Knowles (KN) Q3 2026 earnings review
Knowles raises its sales outlook, but hearing-health margins slip
Knowles's industrial and defense capacitor division is expanding rapidly while its hearing-health audio division barely moves. Total sales at the specialty electronics maker jumped 20% from a year ago to $184 million, beating the top of its own plan as Precision Devices revenue climbed 33%. Chief executive Jeffrey Niew lifted the full-year sales growth outlook to 16%, and the new fourth-quarter plan points to 14% growth, erasing the year-end slowdown that the old full-year target implied by our math.
| Revenue | $184.0M +20.3% from a year ago |
|---|---|
| Precision Devices revenue | $117.0M +32.7% from a year ago |
| Profit per share, excluding one-offs | $0.38 +15.2% from a year ago |
| Full-year revenue outlook | Raised to +16% from 10–12% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because the order backlog is now turning into shipments and cash, and the fourth-quarter outlook removes the gap between strong orders and cautious revenue targets. Operating cash flow rebounded to $45 million after a weak first half, putting the full-year cash goal within reach. The bad news: MedTech & Specialty Audio grew only 4% while inventory write-downs and higher research spending cut its profit margin by 2.1 percentage points.
The question now is whether eight quarters of strong capacitor orders reflect lasting defense and energy demand or customers ordering extra parts during a supply shortage. If demand is lasting, bookings will stay ahead of this higher shipment pace; if customers ordered early, the order ratio will drop below one as factory lead times ease. The exact third-quarter order dollar total on the conference call and fourth-quarter inventory levels will tell.
🐂 Bull Case
Precision Devices Growth Reached 33% on Full Factories
Precision Devices makes specialty capacitors and radio frequency filters for medical, defense, industrial, and energy equipment. Chief executive Jeffrey Niew said "our book-to-bill ratio in Precision Devices remained above one for the eighth consecutive quarter, reflecting continued order strength". The book-to-bill ratio compares incoming orders with shipped sales, so a reading above one means the order backlog is still growing.
- Precision Devices revenue: $117.0 million, up 32.7% from a year ago and up 19.0% from last quarter
- Segment profit margin before interest, taxes, depreciation, and amortization, excluding one-offs: 27.5%, up 1.8 percentage points from a year ago
- Segment gross margin, excluding one-offs: 41.6%, up 1.5 percentage points from last quarter
Sales jumped because the backlog from earlier quarters is now turning into shipments across all four end markets, including defense. Profit margins rose on "increased production volume and factory capacity utilization", Knowles said. Selling and administrative costs in the division fell by 0.9 percentage points of sales, excluding one-offs, as higher revenue spread across fixed overhead.
What to watch: the exact book-to-bill ratio and dollar order total on the conference call. A ratio near or above the prior quarter's 1.4 would show that order intake is keeping pace with this 33% shipment jump.
Q4 Plan Erases the Implied Fourth-Quarter Slowdown
Three months ago, Knowles forecast 10% to 12% full-year revenue growth. By our math, that earlier target left fourth-quarter sales at $156 million to $178 million, or anywhere from a 4% drop to a 9% gain from a year ago, which clashed with the growing order book.
The electronics maker removed that gap by guiding fourth-quarter sales to $180 million to $190 million, up 14.1% at the middle of the range. That lifts full-year expected revenue to $689 million, up 16% from 2025. Niew also said "as I look forward to 2027, I expect us to continue exceeding the revenue and adjusted EBITDA growth targets presented at our May 2025 Investor Day", when management targeted 8% to 10% annual sales growth.
What to watch: the 2027 capital spending plan when fourth-quarter results arrive. A higher factory budget would confirm that customer orders require more production lines for 2027.
Third-Quarter Cash Rebound Puts Full-Year Target Within Reach
Cash generation lagged in the first half of 2026 because Knowles built up inventory ahead of customer orders. First-half free cash flow, excluding one-offs and discontinued operations, dropped to $19.8 million from $57.9 million a year earlier, raising concern that working capital would absorb this year's profit growth.
In the third quarter, operating cash flow jumped 53.3% from a year ago to $44.6 million, near the top of the $35 million to $45 million plan. Free cash flow, excluding one-offs, reached $42.6 million, or 23.2% of revenue. The fourth-quarter outlook calls for $60 million to $70 million of operating cash flow, which by our math puts full-year operating cash at 19.9% of sales, right at the top of the company's 16% to 20% target.
What to watch: fourth-quarter inventory levels alongside operating cash flow. Achieving the $65 million middle of the cash range will show that third-quarter shipments are turning into fourth-quarter cash collections.
🐻 Bear Case
MedTech Growth Stays Slow as Inventory Reserves Hit Margins
MedTech & Specialty Audio makes tiny microphones and speakers for hearing aids and medical devices. The division brings in 36% of company sales, but its end market grows only 2% to 4% a year, which holds back Knowles's overall growth rate.
Third-quarter segment sales rose 3.6% from a year ago to $67.0 million on "higher volumes in hearing health shipments", Knowles said, but fell 2.2% from the second quarter. Segment profit margin before interest, taxes, depreciation, and amortization, excluding one-offs, dropped 2.1 percentage points from a year ago to 41.6%. Knowles blamed "inventory reserves and increased R&D and OPEX spend supporting long term growth initiatives".
By our math, segment cost of goods sold rose 1.1 percentage points of sales, excluding one-offs, while research and administrative expenses rose 0.9 percentage points. Because the division barely grows, any inventory write-down or research increase cuts straight into its profit margin.
What to watch: MedTech & Specialty Audio gross margin in the fourth quarter. A second quarter of inventory reserves would show that older hearing-health parts are not selling as planned.
Company Gross Margin Dipped as Factory Costs Rose
Management highlights operating profit before depreciation and amortization, where the margin excluding one-offs rose 0.5 percentage points from a year ago to 26.3%. That gain came from overhead savings, as research, selling, and administrative costs fell by 1.0 percentage point of revenue to 21.8%, excluding one-offs.
Gross margin moved the other way. Total gross margin fell 1.5 percentage points to 44.2%, or 0.9 percentage points to 45.3% excluding one-offs, because the cost of making the products rose from 54.3% to 55.8% of revenue. Faster growth in Precision Devices, which carries a lower gross margin than MedTech, explains part of the shift. In addition, duplicate costs to move production lines to existing factories — which Knowles excludes from its preferred profit numbers — nearly doubled to $1.1 million in the quarter and reached $2.8 million over nine months, up from $0.9 million a year ago.
What to watch: production transfer costs in the fourth-quarter reconciliation table. If these factory move charges stay above $1 million a quarter, the gap between reported profit and management's preferred profit will stay wide.
Risks this quarter didn't answer
Four standing concerns could not be tested from the earnings release and slides alone, while balance-sheet inventory kept climbing.
- Inventory build: inventories rose another $3.2 million in the quarter to $150.3 million, up 20.6% since December by our math, and the release does not state how much is held for unbooked orders.
- Order quality and double-ordering risk: Knowles confirmed a book-to-bill ratio above one, but did not give the exact ratio, total order dollars, or the split between distributors and direct customers.
- Large multi-year defense awards: the release named no new multi-year order dollar figures or delivery schedules, which typically wait for the conference call.
- Raw material costs: palladium hedges ran only through mid-year and resin costs were rising, but the release gave no update on input cost inflation.
👓 Other Themes
Share Repurchases Stepped Up While Debt Fell
Stronger third-quarter cash flow let Knowles buy back more stock and pay down debt at the same time. By our math, the company spent $25.0 million on share repurchases in the third quarter, up from $15.0 million in the second quarter, bringing nine-month buybacks to $47.5 million. Even with those repurchases, long-term debt fell by $15.0 million from June to $116.0 million.
💲 Other KPIs
Total debt minus cash fell 17.2% from $83.8 million a year ago and dropped $12.0 million from the second quarter. Net debt now sits at 0.4 times trailing 12-month profit before interest, taxes, depreciation, and amortization, excluding one-offs, down from 0.6 times in the first quarter and well below the company's 2.75 times limit.
Spending on factory equipment fell 5.2% from $7.7 million a year ago and came in below the $10 million management had planned for the quarter. Over the first nine months of 2026, capital spending rose 46.4% to $24.6 million, or 4.9% of sales, tracking the full-year plan of about 5% of revenue.
The share count used to calculate profit per share excluding one-offs fell 1.1% from 87.9 million a year ago and dropped by 600,000 shares from the second quarter, as third-quarter buybacks reduced outstanding shares.
🔮 Guidance
Raised. At the middle of the fourth-quarter range, full-year sales will grow 16% to $689 million, up from the prior 10% to 12% plan. It is the third raise since late 2025, when the company first pointed to 6% growth, and by our math the 5-percentage-point jump is the largest raise in the sequence.
New. The fourth-quarter plan calls for 14.1% growth from a year ago and 0.5% growth from the third quarter at the $185 million middle of the range, against a tough comparison from last year. Knowles has beaten its quarterly sales midpoint for four straight quarters by an average of 5.2%; if the pattern holds, fourth-quarter revenue would reach about $195 million by our math.
New. The outlook points to $0.41 at the middle of the range, up 13.9% from $0.36 a year ago and up 7.9% from $0.38 in the third quarter. The figure excludes $0.08 per share of net charges, as $0.06 of dividend income from its Syntiant investment partly offsets stock compensation and amortization.
New. At the $0.33 middle of the range, GAAP profit per share from continuing operations rises 13.8% from $0.29 a year ago and jumps 37.5% from $0.24 in the third quarter, lifted by the expected $0.06 per share Syntiant dividend.
New. The plan calls for $65 million at the middle of the range, up 37.7% from $47.2 million a year ago and up 45.7% from $44.6 million in the third quarter. Reaching the middle of the range would bring full-year operating cash flow to $137.1 million, or 19.9% of expected revenue by our math.
❓ Key Questions
What were Precision Devices order dollars and the book-to-bill ratio?
Last quarter management reported a 1.4 book-to-bill ratio and nearly $140 million in orders. The third-quarter release states only that the ratio stayed above one, leaving unclear whether order intake accelerated with shipments or cooled toward parity.
What caused the inventory write-downs in MedTech & Specialty Audio?
Segment operating profit margin fell 2.1 percentage points from a year ago partly because of inventory reserves, even as total company inventories climbed to $150.3 million. Investors need to know if those write-downs were a one-time product transition or a sign of slow-moving stock.
Did Knowles book any large multi-year defense or energy orders?
Management previously committed to calling out large multi-year orders as they arrive, such as July's $15 million radar award. The release mentions none, so the conference call must clarify whether new multi-year awards landed in the third quarter.
Why are factory transfer costs still rising after nine months?
Duplicate costs to move production lines to existing factories rose to $1.1 million in the third quarter and $2.8 million year to date, all excluded from non-GAAP profit. Management has not said when these facility moves will finish.