Knowles expects high end of 4%–6% organic growth range for 2026 while ramping specialty film capacity

Earnings Call Insights: Knowles Corporation (KN) Q3 2025

MANAGEMENT VIEW

* Jeffrey Niew, President, CEO & Director, reported, "Revenue was $153 million, up 7% year-over-year. EPS of $0.33, up 22% year-over-year, and cash from operations was $29 million, all of which were above the midpoint of our guided range." Niew emphasized the company's focus on markets and products with significant competitive advantage and highlighted progress in both the Medtech & Specialty Audio and Precision Devices segments.
* Niew stated that Medtech & Specialty Audio revenue reached $65 million, up 2% year-over-year, and projected revenue growth within the range of 2% to 4% for this segment in 2025.
* The Precision Devices segment delivered Q3 revenue of $88 million, up 12% year-over-year, with robust design wins and strong performance in the defense end market. Niew said, "Our capacitors and RF microwave solutions serve a wide variety of military applications... Defense spending is increasing and shifting towards spending on electronic warfare where our products are in high demand."
* Niew highlighted the company's expectation for the Precision Devices segment to grow at the high end of the 6% to 8% range in 2025. He reiterated that Knowles anticipates organic growth rates at the high end of the stated range of 4% to 6% for the total company next year.
* John Anderson, Senior VP, CFO & Interim Principal Accounting Officer, stated, "We reported third quarter revenues of $153 million, up 7% from the year ago period and at the high end of our guidance range. EPS was $0.33 in the quarter, up $0.06 or 22% from the year ago period and also at the high end of our guidance range. Cash generated by operating activities was $29 million at the high end of our guidance range, driven by lower-than-expected net working capital."
* Anderson noted gross margins in Medtech & Specialty Audio were 53% and Precision Devices gross margins were 41.5%. He also reported ongoing specialty film output improvements and a strong balance sheet supporting growth investments and share buybacks.

OUTLOOK

* Anderson guided Q4 2025 revenues between $151 million and $161 million, up 9% at the midpoint year-over-year. Projected R&D expenses are $8 million to $10 million, SG&A at $26 million to $28 million, and adjusted EBITDA margin in the 22% to 24% range. Interest expense is estimated at $2 million.
* Effective tax rate is expected between 7% and 11%, rising to 15% to 19% in 2026. Projected Q4 EPS is within $0.33 to $0.37 per share, and cash from operating activities is forecast at $30 million to $40 million. Capital spending for Q4 is set at $12 million, with full-year capital spending targeted at approximately 5% of revenues.
* Niew reiterated, "We are expecting to finish the year strong with revenue and EPS growth accelerating in the second half of 2025."

FINANCIAL RESULTS

* Q3 revenue was $153 million, up 7% year-over-year, with EPS of $0.33, up $0.06 or 22% year-over-year. Cash from operations reached $29 million.
* Medtech & Specialty Audio revenue totaled $65 million, and Precision Devices $88 million. Gross margins in Medtech & Specialty Audio were 53%, flat year-over-year, while Precision Devices gross margins rose 150 basis points to 41.5%. R&D expense was $9 million, and SG&A was $26 million. Interest expense was $2 million, down $2 million from the prior year.
* The company purchased 940,000 shares at a total cost of $20 million and reduced outstanding bank borrowings by $15 million. Cash at quarter-end was $93 million, with $176 million in debt and liquidity exceeding $350 million.

Q&A

* Christopher Rolland, Susquehanna: Asked about specialty film capacity and demand outlook, as well as design activity underpinning growth targets. Jeffrey Niew explained that specialty film backlog, excluding a $25 million energy order, is close to $30 million, with anticipated specialty film revenue of $25 million to $30 million this year, rising to at least $55 million to $60 million next year. Niew credited strong design win activity and customer application intimacy for growth across medtech, industrial, defense, and EV.
* Bob Labick, CJS Securities: Inquired about specialty film product applications and follow-on order potential. Niew described pulse power applications in defibrillators, railgun, radiotherapy, and emerging downhole applications, noting ongoing prototype orders and unique technology positioning.
* Labick also asked about the M&A environment. Niew and Anderson reported an improved environment with more assets available and discipline in pursuing only clearly synergistic acquisitions.
* Anthony Stoss, Craig-Hallum: Asked about book-to-bill ratios and palladium price impact. Anderson indicated the book-to-bill within Precision Devices was 1, with a strong bookings quarter and high backlog. On palladium, Anderson said prebuys have locked in prices below current market values through the first half of next year. Niew confirmed price stability and preparedness for customer discussions if needed.
* Stoss further asked about specialty film gross margin improvement. Anderson and Niew acknowledged margin improvement trends, expecting full benefit in late Q2 when the energy order ramps, with sequential improvements projected in Q4 and Q1.
* Tristan Gerra, Baird: Asked about gross margin leverage and capacity utilization rates. Anderson indicated 35% to 40% drop-through on incremental sales, with gross margin improvement expected to be linear through Q2, followed by a significant jump in Q3 as specialty film production fully ramps.
* Gerra also asked about industrial and distribution inventory levels. Niew reported normalized inventory and positive ordering trends aligning with demand.

SENTIMENT ANALYSIS

* Analysts focused on specialty film growth, gross margin improvement, backlog strength, and the M&A pipeline, with a generally positive and optimistic tone, offering congratulations and seeking detail on growth drivers.
* Management maintained a confident tone in both prepared remarks and Q&A, repeatedly expressing optimism about continued growth, design win activity, and operational execution. Anderson’s and Niew’s responses were detailed and assertive, with Niew stating, "We are laser-focused on what we do best, designing custom engineered products and delivering them at scale for customers and markets that value our solution, positioning us well for growth in 2025 and beyond."
* Compared to the previous quarter, the tone in both management and analyst questions was consistent, with continued focus on organic growth, margin improvements, and expansion opportunities. Management confidence remains high, and analysts are constructive.

QUARTER-OVER-QUARTER COMPARISON

* Q3 guidance called for $144 million to $154 million in revenue and EPS of $0.29 to $0.33; Q4 guidance increased to $151 million to $161 million in revenue and EPS of $0.33 to $0.37, reflecting optimism and acceleration.
* Management raised expectations for organic growth rates to the high end of the 4% to 6% range for 2026, compared to a mid-range focus previously.
* Segment performance shifted, with Precision Devices showing stronger growth and margin improvement than in Q2, largely attributed to defense and energy market demand.
* Management’s confidence in specialty film capacity expansion and revenue ramp is more prominent this quarter.
* Analysts continue to emphasize growth, specialty film, and margin improvement, with increased attention to the M&A environment and raw material costs.

RISKS AND CONCERNS

* Anderson noted exposure to tariffs is less than 5% of revenue and 3% of cost of goods sold, with success in passing costs to customers.
* Rising palladium prices were identified as a risk, but management mitigated with prebuys and price controls through mid-next year.
* Specialty film gross margins remain below company average due to ramp costs, but improvements are expected as production increases.
* Management highlighted ongoing monitoring of backlog, order activity, and input costs.

FINAL TAKEAWAY

Knowles Corporation’s Q3 2025 call showcased accelerating growth, particularly in the Precision Devices segment and specialty film business, supported by strong design win activity, robust backlog, and market demand across defense, industrial, and energy. Management increased full-year guidance and targeted organic growth at the high end of previously stated ranges, while emphasizing operational execution and disciplined capital allocation. The company’s focus on specialty film capacity expansion, proactive risk management, and readiness for strategic acquisitions positions it for continued revenue and earnings growth into 2026.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/kn/earnings/transcripts]

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