Electronic components manufacturer Knowles (NYSE: KN) reported Q3 2026 results beating Wall Street’s revenue expectations, with sales up 20.3% year on year to $184 million. On top of that, next quarter’s revenue guidance ($185 million at the midpoint) was surprisingly good and 6% above what analysts were expecting. Its non-GAAP profit of $0.38 per share was 6.3% above analysts’ consensus estimates.

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StockStory’s take

Knowles delivered a strong Q3, with revenue growth driven by broad-based demand across its key end markets and segments. Management credited the outperformance to robust order activity in Precision Devices and earlier-than-usual product launches from hearing health customers, who are incorporating new artificial intelligence features. CEO Jeffrey Niew pointed to successful execution on design wins in MedTech, defense, and electrification, highlighting the company’s ability to scale customized solutions for customers. Niew noted, “Our results continue to demonstrate that our focus on markets and products where we have significant competitive advantages is paying dividends.”

Looking ahead, Knowles’ forward guidance reflects confidence in sustained demand and operational leverage, particularly as new capacity comes online in Precision Devices. Management expects continued growth from design wins in MedTech and defense, with a healthy backlog supporting visibility into 2027. CFO John Anderson outlined plans for higher capital spending to address capacity constraints and projected ongoing gross margin expansion, while Niew added, “We see a clear path to 30% EBITDA margins over the next two to three years as we scale and bring on additional automation.”

Key insights from management’s remarks

Management attributed the quarter’s results to strong order momentum in Precision Devices, early demand for AI-enabled hearing health products, and expanding opportunities in MedTech, defense, and industrial markets.

• Precision Devices order strength: The Precision Devices segment saw broad-based demand, with a book-to-bill ratio of 1.5 and nearly $180 million in orders, highlighted by a $15 million defense RF filters order to be delivered over three years. This segment benefited from new design wins in MedTech, defense, and electrification, providing a robust pipeline and reinforcing management’s decision to invest in capacity expansion.
• Early AI-driven demand in hearing health: Hearing health customers accelerated product launches due to new artificial intelligence features, leading to earlier-than-expected sales in the MedTech & Specialty Audio segment. This shift in seasonality contributed to segment growth and reflects broader industry trends towards AI integration in medical devices.
• Capacity constraints emerging: Strong demand has pushed certain product lines in Precision Devices close to capacity limits, prompting Knowles to invest in additional manufacturing capability. Management expects new capacity to begin coming online in late Q1 of next year, fully ramping in the second half of 2027, supporting continued revenue momentum.
• Margin expansion through automation: The company’s recent ramp of a fully automated facility for a major energy order provided lessons that are now being applied more broadly. Enhanced automation, improved yields, and operational efficiencies are expected to drive margin improvement, particularly in businesses acquired through M&A.
• Shareholder returns and balance sheet discipline: Knowles returned capital through $25 million in share repurchases and reduced debt by $15 million during the quarter, while maintaining liquidity and funding organic growth. This approach allows the company to support investments in capacity and pursue strategic acquisitions without compromising financial flexibility.

Drivers of future performance

Management expects ongoing growth as new capacity comes online and market trends in MedTech and defense remain favorable.

• Design wins and backlog visibility: Sustained demand for custom solutions in MedTech, defense, and electrification is underpinned by a strong backlog and active pipeline. CEO Jeffrey Niew highlighted increasing customer requests for tailored products, a trend supporting multi-year revenue visibility and reducing exposure to cyclical downturns.
• Capacity expansion to meet demand: With some Precision Devices product lines nearing capacity, management is prioritizing capital investments to expand manufacturing. New capacity is expected to ease current constraints and enable Knowles to capture additional market share, particularly as large defense and energy orders are delivered over multiple quarters.
• Margin improvement initiatives and inflation management: The company aims for annual gross margin improvement of 100 basis points through pricing, higher capacity utilization, and automation. Management believes its critical role in customer supply chains allows for moderate price increases, helping to offset inflationary pressures and support profitability as volumes scale.

Catalysts in upcoming quarters

In the coming quarters, our team will be monitoring (1) the pace at which new manufacturing capacity comes online to alleviate current constraints, (2) the scale and timing of follow-on orders in energy and defense, and (3) the realization of margin expansion from automation and operational improvements. Execution on key design wins and the ability to sustain pricing power in the face of inflation will also be important milestones for Knowles.

Knowles currently trades at $33.95, up from $33.38 just before the earnings. Is there an opportunity in the stock? See for yourself in our full research report (it’s free).

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