Executive Summary / Key Takeaways

• Strategic Transformation Driving Growth: Knowles Corporation has successfully transitioned into a focused industrial technology company, divesting its Consumer MEMS Microphones segment to concentrate on high-growth, high-margin opportunities in MedTech & Specialty Audio (MSA) and Precision Devices (PD) across medtech, defense, industrial, and electrification markets.
• Technological Edge in Niche Markets: The company's core strength lies in its custom-engineered, high-performance components, particularly specialty film capacitors for "pulse power" applications and advanced RF/microwave filters. This differentiation is driving significant design wins and market expansion, notably in defense and the emerging energy sector.
• Accelerating Financial Performance: Following a period of operational adjustments, Knowles is demonstrating strong financial momentum. Q3 2025 saw revenue growth of 7.3% year-over-year to $152.90 million and diluted EPS of $0.33, up 22%. The company anticipates continued year-over-year and sequential growth, with full-year 2025 revenue and EPS accelerating in the second half.
• Robust Outlook and Capital Allocation: Management projects organic growth rates at the high end of the 4% to 6% range for the total company in 2026, driven by secular trends and new initiatives like the specialty film ramp-up, including a significant $75 million-plus energy order. Strong cash flow generation supports ongoing share repurchases and disciplined synergistic acquisitions.
• Mitigated Risks and Competitive Positioning: Knowles benefits from its U.S.-based manufacturing for key products, which helps mitigate tariff impacts and offers a "security of supply" advantage over competitors. While facing competition from larger diversified players, its deep customer intimacy and specialized technology create a defensible moat in its target markets.

A Transformed Enterprise: Precision and Purpose

Knowles Corporation, founded in 1946, has evolved from its origins into a leading manufacturer of specialty electronic components, designing parts that perform unique and critical functions for innovative technologies. The company's enduring strategy centers on leveraging its unique technologies, custom engineering, and scalable manufacturing to deliver innovative solutions. This foundational approach has guided its growth and strategic transformations over the decades, culminating in a significant realignment in late 2024.

The pivotal divestiture of its Consumer MEMS Microphones (CMM) segment to Syntiant Corp. on December 27, 2024, marked a strategic shift, transforming Knowles into a focused industrial technology company. This move allows Knowles to concentrate on its Precision Devices (PD) and MedTech & Specialty Audio (MSA) segments, primarily serving the high-value defense, medtech, industrial, and electrification markets. This strategic pivot was aimed at strengthening the balance sheet, investing in core businesses, and establishing new growth vectors.

Knowles operates within a competitive landscape populated by larger, diversified electronic component manufacturers such as Murata Manufacturing (MRAAY), TDK Corporation (TTDKY), Vishay Intertechnology (VSH), and Analog Devices (ADI). These rivals often boast broader product portfolios and greater manufacturing scale. For instance, Murata, a global leader in electronic components, offers extensive capacitor and RF module lines, benefiting from diversified revenue streams and potentially lower production costs due to its sheer scale. TDK, with a strong focus on automotive and industrial markets, leverages robust R&D and product integration. Vishay competes on cost leadership and high-volume production, while Analog Devices excels in advanced semiconductor solutions.

Against these formidable competitors, Knowles carves out its niche through deep engineering expertise and customer application intimacy. Its competitive advantage, or "moat," is built on proprietary technology in micro-acoustics and RF solutions, strong direct OEM relationships, and specialized expertise in highly regulated markets like medtech and defense. This allows Knowles to differentiate through enhanced product reliability and performance in demanding applications, often leading to superior margins and customer loyalty. For example, its balanced armature speakers for hearing health and high-performance capacitors for medical implants are tailored for environments where reliability is non-negotiable. While Knowles may not match the overall market reach or R&D scale of some larger competitors, its focused approach allows for faster innovation cycles in its chosen high-value segments and a "security of supply" advantage, particularly for its U.S.-manufactured products.

The broader industry is experiencing significant trends, including the growth of AI and data centers, which are driving surging demand for infrastructure. This trend indirectly benefits Knowles by increasing demand for RF products and components in communications and IoT applications tied to data centers. Additionally, the global push towards electrification presents opportunities for Knowles' capacitor solutions, although it may also increase cost structures across the industry.

Technological Edge: Powering Critical Applications

Knowles' investment thesis is fundamentally underpinned by its differentiated technology, which enables it to solve complex problems in critical applications. The company's core technological strength lies in its high-performance capacitors, particularly its specialty film line, and its advanced radio frequency (RF) and microwave filters.

The specialty film capacitor technology is a prime example of this differentiation. These capacitors are not merely building blocks in electronic circuits; they are engineered for "pulse power applications" where a significant amount of energy must be stored and then released rapidly. This capability is crucial for devices such as defibrillators, railguns, and radiotherapy equipment. A notable emerging application is in downhole environments, where Knowles' capacitors are being prototyped for use in high-heat conditions for fracking and drill bit cleaning. This technology offers tangible benefits by enabling new applications that require precise, high-energy delivery in demanding conditions, a capability that few competitors can match. The company's new prototype production line for specialty film is now operational, improving production flow and yields, with a larger ramp-up expected in the second half of 2025.

Further expanding its technological footprint, Knowles launched High-Q Ceramic Core Inductors in July 2025. These inductors leverage the company's core expertise in advanced ceramic materials and RF components. They are designed to optimize RF efficiency and signal integrity across mission-critical applications in medical, defense, and industrial sectors. These new inductors minimize energy loss and provide consistent inductance across a broad frequency range, directly addressing engineers' needs for high-performance and reliability in high-frequency designs. While significant revenue from this new line is anticipated in about 24 months, it strategically expands Knowles' total addressable market (TAM) and reinforces its position as a provider of comprehensive, high-performance passive components.

The "so what" for investors is clear: these technological differentiators create a strong competitive moat. By offering custom-engineered solutions for niche, high-value applications, Knowles can command higher average selling prices (ASPs), achieve better margins, and secure long-term contracts. This technological leadership is a direct driver of its market positioning and long-term growth strategy, allowing it to capture new opportunities in evolving markets like defense and energy.

Financial Momentum and Strategic Allocation

Knowles has demonstrated strong financial momentum, particularly after its strategic transformation. For the third quarter of 2025, the company reported revenues of $152.90 million, a 7.3% increase year-over-year. Diluted earnings per share (EPS) from continuing operations stood at $0.21, up from $0.10 in Q3 2024. Non-GAAP diluted EPS was $0.33, a 22% increase year-over-year. Gross profit for the quarter rose by 11.1% to $69.90 million, with the gross profit margin improving to 45.7% from 44.1% in the prior year period. This improvement was primarily driven by higher shipping volumes, company-wide product cost reductions, and increased factory capacity utilization in its ceramic capacitor and RF filter businesses.

The Precision Devices (PD) segment was a key driver of this performance, with revenues increasing by 11.90% year-over-year to $88.20 million in Q3 2025. This growth was broad-based across defense, electrification, medtech, and industrial markets, with defense being particularly strong. PD's adjusted EBIT for Q3 2025 was $20.20 million, up from $16.10 million in Q3 2024. The MedTech & Specialty Audio (MSA) segment also contributed, with revenues of $64.70 million, up 1.60% year-over-year, driven by increased demand in the specialty audio market. MSA's adjusted EBIT was $26.20 million in Q3 2025, a slight increase from $26.10 million in Q3 2024.

For the nine months ended September 30, 2025, total revenues reached $431 million, a 4.9% increase from $411 million in the same period of 2024. Gross profit for this period was $183.80 million, up 5.7%, with the gross profit margin at 42.6%. Earnings from continuing operations for the nine months improved significantly to $25.40 million, compared to $13 million in the prior year.

Knowles maintains a strong liquidity position and a disciplined approach to capital allocation. Cash and cash equivalents stood at $92.50 million as of September 30, 2025. The company generated $66.80 million in net cash from operating activities for the nine months ended September 30, 2025. This robust cash generation enabled the company to repurchase $55 million of common stock and reduce outstanding bank borrowings by $30 million during the same period. The Board of Directors authorized an additional $150 million for its share repurchase program in February 2025, reflecting confidence in the company's valuation and future cash flows. The net leverage ratio, based on trailing 12 months adjusted EBITDA, was a healthy 0.6x at September 30, 2025, with liquidity exceeding $350 million.

Outlook and Growth Trajectory

Management's outlook for Knowles Corporation is one of accelerating organic growth and expanding profitability. For the fourth quarter of 2025, Knowles projects revenues between $151 million and $161 million, representing a 9% increase at the midpoint year-over-year. Diluted EPS is expected to be in the range of $0.33 to $0.37 per share. Cash generated by operating activities is anticipated to be between $30 million and $40 million, with capital expenditures of $12 million. Full-year 2025 capital spending is projected to be approximately 5% of revenues, primarily directed towards expanding capacity for the specialty film line.

Looking further ahead to 2026, Knowles expects organic growth rates for the total company to be at the high end of its stated range of 4% to 6%. This acceleration from historical levels is underpinned by strong secular growth trends in its end markets and new initiatives. The Precision Devices segment is expected to grow at the high end, or even slightly above, its 6% to 8% organic growth range. The MedTech & Specialty Audio segment is projected to grow within the 2% to 4% range for 2025 and 2026.

A significant catalyst for future growth is the specialty film product line. While the line faced production challenges in late 2024 and early 2025, management expects sequential improvements in output and gross margins throughout the first half of 2025, with a more substantial "jump up" in gross margins by Q3 2026. This timeline aligns with the anticipated full delivery of a major $75 million-plus energy order, secured with a substantial prepayment, which is expected to contribute at least $25 million in shipments in 2026. Excluding this large energy order, the specialty film line already boasts a backlog of nearly $30 million and is expected to generate $25 million to $30 million in 2025, potentially reaching $55 million to $60 million in 2026 with the energy order. This specialty film category is expected to drive meaningful growth and contribute to overall EBITDA margin expansion.

The company's overall gross margin is projected to finish 2025 in the 44% to 45% range, with opportunities to go higher in 2026, particularly in the back half, driven by the specialty film ramp-up. The effective tax rate is expected to increase to 15% to 19% in 2026.

Risks and Competitive Dynamics

While the outlook is positive, Knowles faces several risks. The company acknowledges potential dis-synergies following the CMM divestiture, necessitating ongoing cost structure adjustments. Global economic instability, including inflation, rising interest rates, and geopolitical uncertainties, could impact demand, particularly in the industrial market, which is more sensitive to recessions than medtech or defense. However, management notes that industrial market inventory levels at distributors have normalized to the three to three-and-a-half month level, leading to increased order activity.

Tariffs also present a potential headwind. While the U.S. announced a new universal baseline tariff of 10% in April 2025, Knowles believes its direct exposure is less than 5% of revenue and indirect exposure (cost of goods sold) is less than 3%. The company has had success in passing these costs on to customers and expects this to continue without significant business loss. Its "proximity manufacturing" strategy, with most U.S.-built products shipped within the U.S. and Asian-built products shipped to Asia, helps mitigate these impacts. Furthermore, the essential nature of products in medtech and the secure defense programs in which Knowles participates offer a degree of insulation from economic shocks.

Rising raw material costs, such as palladium, are another consideration. While palladium prices have increased, Knowles has secured prebuys through the first half of 2026, mitigating immediate impact on gross margins. Should prices remain elevated, discussions with customers for price adjustments would likely occur.

In the competitive arena, Knowles' specialized focus, while a strength, also presents a vulnerability compared to larger, more diversified players. Competitors like Murata and TDK, with their extensive product lines and broader market reach, may achieve greater economies of scale. However, Knowles' deep customer intimacy and custom engineering capabilities allow it to maintain strong relationships and secure design wins in niche, high-value applications. The company's U.S.-based manufacturing for many of its precision devices also offers a "security of supply" advantage, leading to inbound calls from customers seeking alternatives to non-U.S. suppliers, particularly in the industrial space. This could present an upside not yet factored into current guidance.

Conclusion

Knowles Corporation is undergoing a compelling transformation, shedding its consumer business to sharpen its focus on high-performance, custom-engineered solutions for resilient industrial technology markets. The company's strategic pivot, underpinned by its differentiated technologies in specialty film capacitors and RF filters, is translating into tangible financial gains, with accelerating revenue and EPS growth projected for the second half of 2025 and into 2026. The robust backlog, particularly in the Precision Devices segment, and the significant energy sector order for specialty film, underscore the market's demand for Knowles' unique capabilities.

While macroeconomic uncertainties and tariff dynamics present ongoing considerations, Knowles' proactive risk mitigation strategies, including its U.S. manufacturing footprint and ability to pass on costs, position it favorably. The company's disciplined capital allocation, balancing share repurchases with a keen eye on synergistic acquisitions, further enhances shareholder value. As Knowles continues to leverage its technological leadership and deep customer intimacy in medtech, defense, industrial, and electrification, it is well-positioned to capitalize on secular growth trends and expand its market share in critical, high-value applications, making a compelling case for discerning investors.