Knowles Corp (KN) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the Q2 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 one again. I will now hand the conference over to Sarah Cook, Vice President of Investor Relations. Sarah, please go ahead.

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 in the company's SEC filings including but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 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 claims 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 gap measure. All financial references on this call will be on a non-gap 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 we'll 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 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 two 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 BALM's armature speakers. I remain confident in our prospects to increase our content per device and 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 microsolutions group ability to expand our reach as a new platform, we expect an increase in growth above historical rates for this segment in the future. In the precision device segment, Q2 revenue was $98 million, up 25% year-over-year with all end markets we serve. MedTech defends 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 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 six 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 previously 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 of shipments on the energy order. Orders in the PD segment were nearly $140 million in Q2, well above Q1 bookings and providing you with 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 have 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 investor day remain intact life expectancy rates are increasing and the aging population grows correlating healthcare expenditures are increasing as well our products apply the healthcare industry with capacitors for medical imaging, advanced life-saving therapies, and cardiovascular devices, to name a few. 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 2-4% growth annually. In precision devices, our capacitors provide the energy delivery needed to ensure devices, use 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 of 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 communication. 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 med tech and defense the industrial market is growing at a faster pace than we believed it would 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 aero electronics our capacitors are used in a wide array of solutions from factory robotics hvac equipment precision lasers and semiconductor equipment as manufacturers are challenged to find solutions for manufacturing automation and product optimization, our capacitors provide an essential energy source that advances the performance. 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. 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 33 cents in the quarter, up 9 cents, 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% 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 end markets. Segment growth margins were 40.1%, up 140 basis points from the second quarter of 2025, largely driven by increased production volume and factory capacity utilization as we deliver on strong demand. While we have 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 precision device gross margins in the second half of the year on a 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 PD segments. SG&A expenses were $31 million, up $3 million, primarily by higher sales commissions, annual merit increases, and increased expenses primarily to support 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 $15 million. We exited the quarter with cash 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 to $31 million. We're 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 percent we're projecting eps to be within the range of 34 to 38 cents per share up three cents or nine percent year this assumes weighted average shares outstanding during the quarter of 87 million 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 to 12% with adjusted EBITDA growth of 20 to 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 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 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. um you know and 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 four percent so we have a little bit of a headwind in our msa segment in in q4 but the pd segment will continue to grow at the rates that are similar to what we said so you know i i wouldn't read too much into this you know in terms of one quarter uh the 10 to 12 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 add one other thing about the msa cement 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 in the last day, and 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 could be closer to the 4% range, or the end market could be closer to the 4% range.

So 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 two to four percent for the full year perfect thank you jeff uh and then um 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 and markets um but clearly uh it seems like it's a 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'd be 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. And so I'd say, you know, generally, as I said before in 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 a sole source position. We raise prices on an annual basis. I think what you've seen a lot in the other paths that people are reporting who sell many more commoditized products, their prices go up and down with market demand. We don't really see our prices go down. I mean, 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. 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 percent. Doing the math real quick, it looked like it was just under 20 percent 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.

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 5 million. So, you know, it's a little more than $5 million. 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 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, you know, again, I think I've said this before. You know, I cut it by market. I cut it by product. I cut it by OEM versus distribution. It's broad-based. And, you know, we continue to watch because I think one of the things that we're just cognizant of here is, is that we don't want to be adding capacity for what I would call our transient orders, where we get orders for commoditized products because the other guys' 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. So we're having, you know, very strong, strong, and again, it's an industrial, defense, med tech, you know, we know about the deliveries on the energy order. So, you know, I think when I look at it across the board, we're, you know, we've got a lot of great design wins. We got a lot of great product portfolio. 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, you know, 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, you know, next year being potentially above the organic targets, and also in the investor day, you talked about, you know, M&A over time. It's been part of the, you know, business model as well. Can you talk about the environment out there? And it feels like you have, you know, 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 backseat on M&A. I would say we're being very selective in M&A. I mean, we want to make sure, you know, that if you look back, you know, 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 says, 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 that we can see driving growth, you know, 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 you know 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 uh and you know we are you obviously know we're generating a lot of cash our cash flow is going to be strong again this year and so you know i think if we find the right deal we will we will move forward on it, on the right deal.

And Bob, absent M&A, we'll 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 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 defense. 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. Are 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 say it's actually the opposite. Filters are a lot larger portion than capacitors.

Filters are roughly $80 million.

Yeah, $81 million.

And 90% of that is defense.

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 the way you call it my product, 40 to 50. Well, and you're $125 million or so. Yeah, a little more than that. But I would say that the filter business is definitely growing very rapidly. And I would say the vast majority of that, as John said, 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 the 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 an accelerated 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've got a big push by the United States to increase defense spending in our allies, and the U.S. allies, and that's not yet reflected in, you know, 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, you know, I think it's definitely quote activity super high design activity 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 uh 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 just curious your thoughts on gross margins kind of heading into next year?

Yeah, Tony, sure. So, the PD 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 as we see the strong demand that Jeff talked about across all our markets and products. I think going forward, you know, we clearly see an opportunity to further improve PD gross margins in the second half of this year really driven by you know the pricing environment being favorable as well as mix and then continued uh increased factory overhead absorption i'm not giving specific guidance but we should be in the low 40 range in that pd segment 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 uh in 2027 in this business 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 can be 20 weeks. So some of the pricing things that we're doing, actions we're taking today, don't really hit the P&L until next year. So 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 CapEx. 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 5% 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 build 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 EBITDA margins close to 30 percent. And again, it's through gross margin expansion, but also through operating leverage. That's it.

Understood. Great job, team.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.