guidance, I would like to take a moment to reflect on where we have been, where we are now, and where we are heading. As it has been a little over a year since we did our investor day, let me provide an update on the changes we are seeing in our end markets and how it is supporting our accelerated revenue growth. Let me start with the MedTech market. Both precision devices and MedTech and specialty audio segments participate in this market. The secular growth trends we communicated a year ago on our investor day remain intact. Life expectancy rates are increasing and the aging population grows correlating health care expenditures are increasing as well our products apply the health care industry with capacitors for medical imaging advanced life-saving therapies and cardiovascular devices to name a few in our hearing health business our our hearing health business provides an array of solutions that help our customers enhance quality of life for those with hearing loss on a blended global basis for the specific portions of the market we serve, we are outpacing the general medtech market growth rate communicated last year at Investor Day as we focus on design wins for next-generation medical solutions. Growth in this market comes from multiple sources. The hearing health market continues to consistently deliver 2 to 4 percent growth annually. In precision devices, our capacitors provide the energy delivery needed to ensure devices used in cancer treatments, imaging, and precision lasers perform reliably and with high performance. There are significant advances in medical technologies, and our products support these advances, evidenced by design wins and growth in the medtech space. The defense market is definitely growing at a more rapid rate than we anticipated in May in 2025, with global conflicts on the rise and increased defense spending, specifically on electronic warfare. Our RF filters and capacitors serve the defense market rf microwave technologies serve a broad base of communication applications from radar detection and jamming to ground and sea communications and we are being used in next generation of products ensuring reliable and secure military communications we see strong order intake in our rf microwave products as we continue to be a sole source supplier on a number of key defense programs our capacitors provide the electrical energy source needed for extremely harsh applications like munitions and detonation devices additionally we expect increasing demand in the future driven by replenishment of stocks in connection with the iran conflict all this adds up to an expectation of continued strong organic growth with the possibility of an acceleration of growth in the midterm. Like MedTech and Defense, the industrial market is growing at a faster pace than we believed it would when we hosted our investor day last year. NOL serves a very broad set of customers across the industrial markets, both directly as well as through our distribution partners like TTI and Arrow Electronics. Our capacitors are used in a wide array of solutions from factory robotics, HVAC equipment, precision lasers, and semiconductor As manufacturers are challenged to find solutions for manufacturing automation and product optimization, our capacitors provide an essential energy source that advances the performance of their system. Our strategy of leveraging our unique technologies to design custom engineered solutions and then deliver them at scale for blue chip customers in high growth markets that value our solutions is proving to be a powerful combination, driving revenue growth, expanding margins, and strong cash flow. Now, let me turn the call over to John to review our financial results and give our Q3 guidance.

Thanks, Jeff. We reported second quarter revenues of $167 million, up 14% from the year-ago period and well above the high end of our guidance range. EPS was $0.33 in a quarter, up $0.09, or 38% from the year-ago period and above the high end of our guidance range. Cash provided by operating activities was $28 million, near the high end of our guidance range. In the MedTech and specialty audio segment, Q2 revenue was $69 million, up 2% compared with the year-ago period. Gross margins were 53.1%, up 250 basis points from the year-ago period, driven by factory productivity gains. the precision devices segment delivered second quarter revenue of 98 million up 25 percent from the year ago period increased demand from both oem customers and our distribution channel partners resulted in year-over-year growth in medtech defense industrial and electrification segment growth margins were 40.1 percent up 140 basis points from the second quarter of 2025 largely driven by increased production volume and factory capacity we deliver on strong demand. While we've delivered significant year-over-year gross margin improvement of more than 200 basis points in the first half of 2026, I remain confident in our ability to further improve the second half of the year on higher pricing, favorable mix, and increased factory capacity. On a total company basis, R&D expense in the quarter was $9 million, up slightly compared to q2 2025 on higher project spending in both msa and sgna expenses were 31 million up 3 million from primarily by higher sales commissions annual merit increases and increased expenses interest expense for the quarter was 2 million down 1 million from the second quarter of 2025 due to lower average debt balances now i'll turn to our balance sheet and cash flow In the second quarter, we generated $28 million in cash from operating activities and capital spending was $7 million. During the second quarter, we repurchased 416,000 shares at a total cost of $50 million and $131 million of borrowings outstanding under our revolving credit facility. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was 0.5 times and we have liquidity of more than $315 million, as measured by cash to our Q3 guidance. For the third quarter of 2026, revenues are expected to be between $167 and $177 million, up 12.5% year-over-year at the midpoint. R&D expenses are expected to be between $9 and $11 million. Selling and administrative expenses are expected to be within the range of $29. We are projecting adjusted EBIT margin for the quarter to be within the range of 22 to 24%. Interest expense in Q3 is estimated at $2 million, and we expect an effective tax rate of 15 to 19%. We're projecting EPS to be within the range of $0.34 to $0.38 per share, up $0.03 or 9% year-review. This assumes weighted average shares outstanding during the quarter of $0.87 million. We're projecting cash from operating activities to be within the range of $35 to $45 million. Capital spending is expected to be $10 million. We expect full-year capital spending to be approximately 5% of revenues as we make investments in capacity to support increased customer demand. Our strong growth and financial results in the first half of the year, combined with a robust backlog and increased order activity, give me confidence in our ability to deliver 2026 revenue growth of 10-12% with adjusted EBITDA growth of 20-24% over 25 levels, with both metrics well above the high end of the target ranges that we provided in our May 2025 investor day. I'll now turn the call back over to the 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 1 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 Christopher Rowland with Susquehanna. Your line is open. Please go ahead.

Hey, guys. Congrats on the quarter. Thanks for the question. And as I think about that 10% to 12% for the full year, obviously great results here. But for the fourth quarter, it's maybe a little lower growth than I had previously modeled. I was wondering maybe if you could talk about maybe some of the moving parts there and how to think about it for December, but also any other caller on September and the moving parts there would be great, too.

Well, I mean, I think, you know, based on where we're at today, I would say we're going to see sequential growth from Q3 to Q4, you know, and I think the sequential growth will come from a number of different areas. do you have to remember, Chris, as we kind of said, we started off with a bang in the MSA segment in the first quarter. And, you know, a lot of the growth came in the first quarter that they are going to produce that to get to the two to 4%. So we have a little bit of a headwind in our MSA segment in Q4, but the PD segment will continue to grow at the rates that are similar to what we said. So, you know, I wouldn't read too much into this, you know, in terms of one quarter, the 10 to 12 percent is a number that you know we feel comfortable with but it is sequentially up and just keeping in mind the msa segment is you know a little bit slower for the full year it's up in that two to four percent range i would have one other thing about the msa segment segment probably a little too early to call this um there's been a fair amount of data that come out about the hearing aid industry and on the last day and i i honestly have not been able to fully digest what this all means. But we say 2% to 4%. Some of the things we've now seen at the MSA segment, you know, could be closer to the 4% range, or the end market could be closer to the 4% range. So, you know, I think, again, we're comfortable with the top 10 to 12. And the moving parts are PD continues the growth rate. MSA is going to be slower because kind of what we talked about before, inventory building in the first half of the year, but no real problems there. 2% to 4% for the full year.

Perfect.

Thank you, Jeff.

And then as a follow-up, as we talk about kind of the passives market more broadly, and I know you have very specific products, very specific customers and markets, but clearly it seems like it's a rising tide environment for all passives. And I was wondering if there was any spillover into your market tightness in other areas. Is it driving anything for you guys? And additionally, on the pricing dynamic, are you able to maybe take a little bit more price in the back half, just considering how much tighter the whole industry and cycle is becoming.

Yeah, I mean, generally saying on the precision-specific precision device side, demand is definitely stronger in the back half year than we would project at the beginning of the year. That's pretty broad-based across industrial, med tech, and more pronounced even in defense, for sure. I would sit there and, I mean, industrial is probably kind of a little stronger as well uh um and so i think you know generally as i said before pricing we're not a commodity product and we tend to raise prices on an annual basis in the pd segment right i would say the pricing environment is definitely stronger than it was last year and we're probably going to get more pricing this year but again generally speaking we're sole source position we raise prices on an annual basis i think what you've seen a lot the other paths that people are reporting who sell many more commoditized product their prices go up and down with market demand we don't really see our prices go down i mean it's it's it's relatively up every year but i would say the pricing is definitely more pronounced this year than it hasn't been in previous years excellent thank you guys your next question from the line of Bob LeBeck with CJS Securities.

Bob, your line is open. Please go ahead.

Thanks. Good afternoon. Congratulations, and thanks for taking our questions. So obviously, really strong growth in PD in the quarter, and I think you mentioned about $5 million from the energy order, which is great to hear, but that leaves kind of the rest of PD at close to 20%. I was doing the math real quick. It looked like it was just under 20% growth. And can you talk about, you know, what were the, that's a pretty big number too. Any, like, you know, what were the, the big drivers there and, and talk about, you know, kind of cadence of both energy and then kind of remaining PD business and, you know, for the balance of the year.

Yeah. Yeah. I think, you know, I really tried to call this out. If you think about on the energy order we shipped it's actually more than five million so you know it's a little more than five million but but but take that off and if you calculate the because we didn't receive a new order on energy right so that's like the book the bill and that was like zero right if you think about that's what i'm trying to like highlight here we received almost 140 million dollars in orders in the core. And so the bookings were very strong in Q2, and that was up from a little over $100 million of orders in Q1. And so it's very broad-based. I wish I could sit there and point to one market or one application, but again, I think I've said this before, I cut it by market, I cut it by product. I cut it by OEM versus distribution. It's broad-based. And we continue to watch because I think one of the things that we're just cognizant of here is that we don't want to be adding capacity for what I would call our transient orders, where we get orders for commoditized product because the other guy's lead times go really long. Well, I think we've seen a couple examples of this. That is not the majority of the bookings that we're getting. It's pretty sustainable you know long-term type stuff and what you're starting to see even in july i've already looked at the bookings you know for the first you know 20 some days of the month bookings are strong again in july uh so we're having you know very strong strong and again it's an industrial defense medtech you know we know about the deliveries on the energy order so you know i think when i look at across the board we're you know we've got a lot of great design wins we got a lot of great Our product portfolio is really well-positioned, and I feel really good about where we are with our product. So I wish I could point to one thing, but I look, again, by market, direct versus distribution, by product, everything's up.

That's wonderful. That sounds great. And then I guess just for a follow-up, obviously in the release you discussed, next year being potentially above the organic targets, And also in the investor that you talked about, you know, M&A over time, it's been part of the business model as well. Can you talk about the environment out there? And it feels like you have so much ahead of you organically. So are you, you know, taking a backseat on M&A or is there stuff to look at? What's the market like for you right now?

No, I wouldn't say we're taking a back seat on M&A. I would say we're being very selective in M&A. I mean, we want to make sure that if you look back over two years ago, the Cornell deal for us is a home run. I mean, that is a real home run. And we're looking for something that can be additive to what we do. The one plus one equals three. I know that's, you know, a corny thing that everybody said. But with the organic growth opportunities that we have, and, you know, I think we'll probably end up doing an investor day sometime in the first half of next year. We really want to start, like, laying out more detail on these growth platforms, whether it be energy or the microsolutions group or inductors or, you know, downhold applications. There's a lot of stuff to talk about here. and we can see driving growth in the future that isn't driving a tremendous amount of growth this year beyond the energy order. And so I think we're being pretty selective. We've looked at a lot of stuff. I'm not going to sit there and say we're not looking. I've got three full-time people internal who work on this. And you obviously know we're generating a lot of cash. Our cash flow is going to be strong again this year.

And so I think if we find the right deal, we will move forward on it on the right deal and bob absent mna will continue our capital allocation program of buying back shares and we still have some debt to pay down we're at a little over 100 million dollars of debt at five and a quarter interest so we can still get some eps benefit by using that cash to pay down debt super thank you your final question from the line of anthony stoss with craig hollum Your line is open.

You may now go ahead.

Thank you. Hey, Jeff, John, and Sarah. Nice execution, really. Jeff, I wanted to focus in on your commentary about definitely more bullish on military It came in stronger, and like you said, over the midterm, it could accelerate. What kind of visibility is it? Multi-year visibility?

Also, shame on me for not knowing this, but I love just your guess what the splits are our filter revenues versus capacitor i've got to believe it's probably more capacitor but you know any more color you can provide on the military defense side would be helpful yeah so i would actually it's actually the opposite filters are a lot larger portion than capacitors um filters roughly 80 million dollars and 90 percent of that is defense right right and then you've got in the capacitor business we don't have the exact numbers right here but i would say the capacitor business is probably another 50 million of defense i don't have it broken out by uh uh the way called my product 40 to 50 but so all in your 125 million yeah a little more than that but but but i would say that the filter business is definitely growing very rapidly and i would say the vast majority of that as john says is defense and sole source the vast majority of that, I would sit there and say, we're getting more and more people coming to us saying, you know, we're expecting to see significant increases in volume over the next 24 to 36 months. We want to make sure we can secure capacity with you. And this is evidenced by we did receive a big order in July, not reflected in our book to build from last quarter, for over $15 million for a radar application. This is an example. We won't start shipping on this $15 million until 27. It's going to take us 36 months to deliver all that. So I think we're getting more visibility. I would say there's three things that I see that are going to drive and accelerate growth in defense. One is, we'll see how this all plays out. The White House is proposing a larger defense budget significantly, but even if it's half the growth that they are talking about, that would be significant for us. A lot of this is an electronic warfare, but we wouldn't start seeing that increase in defense spending probably until late 27 into 28. Second, you've got the issue of replacement of stocks. We've had a lot of discussions. We're expecting that some of the key programs were on for missile and missile programs. Divides could go up two to four times what they are today. Again, not short term. This is probably going to be more in the, I would say, one to two year time frame as they ramp up. And then lastly, you know, you've got a big push by the United States to increase defense spending in our allies, in the U.S. allies. and that's not yet reflected in what we see today. We're getting a lot more requests from the existing suppliers that we're at, because I think these, you know, like whether it be Germany or France or whoever it may be, they don't have their own defense industry today. They may try to develop it over time, but in the short term they're probably going to be buying more from the same people that we're selling to today. So I think it's definitely quote activity super high, design activity is super high, orders are super high, but there is the possibility about a year from now or so we're going to see an acceleration in this market.

Wow, that's great to hear. And then my last question, John, you called it out about higher gross margins for PD in the second half of this year, but just kind of broadly overall, you must have some pretty decent pricing power if you want to take it.

Just curious your thoughts on gross margins kind heading into next year yeah tony sure so the pv segment delivered gross margins above just 40.1 in q2 and that was up more than 100 basis points from the second quarter of 2025. it was really driven by you know improved factory capacity utilization uh as we see the strong demand that jeff talked about across all our markets and products i think going forward you know we we clearly see an opportunity to further improve pd gross margins in the second half of this year really driven by the pricing environment being favorable as well as mix, and then continued increased factory overhead absorption. I'm not giving specific guidance, but we should be in the low 40% range in that PD segment in the back half of the year.

Yeah, I think just one other thing, Tony, I think you're asking more a little more next year. I do think there's the opportunity to expand gross margins again in 2027 in this business. Now, remember, some of this is going to be productivity, some of this is going to be absorption of overhead, but I think the other thing is pricing, because if you think about the pricing we do throughout the year, sometimes when we give a price increase, it's on the next order, and our lead times could be 20 weeks, so some of the pricing things that we're doing, actions we're taking a day, don't really hit the P&L until next year. um uh so you know i think that's the thing i should say one other thing this is going to live it off the topic but we are looking at spending i think john mentioned on on capex um we're definitely looking at taking up capacity in a number of areas in the pd segment for 2027 and you know we're going to keep this at that five percent of of revenue for capex but that's off a higher revenue number. So we are going to be spending a little bit more on an absolute basis on CapEx because we're just seeing like, again, the bookings and the book to bill are so strong and so broad based.

The last thing I would just wrap up with Tony is, you know, as we've kind of pivoted to industrial tech company, EBITDAs are really important metrics, even more important to us than gross margin. And, you know, we see a path based on what we just provided today is EBITDA margins will be in excess of 25 percent this year we see a path over the next two to three years to get even down margins close to 30 percent and again it's through gross margin expansion but all through through operating leverage that's it understood great job team thank you there are no further questions at this time this concludes today's call thank you for attending you may now disconnect