Operator : Hello, everyone. Thank you for joining us, and welcome to the Q2 Knowles Corporation Earnings Conference Call. I will now hand the conference over to Sarah Cook, Vice President of Investor Relations. Sarah, please go ahead.
Sarah Cook : Thank you, and welcome to our second quarter 2026 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, including, but not limited to, the Annual Report on Form 10-K for the fiscal year ended December 31, 2025, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measure referenced during today's conference call can be found in our press release posted on our website at knowles.com, and in our current report on Form 8-K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measures. All financial references on this call will be on a non-GAAP, continuing operations basis with the exception of Cash from Operations, unless otherwise indicated. We've made selected financial information available on webcast slides, which can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?
Jeffrey Niew : Thanks, Sarah. Thanks to all of you for joining us today. Before getting into the specifics of the Q2 results and the commentary on what we are seeing in our end markets, let me say I'm very pleased with our performance. We had another quarter of strong broad-based organic growth as we continue to build on the momentum we saw in the first quarter. In our core products and markets, we continue to execute on the strategy detailed last year at our Investor Day providing high-value products to markets with strong secular growth trends. Additionally, we are beginning to see positive momentum in some of our new growth platforms and markets that bodes well to drive additional growth in 2027 and beyond. Now on to our results. In the second quarter, we delivered revenue of $167 million, up 14% year-over-year, exceeding the high end of our guided range. EPS of $0.33 was up 38% year-over-year, above the high end of our guided range and cash generated in operations was $28 million, above the midpoint of the guided range. In Q2, Medtech & Specialty Audio revenue was $69 million, slightly better than expected, up 2% year-over-year. We continue to believe the Hearing Health market will grow at historical rates in 2026. Beyond 2026, we are well positioned to win next-generation designs for MEMS microphones and balanced armature speakers. I remain confident in our prospects to increase our content per device and next-generation hearing health products, as Knowles continues to demonstrate our ability to deliver unique solutions with superior technology and reliability our customers have come to depend on. This, coupled with our Micro Solutions group ability to expand our reach as a new platform, we expect an increased growth at historical rates for this segment in the future. In the Precision Devices segment, Q2 revenue was $98 million, up 25% year-over-year with all end markets we serve, medtech, defense, industrial, and electrification growing on a year-over-year basis. Medtech growth was supported by strong sales across a number of applications, including defibrillators and MRI machines. In the defense market, our RF microwave products continue to support strong growth across many communications applications. We are seeing more defense customers coming to us, wanting to place multiyear orders to secure capacity. As an example, early in July, we received a $15 million-plus order for a radar application that is expected to ship over 36 months starting in 2027. We intend to continue to call these large multiyear orders as we receive them. In the industrial market, sales grew significantly again this quarter. Demand was broad-based at both our distribution partners and OEMs as our capacitor products support a multitude of applications and industries. We continue to see robust design wins in the industrial space. As an example, this quarter, we saw strong sales with a New Product Introduction in the HVAC repair space. And lastly, I'm happy to report we delivered more than $5 million against our previously announced energy order and are fully ramped, as we expected heading into Q3 with yields better than planned. Overall, book-to-bill in Precision Devices was 1.4. This marked the seventh consecutive quarter with a book-to-bill greater than 1. Order strength was across all our end markets, both at the OEMs and with our distribution partners. It is worth emphasizing the strength of bookings in our core products as the book-to-bill was 1.4, even with extremely strong shipments in Q2, including over $5 million of shipments on the energy order. Orders in the PD segment were nearly $140 million in Q2, well above Q1 bookings and providing me confidence in continued growth in the future. I continue to be excited by the strength of our business and the momentum we built in the first half of the year. We are well positioned for continued strong organic revenue growth and margin expansion. As I've said on previous call, I believe Knowles has entered a period of accelerated organic growth. With a very healthy backlog of existing orders, strong secular trends in the markets we serve, and accelerating book-to-bill, we now expect our revenue growth in 2026 to be between 10% and 12%, well above the high end of our organic revenue growth target of 4% to 6% that we provided at our Investor Day in May of last year. Before I turn the call over to John to cover our financial results and provide our Q3 guidance, I would like to take a moment to reflect on where we have been, where we are now, and where we are heading. As it has been a little over a year since we did our Investor Day, let me provide an update on the changes we are seeing in our end markets and how it is supporting our accelerated revenue growth. Let me start with the medtech market. Both Precision Devices and Medtech & Specialty Audio segments participate in this market. The secular growth trends we communicated a year ago at our Investor Day remain intact. Life expectancy rates are increasing and the aging population growth, correlating health care expenditures are increasing as well. Our products supply the health care industry with capacitors for medical imaging, advanced lifesaving therapies, and cardiovascular device, to name a few. In our Hearing Health business -- our Hearing Health business provides an array of solutions that help our customers enhance quality of life for those with hearing loss. On a blended global basis, for the specific portions of the market we serve, we are outpacing the general medtech market growth rate communicated last year at Investor Day as we focus on design wins for next-generation medical solutions. Growth in this market comes from multiple sources. The Hearing Health market continues to consistently deliver 2% to 4% growth annually. In Precision Devices, our capacitors provide the energy delivery needed to ensure devices used in cancer treatments, imaging, and precision lasers perform reliably and with high performance. For significant advances to medical technologies and our products support these advances evidenced by design wins and growth in the medtech space. The defense market is definitely growing at a more rapid rate than we anticipated in May 2025 with global conflicts on the rise and increased defense spending, specifically on electronic warfare. Our RF filters and capacitors serve the defense market. Our migrated technologies serve a broad base of communication applications, from radar detection and jamming to ground and sea communications and we are being used in next-generation products, ensuring reliable and secure military communications. We see strong order intake in our RF microwave products as we continue to be a sole-source supplier on a number of key defense programs. Our capacitors provide the electrical energy source needed for extremely harsh applications like munitions and detonation devices. Additionally, we expect increasing demand in the future driven by replenishment of stocks in connection with the Iran conflict. All this adds up to an expectation of continued strong organic growth with the possibility of an acceleration in the midterm. Like medtech and defense, the industrial market is growing at a faster pace than we believed it would when we hosted our Investor Day last year. Knowles serves a very broad set of customers across the industrial markets, both directly as well as through our distribution partners like TTI and Arrow Electronics. Our capacitors are used in a wide array of solutions from factory robotics, HVAC equipment, precision lasers, and semiconductor equipment. As manufacturers, our challenge to find solutions for manufacturing automation and product optimization, our capacitors provides an essential energy source that advances the performance of their solutions. Our strategy of leveraging our unique technologies to design custom-engineered solutions and then deliver them at scale for blue-chip customers in high-growth markets that value our solutions is proving to be a powerful combination, driving revenue growth, expanding margins and strong cash flow to drive shareholder value. Now let me turn the call over to John to review our financial results and give our Q3 guidance.
John Anderson : Thanks, Jeff. We reported second quarter revenues of $167 million, up 14% from the year-ago period and well above the high end of our guidance range. EPS was $0.33 in the quarter, up $0.09 or 38% from the year-ago period and above the high end of our guidance range. Cash provided by operating activities was $28 million, near the high end of our guidance range. In the Medtech & Specialty Audio segment, Q2 revenue was $69 million, up 2% compared with the year ago period. Gross margins were 53.1%, up 250 basis points from the year ago period driven by factory productivity gains. The Precision Devices segment delivered second quarter revenue of $98 million, up 25% from the year-ago period. Increased demand from both OEM customers and our distribution channel partners resulted in year-over-year growth in medtech, defense, industrial, electrification end markets. Segment gross margins were 40.1%, up 140 basis points from the second quarter of 2025, largely driven by increased production volume and factory capacity utilization as we deliver on strong demand across all markets and products. While we 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 Devices gross margins in the second half of the year on higher pricing, favorable mix, and increased factory capacity utilization. On a total company basis, R&D expense in the quarter was $9 million, up slightly compared to Q2 2025 on higher project spending in both MSA and PD segments. SG&A expenses were $31 million, up $3 million from prior-year levels, driven primarily by higher sales commissions, annual merit increases, and increased expenses primarily to support new product initiatives. Interest expense for the quarter was $2 million, down $1 million from the second quarter of 2025 due to lower average debt balances. Now I'll turn to our balance sheet and cash flow. In the second quarter, we generated $28 million in cash from operating activities and capital spending was $7 million. During the second quarter, we repurchased 416,000 shares at a total cost of $15 million. We exited the quarter with cash of $50 million and $131 million of borrowings outstanding under our revolving credit facility. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA, was 0.5x, and we have liquidity of more than $315 million, as measured by cash plus unused capacity under our revolver. Moving to our Q3 guidance. For the third quarter of 2026, revenues are expected to be between $167 million and $177 million, up 12.5% year-over-year at the midpoint. R&D expenses are expected to be between $9 million and $11 million. Selling and administrative expenses are expected to be within the range of $29 million to $31 million. We are projecting adjusted EBIT margin for the quarter to be within the range of 22% to 24%. Interest expense in Q3 is estimated $2 million, and we expect an effective tax rate of 15% to 19%. We are projecting EPS to be within the range of $0.34 to $0.38 per share, up $0.03 or 9% year-over-year at the midpoint. This assumes weighted average shares outstanding during the quarter of 87 million on a fully diluted basis. We're projecting cash from operating activities to be within the range of $35 million to $45 million. Capital spending is expected to be $10 million. We expect full-year capital spending to be approximately 5% of revenues as we make investments in capacity to support increased customer demand in the Precision Devices segment. Our strong growth and financial results in the first half of the year, combined with the robust backlog and increased order activity, give me confidence in our ability to deliver 2026 revenue growth of 10% to 12% with adjusted EBITDA growth of 20% to 24% over 25 levels. With both metrics well above the high-end of the target ranges that we provided at our May 2025 Investor Day. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator?
Operator : Your first question from the line of Christopher Rolland with Susquehanna. Please go ahead.
Christopher Rolland : Congrats on the quarter. And as I think about that 10% to 12% for the full year, obviously, great results here. But for the fourth quarter, it's maybe a little lower growth than I had previously modeled. I was wondering maybe if you could talk about maybe some of the moving parts there and how to think about it for December, but also any other color on September and the moving parts there would be great, too.
Jeffrey Niew : Well, I mean, I think based on where we're at today, I would say we're going to see sequential growth from Q3 to Q4. And I think the sequential growth will come from a number of different areas. So you have to remember, Chris, as we've kind of said we started off with a bang in the MSA segment in the first quarter and a lot of the growth came in the first quarter that they were going to produce that to get to the 2% to 4%. So we have a little bit of a headwind in our MSA segment in Q4. But the PD segment will continue to grow at the rates that are similar to what we said. So I wouldn't read too much into this in terms of 1 quarter. The 10% to 12% is a number that we feel comfortable with, but it is sequentially up. And just keeping in mind the MSA segment is a little bit slower. For the full year, it's up in that 2% to 4% range. I would have 1 other thing about the MSA sematic segment, probably a little too early to call this -- there's been a fair amount of data that's come out about the hearing aid industry and in the last day. And I honestly have not been able to fully digest what this all means. But we say 2% to 4%, some of the things we've now seen in the MSA segment could be closer to the 4% range or the end market could be closer to the 4% range. So I think, again, we're comfortable with the 10% to 12%. And the moving parts or PD continues the growth rate. MSA is going to be slower because kind of what we talked about before, inventory building in the first half of the year, but no real problems there, 2% to 4% for the full year.
Christopher Rolland : Perfect. And then as a follow-up, as we talk about kind of the passives market more broadly, and I know you have very specific products very specific customers, and end markets. But clearly, it seems like it's a rising tide environment for all passive and I was wondering if there was any spillover into your market tightness in other areas? Is it driving anything for you guys? And additionally, on the pricing dynamic, are you able to maybe take a little bit more price in the back half, just considering how much tighter the whole industry and cycle is becoming?
Jeffrey Niew : Yes. I mean, generally saying, on the precision-specific Precision Devices side, Demand is definitely stronger in the back half of the year than we would have projected at the beginning of the year. And that's pretty broad-based across industrial, medtech and more pronounced even in defense for sure. I would sit there -- I mean industrial is probably kind of a little stronger as well. And so I think, generally, as I said before, pricing, we're not a commodity product and we tend to raise prices on an annual basis in the PD segment, right? I would say the pricing environment is definitely stronger than it was last year, and we're probably going to get more pricing this year, but again, generally speaking, we're sole-source position. We raised prices on an annual basis. I think what you've seen a lot of the other passive people are reporting who sell many more commoditized products, their prices go up and down with market demand. We don't really see our prices go down. I mean it's relatively up every year. But I would say that the pricing is definitely more pronounced this year than it has been in previous years.
Operator : Your next question from the line of Bob Labick with CJS Securities. Please go ahead.
Bob Labick : So obviously, really strong growth in PD in the quarter. And I think you mentioned about $5 million from the energy order, which is great to hear. But that leaves kind of the rest of PD at close to 20%, doing the math real quick. It looked like it was just under 20% growth. And -- can you talk about what were the -- that's a pretty big number too. Any like -- what were the big drivers there? And talk about kind of cadence of both energy and then kind of remaining PD business for the balance of the year?
Jeffrey Niew : Yes. I think I really tried to call this out. If you think about on the energy order, we shipped -- it's actually more than $5 million. So it's a little more than $5 million. But take that off -- and if you calculate the -- because we didn't receive a new order on energy, right? So that -- like the book-to-bill in that was like 0, right? If you think about -- that's why I'm trying to like highlight here. We received almost $140 million in orders in the core. And so the bookings were very strong in Q2, and that was up from a little over $100 million of orders in Q1. And so it's very broad-based. I wish I could sit there and point to 1 market or 1 application. But, again, I think I said this before, I cut it by market, I cut it by product, I cut it by OEM versus distribution. It's broad-based. And we continue to watch because I think 1 of the things that we're just cognizant of here is that we don't want to be adding capacity for what I would call our transient orders, where we get orders for commoditized product because the other guys lead times go really long. Well, I think we see a couple of examples of this. That is not the majority of the bookings that we're getting. It's pretty sustainable, long-term type stuff. And what you're starting to see, even in July, I've already looked at the bookings for the first 20-some days of the month. Bookings are strong again in July. So we're having very strong, strong -- and again, it's in industrial, defense, medtech, we know about the deliveries on the energy order. So I think when I look at it across the board, we're -- we've got a lot of great design wins. We got a lot of great product portfolio. Our product portfolio is really well positioned and I feel really good about where we are with our products. So I wish I could point to 1 thing, but I look again, by market, direct versus distribution by product, everything is up.
Bob Labick : That's wonderful. That sounds great. And then I guess, just for a follow-up. Obviously, in the release you discussed next year being potentially above the organic targets? And also in the Investor Day, you talked about M&A over time. It's been part of the business model as well. Can you talk about the environment out there? It feels like you have so much ahead of you organically. So are you taking a back seat on M&A? Or is there stuff to look at? What's the market like for you right now?
Jeffrey Niew : No, I wouldn't say we're taking a back seat on M&A. I would say we're being very selective in M&A. I mean we want to make sure that if you look back over 2 years ago, the Cornell deal for us is a home run. I mean, that is a real home run. And we're looking for something that can be additive to what we do. The 1 plus 1 equals 3, I know that's a corny thing that everybody says. But with the organic growth opportunities that we have, and I think we'll probably end up doing an Investor Day sometime in the first half of next year, we really want to start like letting out more detail on these growth platforms, whether it be energy or the Micro Solutions Group or inductors or downhole applications. There's a lot of stuff to talk about here that we can see driving growth in the future that isn't driving a tremendous amount of growth this year beyond the energy. And so I think we're being pretty selective, we've looked at a lot of stuff. I'm not going to sit there and say we're not looking. I've got 3 full-time people internal who work on this. And you obviously know we're generating a lot of cash. Our cash flow is going to be strong again this year. And so I think if we find the right deal, we will move forward on the right deal.
John Anderson : And Bob, absent M&A, we'll continue our capital allocation program of buying back shares, and we still have some debt to pay down. We're in a little over $100 million of debt at 5.25% interest. So we can still get some EPS benefit by using that cash to pay down debt.
Operator : Your final question from the line of Anthony Stoss with Craig-Hallum.
Anthony Stoss : Jeff, John, Sarah. Nice execution really. Jeff, I wanted to focus in on your commentary about definitely more bullish on the military defense, it came in stronger. And that you said over the midterm, it could accelerate. What kind of visibility? Is it a multiyear visibility also shame on me for not knowing this, but I love just your guess what the splits are RF filter revenues versus capacitor? I've got to believe it's probably more capacitor, but any more color you can provide on the military defense side would be helpful.
Jeffrey Niew : Yes. So I would actually -- it's actually the opposite. Filters are a lot larger portion than capacitors.
John Anderson : Filter is roughly $80 million, 90% of that is defense.
Jeffrey Niew : Right. And then you've got -- in the capacitor business, I don't have the exact numbers right here. But I would say the capacitor business is probably another $50 million of defense. I don't have it broken out by the product $40 million to $50 million...
John Anderson : But so well in, you're $125 million or so...
Jeffrey Niew : More than that. But I would say that the filter business is definitely growing very rapidly. And I would say the vast majority of that, as John said, is defense and sole source, the vast majority of that. I would sit there and say, we're getting more and more people coming to us saying we're expecting to see significant increases in volume over the next 24 to 36 months. We want to make sure we can secure capacity with you. And this is evidenced by we did receive a big order in July, not reflected in our book-to-bill from last quarter for over $15 million for a radar application -- this is an example. We won't start shipping on this $15 million until '27, and it's going to take us 36 months to deliver all that. So I think we're getting more visibility. I would say there's 3 things that I see that are going to drive an accelerated growth in defense. One is we'll see how this all plays out. The White House is proposing a larger defense budget significantly. But even if it's half the growth that they are talking about -- that would be significant for us. A lot of this is an electronic warfare. And -- but we wouldn't start seeing that increase in defense spending probably until late '27 into '28. Second, you've got the issue of -- you've got the issue of replacement of stocks. We've had a lot of discussions. We're expecting that some of the key programs we're on for and missile programs. The volumes could go up 2 to 4x what they are today. Again, not short term, this is probably going to be more in the, I would say, 1- to 2-year time frame as they ramp up. And then lastly, you've got a big push by the United States to increase defense spending in our allies in the U.S. allies. And that's not yet reflected in what we see today we're getting a lot more requests from the existing suppliers that we're at because I think these -- like whether it be Germany or France or whatever it may be, they don't have their own defense industry today. They may try to develop it over time. But in the short term, they're probably going to be buying more from the same people that we're selling to today. So I think it's definitely core activity is super high, design activity is super high. Orders are super high, but there is the possibility about a year from now or so, we're going to see an acceleration in this market.
Anthony Stoss : Wow, that's great to hear. And then my last question, I know, John, you called it out about higher gross margins for PD in the second half of this year. But just kind of broadly overall, you must have some pretty decent pricing power, if you want to take it. Just curious, your thoughts on gross margins kind of heading into next year.
John Anderson : Yes, Tony, sure. So the PD segment delivered gross margins about just 40.1% in Q2, and that was up more than 100 basis points from the second quarter of 2025. It was really driven by improved factory capacity utilization as we see the strong demand that Jeff talked about across all our markets and products. I think going forward, we clearly see an opportunity to further improve PD gross margins in the second half of this year, really driven by the pricing environment being favorable as well as mix and then continued increased factory overhead absorption. I'm not giving specific guidance, but we should be in the low 40% range in that PD segment in the back half of the year.
Jeffrey Niew : Yes. I think just one other thing, Tony, I think you're asking more a little bit about next year. I do think there's the opportunity to expand gross margins again in 2027 in this business. Now remember, some of this is going to be productivity. Some of this is going to be absorption of overhead. But I think the other thing is pricing. Because if you think about the pricing we do throughout the year, sometimes when we give a price increase, it's on the next order. And we don't -- and our lead times could be 20 weeks. So some of the pricing things that we're doing, actions we're taking today don't really hit the P&L until next year. So I think that's a thing, I just add 1 other thing. This is kind a little bit off the topic, but we are looking at spending, I think John mentioned on CapEx. We're definitely looking at taking up capacity in a number of areas in the PD segment for 2027. And we're going to keep this at that 5% of revenue for CapEx, but that's off a higher revenue number. So we are going to be spending a little bit more on an absolute basis on CapEx because we're just seeing, like, again, the bookings and the book-to-bill are so strong, it's so broad based.
John Anderson : Yes. The last thing I would just wrap up with, Tony, is as we've kind of pivoted to an industrial tech company, EBITDA is a really important metrics, even more important to us than gross margin. And we see a path based on what we just provided today is EBITDA margins will be in excess of 25% this year. We see a path over the next 2 to 3 years to get EBITDA margins close to 30%. And again, it's through gross margin expansion, but also through operating leverage. That's it.
Operator : There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
