Q3 2026 Knowles Corp Earnings Call

October 22, 2026

Operator 2: 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 1 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.

Operator: 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 1 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.

Speaker #1: 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.

Sarah Cook: Thank you, and welcome to our third quarter 2026 earnings call. I am Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, 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 Knowles, 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 uncertainties in the company's SEC filings, including but not limited to the annual report on Form 10-K for the fiscal year ended 31 December 2025.

Speaker #2: Thank you, and welcome to our third quarter 2026 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO.

Speaker #2: Our call today will include remarks about future expectations, plans, and prospects for Knowles, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable federal security laws.

Speaker #2: 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.

Speaker #2: 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 31st, 2025, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release.

Sarah Cook: 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 Knowles 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 knowles.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, or unless otherwise indicated. We have made selected financial information available on webcast slides, which can be found in the investor relations section of our website.

Speaker #2: All forward-looking statements are made as of the date of this call, and Knowles's claims any duty to update such statements, except as required by law.

Speaker #2: 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 knowles.com and in our current report on Form 8-K filed today with the SEC.

Speaker #2: 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 or unless otherwise indicated.

Speaker #2: 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.

Sarah Cook: With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

Speaker #2: Jeff?

Jeffrey Niew: 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 Q3. 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 us well for future growth. in Q3, MedTech & Specialty Audio revenue was $67 million, up 4% year-over-year.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: EPS was $38 cents, 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.

Speaker #3: I believe our results continue to demonstrate that our focus on markets and price where we have significant competitive advantages is paying dividends and positions us well for future growth.

Speaker #3: In Q3, MedTech and Specialty Audio revenue was $67 million, up 4% year over year. Hearing health OEM customers typically launch new products annually in Q4.

Jeffrey Niew: Hearing health 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, up 33% year-over-year, with strong demand across every major product line and end market we serve: MedTech, defense, industrial, and 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 remained robust.

Speaker #3: 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.

Speaker #3: Precision devices delivered Q3 revenue of $117 million, up 33% year over year, with strong demand across every major product line and end market we serve.

Speaker #3: MedTech, defense, industrial, and 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.

Speaker #3: I believe our year-over-year growth demonstrates the strength of our strategy and the momentum across the business. On a basis of strong revenue growth, orders remain robust.

Jeffrey Niew: Precision Devices had a book to bill of 1.5 in Q3, with broad-based order strength across our key end markets, both among OEMs and with our distribution partners. Q3 orders in PD 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 RF 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 end markets. In MedTech, our pulse power film capacitors continue to win in defibrillator and radiotherapy applications, while our ceramic capacitors are securing strong design wins in next-generation medical imaging and implantables. In defense, demand remains strong across all our product categories.

Speaker #3: Precision devices had a book-to-bill of $1.5 in Q3, with broad-based order strength across our key-in markets, both among OEMs and with our distribution partners.

Speaker #3: Q3 orders in PD 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 RF filters for a defense customer that will be delivered over the next 36 months.

Speaker #3: 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 and defibrillator and radiotherapy applications while our ceramic capacitors are securing strong design wins and next-generation medical imaging and implantables.

Speaker #3: In defense, demand remains strong across all our product categories. Our RF filters film and ceramic capacitors are at high demand in munitions and communications applications.

Jeffrey Niew: Our RF filters, films, and ceramic capacitors 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 orders, 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 H2 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.

Speaker #3: 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 in semiconductor equipment.

Speaker #3: With strong orders at 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.

Speaker #3: 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.

Speaker #3: 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 filings by $15 million, in addition to funding organic growth initiatives.

Jeffrey Niew: In the Q3, we repurchased $25 million in shares and reduced outstanding bank borrowings 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.

Speaker #3: 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.

Speaker #3: Our strategy of combined 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.

Jeffrey Niew: In 2027, as we add capacity, new design wins ramp, and we fulfill our healthy backlog within our PD segment and our MSA 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: By following the same playbook, we used in our core of investing in an 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.

Speaker #3: 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.

Jeffrey Niew: 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 meaningfully expand our SAM, will complement our strong core, and I look forward to providing a more detailed outlook and updates on these initiatives and others in 2027.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: All these initiatives are expected to meaningfully expand our SAM, will complement our strong core and I look forward to providing a more detailed outlook and updates on these initiatives and others in 2027.

Jeffrey Niew: Now, let me turn the call over to John for our financial results and our Q4 guidance.

Speaker #3: Now, let me turn the call over to John for our financial results and our Q4 guidance.

John Anderson: Thanks, Jeff. We reported Q3 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 the year-ago period, and at the high end of our guidance range. Cash provided by operating activities was $45 million, also at the high end of our guidance range. In the MedTech & 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 Q3 revenues of $117 million, up 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.

Speaker #2: 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.

Speaker #2: EPS was $38 cents in the quarter, up 5 cents or 15% from the year-ago period and at the high end of our guidance range.

Speaker #2: Cash provided by operating activities was $45 million, also at the high end of our guidance range. In the MedTech and specialty audio segment, Q3 revenue was $67 million, up 4% compared with the year-ago period.

Speaker #2: Gross margins were $51.9%. The precision devices segment delivered third quarter revenues of $117 million, up 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.

Speaker #2: MedTech, defense, industrial, and electrification. Segment gross margins were $41.6%, up 10 basis points from the third quarter of 2025 on higher volume partially offset by unfavorable inventory adjustments.

John Anderson: Segment gross margins were 41.6%, up 10 basis points from Q3 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. SG&A expenses were $30 million, up $4 million from prior year levels, driven primarily by higher sales commissions, higher incentive compensation expense, and increased headcount as we pulled forward hiring primarily to support increased customer demand and new product initiatives. Interest expense for the quarter was $1.6 million, down $700,000 from Q3 2025 due to lower average debt balances. Now, I'll turn to our balance sheet and cash flow. In Q3, we generated $45 million in cash from operating activities, and capital spending was $7 million.

Speaker #2: 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.

Speaker #2: SG&A expenses were $30 million, up $4 million from prior-year levels, driven primarily by higher sales commissions, higher incentive compensation expense, and increased headcount as we pulled forward hiring primarily to support increased customer demand and new product initiatives.

Speaker #2: 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.

Speaker #2: 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.

John Anderson: During Q3, 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 revolving credit facility. Moving to our Q4 guidance. For Q4 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%.

Speaker #2: 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 revolving credit facility.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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%.

John Anderson: Interest expense in Q4 is estimated at $1.5 million, and we expect an effective tax rate of 15% to 19%. We are projecting EPS to be within the range of $0.39 to $0.43 per share, up $0.05 or 14% year over year at the midpoint, driven by a 20% increase in adjusted EBITDA, partially offset by the absence of a $0.03 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 are 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 5% of revenues.

Speaker #2: We're projecting EPS to be within the range 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.

Speaker #2: 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.

Speaker #2: Capital spending is expected to be $8 million. We expect full-year capital spending to be approximately 5% of revenues. Looking ahead, we expect capital spending to be above our historic range of 3 to 5 percent, increasing to 5 to 7 percent of revenues in 2027 as we continue to make investments in capacity to support increased customer demand in the precision device segment.

John Anderson: Looking ahead, we expect capital spending to be above our historic range of 3% to 5%, increasing to 5% to 7% of revenues in 2027 as we continue to make investments in capacity to support increased customer demand in the Precision Devices segment. The strong growth and financial results we have achieved through the first three quarters of 2026, 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 will now turn the call back over to the operator for the Q&A portion of our call. Operator?

Speaker #2: 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.

Speaker #2: I'll now turn the call back over to the operator for the Q&A portion of our call. Operator?

Operator 2: We will now begin the 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. 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-Hallum. Anthony, your line is open. Please go ahead.

Operator: We will now begin the 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. 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-Hallum. Anthony, your line is open. Please go ahead.

Speaker #3: I will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #3: 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.

Speaker #3: 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 Hellum.

Speaker #3: Anthony, your line is open. Please go ahead.

Anthony Stoss: Great. Thank you. Congrats again on just solid and continued execution. Jeffrey, would love to hear your thoughts. You gave a little bit of a preamble on 2027. Maybe you can expand on that a little bit, in terms of order visibility, kind of entering into the H1 2027. Then I have a couple of follow-ups.

Speaker #2: Great. Thank you. Congrats again on just solid and continued execution. Jeff, I'd love to hear your thoughts. You gave a little bit of a preamble on 2027.

Speaker #2: Maybe you can expand on that a little bit, in terms of order visibility, kind of entering into the first half of 2027. Then I have a couple of follow-ups.

Jeffrey Niew: Yeah. Let me just say at a top level, if you look sector by sector or market by market that we are in, what we are seeing is just extremely high design activity. Whether it be for faster, more precision, getting more output, new innovative features, all the applications we are involved in, people are asking for more customized stuff. It is a trend that we are just clearly seeing now. Our product portfolio is well-positioned to take advantage of this. I mean, it is very well-positioned. Now to take it to 2027, let me break it down by the segments. First, MSA. MSA, 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 would say primarily in the H1.

Speaker #4: Yeah. So let me just say at a top level, if you look sector by sector or market by market that we're in, what we're seeing is just extremely high design activity.

Speaker #4: And whether it be for faster more precision, getting more output, new innovative features, all the applications we're involved in, people are asking for more customized stuff.

Speaker #4: 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.

Speaker #4: Now, to take it to '27, let me break it down by the segments, right? First, MSA. MSA, we expect next year the hearing health business is going to perform at historical levels again.

Speaker #4: 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 where we're at the last time buy at the end of this year there'll be no revenue and that's about a headwind of about 2 to 3 percent next year.

Jeffrey Niew: I think we mentioned this before on stamping, that we had this. When we sold the consumer business, we have a supplier where we are at the last time buy at the end of this year. There will be no revenue. That is about a headwind of about 2% to 3% next year, especially more in the H1, I would say, than the H2. But the microsolutions business, as we talked about, should start accelerating in the H2. So overall, we will still probably be in that 2% to 4% for the full year, although it may be down a little bit in the H1. Now PD, the book to bill again in the Q2 was very strong. But the orders we are taking now, it was 1.5 in Q3. The orders we are taking in Q3 are already being scheduled into the H1 of next year.

Speaker #4: Especially more in the first half, I would say, in the back half. But the micro solutions business, as we talked about, should start accelerating in the back half.

Speaker #4: So overall, we'll still probably be in that 2 to 4 percent for the full year although it may be down a little bit in the first half.

Speaker #4: 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.

Speaker #4: The orders we're taking in Q3 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.

Jeffrey Niew: But we are at a point where we are pretty close to capacity constraints. So while we are going to have very strong year-over-year growth in the H1 with PD, I think sequentially it is going to be relatively flat because of capacity constraints. I think that is probably the one thing. One other thing I think 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 does not generate a lot of EBIT, so it will not affect the EBIT, and the margin should be better.

Speaker #4: So what 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.

Speaker #4: And so I think that's probably the one thing. And when I say I think on just to be clear on the MSA thing, yes, it may be a little bit of a headwind in stamping, but remember, that stamping was on a cost-plus basis.

Speaker #4: It doesn't generate a lot of EBIT. So it won't affect the EBIT and the margin should be better.

John Anderson: Yeah. I think gross margins, Anthony Stoss, this year we have talked about kind of for MSA in that low 50% range. I would expect that maybe a little, a percent or so higher in 2027 over 2026.

Speaker #2: Yeah. I think gross margins, Tony, this year we've talked about kind of for MSA in that low 50% range. It expect that maybe a little a percent or so higher in '27 over '26.

Jeffrey Niew: Yeah. Bottom line is on this, we expect strong year-over-year growth in H1.

Speaker #4: Yeah. 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 first quarter, might be slightly down, like PD being flat sequentially because of capacity constraints.

Jeffrey Niew: But sequentially, it is probably going to be, especially in Q1, might be slightly down, like PD being flat sequentially because of capacity constraints, with MSA being slightly down.

Speaker #4: With MSA being slightly down.

Anthony Stoss: 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 is only going to be down a little bit, like 1% to 2% sequentially?

Speaker #2: Could 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.

Speaker #2: Are you saying it's only going to be down a little bit? Like 1, 2 percent sequentially?

Jeffrey Niew: I think that is a fair guess. Somewhere in that. It is slightly down sequentially based on the guide that we have now.

Speaker #4: I think that's a fair I think that's a fair guess. Somewhere in that, it's slightly down sequentially based on the guide that we have.

John Anderson: Tony, were you talking about the MSA segment or total Knowles?

Speaker #2: Tony, were you talking about the MSA segment or total nulls?

Anthony Stoss: Total Knowles.

Speaker #4: Total, total nulls. 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, as we're pretty much running all out.

Jeffrey Niew: Yeah. It will be down slightly sequentially, but still, if you look at the year-over-year number, it is way up. MSA being slightly down, because of the stamping business going away, PD being flat, capacity constrained, as we are pretty much running all out.

Anthony Stoss: Got it. No, it is a good problem to have. My last question, Jeff. Love to hear an update on the energy order, the trajectory, and what you are seeing from that customer.

Speaker #2: Got it. No, it's a good problem to have. And then my last question, Jeff. Love to hear kind of an update on the energy order that trajectory and what you're seeing from that customer.

Jeffrey Niew: Yeah, the business fully ramped. We are outputting as expected. Now we have about six, seven more quarters of delivery of this order. I think if I look at the numbers, it is performing in terms of the margins and the output as expected. I really put a call out to the team. This was a Herculean effort to ramp this with this speed and this amount of volume. It is going very well.

Speaker #4: Yeah. I mean, the business is fully ramped or outputting as expected. And so now we've got about six, seven more quarters of delivery of this order.

Speaker #4: I think if I look at the numbers, it's performing in terms of the margins and the output as expected. I really put a really call out to the team.

Speaker #4: I mean, this was like a Herculean effort to ramp this with this speed and this amount of volume. But it's going very well.

Anthony Stoss: Perfect. Great job, guys. Thank you.

Speaker #2: Perfect. Great job, guys. Thank you.

John Anderson: Thanks, Tony.

Speaker #1: Thanks, Tony.

Operator 2: Your next question from the line of Christopher Rolland with Susquehanna. Christopher, your line is open. Please go ahead.

Operator: Your next question from the line of Christopher Rolland with Susquehanna. Christopher, your line is open. Please go ahead.

Speaker #3: Your next question from the line of Christopher Rowland with Susquehanna. Christopher, your line is open. Please go ahead.

Christopher Rolland: Hi, guys. Congrats, and thank you for the question. Mine is around looking at Knowles 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 are seeing here is really more representative of something through cycle? Maybe if you could put the larger picture in focus for us.

Speaker #5: Hi, guys. Congrats and thank you for the question. Mine is around looking at nulls, kind of through the cycle here. I think everybody is benefiting from the cycle.

Speaker #5: 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 representatives of something through cycle?

Speaker #5: Maybe if you could put the larger picture in focus for us.

Jeffrey Niew: Let me just first say it based on the markets. If I think about the markets that we participate in, and I think I said this. In MedTech, I do not see that there is safety stock or that this is going to grow through a cycle. We got a lot of great new design wins. I think it is sustainable. We are not seeing in MedTech that there is a concern here. Then I go to defense. I would argue that there is 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 the US as well as allies, the replacement of munitions. There is a lot of things going on here that says that this is going to continue to maybe even accelerate.

Speaker #4: So let me just first say 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.

Speaker #4: We 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.

Speaker #4: As budgets around the world are increasing for both the US as well as allies, the replacement of munitions there's a lot of things going on here that says that this is going to continue to maybe even accelerate.

Jeffrey Niew: That is 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 have got a lot of great design wins as well as the energy order. I do not see a lot of concerns there. So it really comes back down to industrial. If you look at it, there are some pockets here where I would sit there and say, "Okay, maybe this is not sustainable." Like semiconductor equipment, how long will that last? But we are not really overly reliant on one market. I can tell you, when I look at our distribution partners, they do not have a lot of inventory. They are not holding excess inventory like we saw happen in 2022.

Speaker #4: And so that's about 60% of our business or so right there as a company. The electrification is what it is. It's and is, I would say, we've still expect growth next year.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: They're not holding excess inventory. Like we saw happen in '22. And I think this goes back to kind of the discussion of what's different between back then in '22.

Jeffrey Niew: I think this goes back to the discussion of what is different between back then in 2022. In 2022, 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 are driven by our demand in our core markets. I think generally speaking, we are going to be pretty good going forward through the cycle.

Speaker #4: 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.

Speaker #4: 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 through the cycle.

John Anderson: Yeah, Chris, just to clarify too on that. Jeff mentioned roughly 60% of our business is MedTech and defense, and MedTech includes the hearing health business.

Speaker #2: Yeah. Chris, just to clarify too, on that Jeff mentioned, it's roughly 60% of our business is med and defense and med includes the hearing health business.

Jeffrey Niew: Yeah.

Speaker #4: Yes. Yeah. Yeah.

Christopher Rolland: Yeah. Okay. Perfect. As I look at some of the implied Q4 stuff around gross margin, it looks like that is up nicely. Maybe any puts and takes into next year as well, that would be appreciated.

Speaker #5: 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.

Speaker #5: Maybe any puts and takes into next year as well. That would be appreciated.

John Anderson: Yeah, Chris, you are right. In terms of gross margin, if you take the guidance, the components of the guidance that I gave, you can back into gross margin, and it is just above 46% at the midpoint of the guidance that I gave. I think there is room to continue to expand gross margins. Our target is 100 basis points a year. But exiting this year, again, the guidance I provided is just a touch above 46%, but there is room for them to increase that next year.

Speaker #2: 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.

Speaker #2: And it's just above 46% at the midpoint of the guidance that I gave. I think there's room to continue to expand gross margins. Our target is 100 basis points a year.

Speaker #2: But I kind of exiting this year, again, the guidance I provided is just a touch above 46%. But there is room to increase that next year.

Christopher Rolland: Okay. Excellent. Thank you, guys.

Speaker #5: Okay. Excellent. Thank you, guys.

Speaker #2: Go ahead.

Jeffrey Niew: Yeah. I would just add one more thing, Chris, on that, as I am kind of looking at the numbers here. I think we are going to exit well above 25% on EBITDA margins this year. I think John said this before, but we clearly see the path over the midterm now to get to 30% EBITDA margins.

Speaker #4: Yeah. I would just add one more thing, Chris, on that, is I'm kind of looking at the numbers here. I think we're going to exit above, well above 25% on EBITDA margins this year.

Speaker #4: And I think John said this before, but I mean, we clearly see the path over the midterm now to get to 30% EBITDA margins.

John Anderson: Yeah, if you take what I said, the gross margin alone, we think there is 100 basis points of improvement annually, then we are going to get operating leverage of 50 to 100 basis points with the growth that we have. Yeah, you can see a path there within two to three years going from where we are, just a little north of 25% this year to 30%.

Speaker #2: Yeah. If you take what I said, the gross margin alone, we think there's 100 basis points of improvement annually. And then we're going to get operating leverage of 50 to 100 basis points with the growth that we have.

Speaker #2: So yeah, you can see a path there within two to three years, going from where we are just a little north of 25 this year to 30%.

Operator 2: Your next question from the line of Tristan Gerra with Baird. Tristan, your line is open. Please go ahead.

Operator: Your next question from the line of Tristan Gerra with Baird. Tristan, your line is open. Please go ahead.

Speaker #3: Your next question from the line of Tristan Jarrah with Baird. Tristan, your line is open. Please go ahead.

Tyler Van Valin: Hi, this is Tyler Van Valin for Tristan. Thanks for taking the questions. Looking into 2027, could you give us a sense of which of the newer growth platforms that you outlined in the prepared remarks are closest to contributing meaningful revenue? Are you starting to get production orders that give you better visibility on the timing across those different platforms?

Speaker #6: Hi. This is Tyler Baumbaum for Tristan. Thanks for taking the questions. Looking into 2027, could you give us a sense of which of the newer growth platforms that you outlined in the paragraph marks are closest to contributing meaningful revenue?

Speaker #6: Are you starting to get production orders that give you better visibility on the timing of across those different platforms?

Jeffrey Niew: Yeah. So here is what I would say is, I will 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, as we kind of move forward. But let me talk about it a little bit. First I would say, if you look at our Micro Solutions Group from MSA, we really have now a list as long as my arm of opportunities. We are really starting to actually have to kind of push back on customers. We talked about this. We had about $1 million worth of revenue in 2025. We will have 2 to 3, probably going to push closer to 3 this year. I see a clear path north of 5 next year. Then if you look in 2028, it should be north of 10 and maybe even more.

Speaker #4: Yeah. 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?

Speaker #4: As we kind of move forward. But let me kind of talk about it a little bit. First, I'd say 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.

Speaker #4: We're really starting to actually have to kind of push back on customers we talked about this we had about a million dollars worth of revenue in 2025.

Speaker #4: We'll have a two to three, probably finish closer to three this year. I see a clear path north of five next year. And then if you look into in '28, it should be north of 10.

Speaker #4: And maybe even more. And so I'd say that one is really coming along well. I would sit there and say, the pulse power opportunity it's a matter now of really of our execution.

Jeffrey Niew: I would say that one is really coming along well. I would sit there and say, the pulse power opportunity, it is a matter now of really of our execution. There are so many new applications, whether it be downhole applications, there are all different types of things, in terms of even beyond the energy that we have discussed kind of a lot. I would say that is ready to go. It is a question of when the customers will start ordering in some of these new applications. I am really encouraged. We have not talked about this at all. We introduced a line of attenuators. This is primarily for defense, takes some time, but super encouraged by the initial reaction we are getting from attenuators. I am super encouraged by inductors. A lot of good stuff coming here.

Speaker #4: There's so many new applications whether it be downhole applications, there's all different types of things, in terms of even beyond the energy that we've discussed, kind of a lot.

Speaker #4: So I'd say and that's ready to go. And I mean, it's a question of when the customers will start ordering in some of these new applications.

Speaker #4: I'm really encouraged. I mean, we have not talked about this at all. We introduced a line of attenuators. Now, this is primarily for defense.

Speaker #4: Takes some time, but super encouraged by the initial reaction we're getting from attenuators. I'm super encouraged by inductors. So a lot of good stuff coming here.

Jeffrey Niew: I think I would just say this, what we are seeing is a meaningful expansion of our SAM with all these things we are doing beyond the core that will supplement that growth. That is why we are feeling more and more compelled to kind of call that out. I think we will lay some numbers around that probably sometime in the new year.

Speaker #4: 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.

Speaker #4: And that's why we're feeling more and more compelled to kind of call that out. I think we'll lay some numbers around that probably sometime in the new year.

Tyler Van Valin: Well, looking forward to that. For my 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 order?

Speaker #6: Great. Well, looking forward to that. With the for my 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?

Jeffrey Niew: Let me give you the short answer. Yes. Let me give you a little more color, a little bit longer answer. I think we are still six to seven quarters out from completing this order. I think there is a possibility that we get another order that follows right on, but there may be a small gap. I think from my perspective, we have so many growth opportunities that are even beyond this energy order. I think, not that I do not want to focus on this, because this could be a big upside to our numbers in 2028, 2029 and beyond. But it is a great opportunity for us and hopefully, as we get further along in delivering this order, we will be able to talk more about what comes beyond.

Speaker #4: Let me give you the short answer. Yes. Let me give you a little more color, a little bit longer answer. I think we're still six to seven quarters out from completing this order.

Speaker #4: I think there's a possibility that 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 that are even beyond this energy order.

Speaker #4: 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.

Speaker #4: But I mean, it's a great opportunity for us. And hopefully, we'll as we get further along in delivering this order, we'll be able to talk more about what the next what comes beyond.

Tyler Van Valin: Well, thanks again for taking the question.

Speaker #6: Great. Well, thanks again for taking the questions.

Operator 2: Your next question from the line of Bob Labick with CJS. Bob, your line is open. Please go ahead.

Operator: Your next question from the line of Bob Labick with CJS. Bob, your line is open. Please go ahead.

Speaker #3: Your next question from the line of Bob Levesque with CJS. Bob, your line is open. Please go ahead.

Bob Labick: Thanks. Congratulations on really strong results.

Speaker #5: Thanks. Congratulations on really strong results.

Jeffrey Niew: Thank you.

Bob Labick: Also exciting news that you are adding capacity here, due to all the demand and that you are kind of bumping up. Obviously, we have talked about the energy order on the call already. You have 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?

Speaker #4: Thank you.

Speaker #5: Also exciting news that you're adding capacity here. Due to all the demand and that you're kind of bumping up. And obviously, we've talked about the energy order on the call already.

Speaker #5: 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?

Speaker #5: And how can you apply that to the incremental capacity you want to add? And also just other Knowles facilities already in the footprint of manufacturing?

Jeffrey Niew: That is a great question, Bob. I think what we have 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 is what we have learned. I think part of that, John has kind of alluded to that within the former Cornell business that we acquired, the specialty film business, we think there is great opportunities for margin expansion. I do not 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 this area, we are going to be adding more automation in order to improve yields, lower our overhead, and make the Cornell business more profitable. I think we have alluded this, when we bought that business, it was in the 27% to 28% gross margin.

Speaker #4: I mean, 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.

Speaker #4: I think that's what we've learned. I think part of that, John's kind of alluded to, that within the Cornell former Cornell business that we acquired, the specialty film business, we think there are great opportunities for margin expansion.

Speaker #4: 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.

Speaker #4: But for sure, this area, we're going to be adding more automation in order to improve yields lower our overhead, and make the Cornell business more profitable.

Speaker #4: I think we've alluded to this when we bought that business. It was in the 2007, 28% gross margin. It's exiting the year in the mid-30s now with a clear path above 40.

Jeffrey Niew: It is exiting the year in the mid-30s now with a clear path above 40%. We are seeing all the things that we expected from that. I think what we are hoping is we can find another acquisition that is a 1 plus 1 equals 3 and be a real home run that is like another Cornell over the next year or two that really makes sense for us.

Speaker #4: 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.

Bob Labick: Okay, great. Yeah. Then obviously you gave a nice initial look to 2027 and in general in the economy and kind of the macro, there is obviously a lot of inflationary pressures right now. How is Knowles positioned based on the kind of current inflationary market and how would this project into 2027 for you, if at all?

Speaker #5: Okay. Great. Yeah. 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.

Speaker #5: Right now, how is Knowles positioned based on the kind of current inflationary market? And how would this project into 2027 for you, if at all?

Jeffrey Niew: I think we are positioned very well. I think, just to base first day off, we have an excellent operation team globally that focused on value creation every year. So they are looking for ways to reduce costs, improve yields. We have that going on and that is an ongoing thing. I think we have alluded to this. I think the pricing environment is positive and the direction we are heading with the customer to win. Generally speaking, we are a critical piece of the bill of materials, but we are not an overly large portion of our bill of materials to our customers. So, moderate pricing every year, increases are pretty much what we do.

Speaker #4: I think we're positioned very well. I think just to face first day off, we have an excellent operation team globally that's focused on value creation every year.

Speaker #4: So they're looking for ways to reduce cost, reduce improve yields, we have that going on. That's an ongoing thing. I think we've alluded to this.

Speaker #4: I think the pricing environment is positive and the direction we're heading with the customers are with. Generally speaking, we are a critical piece of the bill of materials.

Speaker #4: But we're not an overly large portion of our bill of materials for our customers. And so moderate pricing every year, increases are pretty much what we do.

Speaker #4: I wouldn't say we do it with every customer across 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 be able to handle inflationary pressures.

Jeffrey Niew: I would not say we do it with every customer across every single segment, but we are looking at this on a continual basis and I think generally speaking, we are in a very good position to be able to handle inflationary pressures. I do not.

Speaker #4: I don't know.

Speaker #2: Yeah, Bob. I'll just add to that. I mean, I talked about the potential to increase gross margins on a basis point. The levers are really price, capacity utilization, and productivity on the factory floor.

John Anderson: Yeah. Bob, just to add to that, I talked about 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 is a piece of both of those that will benefit us in 2027.

Speaker #2: Those are the three components. And there's a good piece of both of those little benefit us in 2027.

Speaker #5: Okay. Great stuff. Thank you very much.

Speaker #4: Thank you.

Bob Labick: Okay, great stuff. Thank you very much.

Jeffrey Niew: Thank you.

Operator 2: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

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