Knowles (KN) Q2 2026: Precision Devices Surge 25%, Multi-Year Defense Orders Signal Accelerating Backlog
Knowles posted broad-based double-digit growth in Q2, propelled by a 25% surge in Precision Devices and strong defense order momentum. Management raised full-year growth expectations as robust bookings and a 1.4 book-to-bill ratio point to durable demand. Multi-year defense and industrial wins, coupled with pricing tailwinds, position KN for continued margin expansion into 2027.
Summary
- Defense and Industrial Orders Outpace Expectations: Multi-year defense wins and broad industrial adoption drive backlog growth.
- Margin Expansion Driven by Pricing and Utilization: Gross margin gains reflect improved pricing power and strong factory utilization.
- 2026 Revenue Guidance Lifted on Robust Backlog: Management signals confidence in double-digit organic growth through year-end and into 2027.
Business Overview
Knowles Corporation designs and manufactures advanced micro-acoustic, audio processing, and precision device solutions for MedTech, defense, industrial, and specialty audio markets. The company operates two primary segments: MedTech and Specialty Audio (MSA), focused on hearing health and audio components, and Precision Devices (PD), which provides capacitors, RF filters, and microwave products for mission-critical applications. Revenue is generated through a mix of OEM sales and distribution channels, with a growing emphasis on high-value, sole-source components in secular growth markets.
Performance Analysis
Knowles delivered a standout quarter with organic revenue up 14% year-over-year, surpassing the top end of guidance. The PD segment was the clear growth engine, rising 25% YoY and accounting for the majority of incremental revenue, fueled by strong demand across MedTech, defense, industrial, and electrification markets. Notably, defense and industrial bookings were particularly robust, and the backlog is further underpinned by a $15 million radar order to be fulfilled over three years starting in 2027.
Gross margin improvement was a highlight, with group-level expansion of over 200 basis points in the first half. PD segment gross margins climbed to 40.1%, up 140 basis points, driven by higher pricing, improved mix, and increased factory utilization. Operating leverage was evident as SG&A rose in support of new product initiatives but was offset by margin gains. Share repurchases and debt reduction continued, with net leverage at just 0.5x EBITDA, highlighting a strong balance sheet.
- Backlog Strengthens Across Segments: Bookings in PD approached $140 million, with a book-to-bill of 1.4 for the seventh consecutive quarter, indicating sustained demand.
- MedTech and Specialty Audio Delivers Consistent Growth: MSA revenue rose 2% YoY, in line with the segment’s historical 2-4% growth range, but management sees upside potential toward the high end of that range.
- Capital Allocation Remains Balanced: $15 million in share repurchases and ongoing debt paydown signal disciplined use of cash amid strong organic growth opportunities.
Momentum in core and emerging markets, combined with a healthy backlog and favorable pricing dynamics, supports management’s confidence in achieving above-target growth for 2026.
Executive Commentary
"We are seeing more defense customers coming to us wanting to place multi-year orders to secure capacity... 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."
Jeffrey Niew, President and CEO
"While we've 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 higher pricing, favorable mix, and increased factory capacity utilization."
Jon Anderson, Senior Vice President and CFO
Strategic Positioning
1. Defense and Industrial Demand Escalates
KN’s positioning as a sole-source supplier in defense RF filters and capacitors is yielding multi-year order visibility, with management citing growing demand for electronic warfare and replenishment of munitions stockpiles. The industrial segment is also outpacing expectations, with broad-based adoption across automation, robotics, and HVAC applications.
2. Pricing Power and Mix Shift Support Margin Expansion
Annual price increases and a non-commodity product mix are driving sustainable margin improvement in PD, a contrast to the cyclical pricing seen in commoditized passives. Management expects continued margin tailwind as price actions taken in 2026 flow through to 2027 results.
3. MedTech and Specialty Audio Remain Steady, with Upside Risk
MSA’s hearing health business continues to deliver stable 2-4% growth, but management noted recent industry data could push results toward the high end of that range. Next-generation MEMS microphones and balanced armature speakers present content-per-device growth opportunities.
4. Capital Deployment Focused on Organic and Selective Inorganic Growth
While M&A remains on the radar, management is prioritizing organic investments and capacity expansion in PD, supported by strong cash generation and a disciplined approach to new platforms such as energy and micro solutions.
5. Backlog and Book-to-Bill Ratios Provide Forward Visibility
The seventh consecutive quarter with a PD book-to-bill over 1.0 and robust multi-year defense orders offer durable revenue visibility into 2027 and beyond.
Key Considerations
This quarter underscores Knowles’ transition from cyclical to secular growth, as defense, industrial, and MedTech tailwinds combine with disciplined execution and capital allocation.
Key Considerations:
- Defense Sole-Source Advantage: Sole-source status in key defense programs is cementing multi-year order flows and backlog depth.
- Factory Utilization and Overhead Absorption: Higher production volumes are translating into greater operating leverage and margin gains.
- Pricing Environment Favors KN’s Product Mix: Non-commodity positioning enables annual price increases, supporting gross margin expansion.
- Organic Growth Outpaces Historical Targets: Raised guidance to 10-12% revenue growth, well above prior 4-6% target range, signals a structural demand shift.
- Selective M&A Remains a Lever: While not a near-term focus, management continues to evaluate strategic deals that could accelerate growth platforms.
Risks
Execution risk remains around scaling capacity for multi-year defense and energy orders, especially as lead times and customer requirements grow more complex. A slowdown in MedTech or industrial capital spending could temper growth, while any shift in defense budgets or geopolitical dynamics may impact long-term visibility. Management’s confidence in backlog and pricing is high, but the sustainability of recent order momentum will be tested as new capacity comes online.
Forward Outlook
For Q3 2026, Knowles guided to:
- Revenue of $177 million, up 12.5% YoY at midpoint
- Adjusted EBIT margin of 22-24%
- EPS of $0.34 to $0.38 per share
- Cash from operations of $35 to $45 million
For full-year 2026, management raised organic revenue growth guidance to 10-12% and expects:
- Further gross and EBITDA margin expansion, with a multi-year path to 30% EBITDA margins
- Capital spending at 5% of revenue to support PD capacity increases
Management highlighted:
- Sequential growth is expected into Q4, with PD segment momentum offsetting a slower MSA ramp after a strong Q1
- Pricing actions and mix improvements will continue to support gross margin gains into 2027
Takeaways
Knowles is capitalizing on secular demand in defense and industrial markets, with a robust backlog and pricing power underpinning both growth and margin expansion. Investors should monitor the cadence of multi-year defense orders and the company’s ability to scale PD capacity without sacrificing margin discipline.
- Backlog and Book-to-Bill Strength: Robust multi-year bookings and a 1.4 book-to-bill ratio in PD support sustained growth visibility.
- Margin Expansion Path: Operating leverage from higher utilization and pricing power are driving gross and EBITDA margin gains, with a path to 30% EBITDA margin over the next two to three years.
- Watch for Execution on Capacity Expansion: Delivery against large energy and defense orders, while maintaining margin discipline, will be key for sustaining investor confidence into 2027.
Conclusion
Knowles delivered a quarter of broad-based, high-quality growth, with defense and industrial markets driving a step-change in backlog and visibility. Margin expansion, pricing power, and disciplined capital allocation position KN for continued outperformance as secular demand trends accelerate.
Industry Read-Through
Knowles’ results signal a rising tide for high-value, sole-source component suppliers in defense and industrial markets, as global rearmament and automation trends accelerate. Pricing power and margin expansion in non-commodity passives contrast with volatility in standard components, suggesting premium suppliers with technical differentiation will continue to outperform. Multi-year order visibility and capacity investments are likely to become industry-wide themes, with implications for capital allocation and supply chain planning across MedTech, defense, and industrial electronics peers.