Knowles Corporation (KN) - Q2 2026 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2026. Knowles Corporation is a leading manufacturer of specialty electronic components, including high-performance capacitors, RF filters, and advanced medtech microphones. The company operates through two reportable segments: Precision Devices and MedTech & Specialty Audio. The results exclude the Consumer MEMS Microphones (CMM) business, which was sold to Syntiant Corp. in late 2024 and is reported as discontinued operations.
Key Financial Metrics (Six Months Ended June 30, 2026)
| Metric | 2026 (YTD) | 2025 (YTD) |
|---|---|---|
| Revenues | $319.9 million | $278.1 million |
| Gross Profit | $141.7 million | $113.9 million |
| Gross Margin | 44.3% | 41.0% |
| Operating Earnings | $40.6 million | $18.7 million |
| Net Earnings | $29.1 million | $5.8 million |
| Diluted EPS (Continuing Ops) | $0.34 | $0.08 |
| Operating Cash Flow | $27.5 million | $37.7 million |
| Long-Term Debt | $131.0 million | $114.0 million |
| Cash and Equivalents | $49.6 million | $103.2 million (end of period 2025) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 15.0% year-over-year (YTD), driven by a 21.5% increase in the Precision Devices segment (industrial, electrification, defense demand) and a 7.4% increase in MedTech & Specialty Audio (hearing health volumes).
- Profitability Expansion: Operating earnings more than doubled to $40.6 million. This was aided by the absence of a $3.6 million impairment charge recorded in Q2 2025 and improved factory capacity utilization.
- Cost Structure: Cost of Goods Sold (COGS) rose 11.2%, primarily due to higher shipping volumes and production transfer costs in the ceramic capacitor business. Selling and administrative expenses increased 7.5% due to higher commissions and headcount additions.
- Interest Expense: Net interest expense decreased significantly ($3.2M vs $5.2M) due to the full repayment of the Seller Note from the Cornell Dubilier acquisition in late 2025.
- Working Capital: Operating cash flow decreased to $27.5 million (from $37.7M) due to increased inventory levels ($23.3M outflow) and receivables, partially offset by higher net earnings.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects 2026 capital expenditures to be approximately 5% of revenues, driven by capacity expansion in the Precision Devices segment.
- Share Repurchases: The company has $106.5 million remaining under its $400 million share repurchase authorization. It repurchased $22.5 million of stock in the first half of 2026.
- Tariff Environment: The company notes a dynamic tariff environment. While a Supreme Court ruling in February 2026 invalidated certain IEEPA tariffs, refunds received were not material as only a small percentage of products were subject to them.
- Risks: Key risks include global economic instability, geopolitical tensions (specifically mentioning the conflict with Iran), supply chain disruptions, and dependence on a limited number of large customers.
Investor Verification Checklist
- Inventory Build: Verify the rationale for the $22.5 million increase in inventory (from $124.6M to $147.1M) and its impact on future working capital needs.
- Production Transfer Costs: Monitor the trend of "production transfer costs" ($1.7M YTD 2026 vs $0.4M YTD 2025) as these are non-recurring costs associated with migrating manufacturing.
- Discontinued Operations: Confirm the finality of the CMM sale adjustments, which resulted in a $0.6 million loss YTD 2026 due to tax liability updates.
- Debt Covenants: Review compliance with the Revolving Credit Facility covenants (Interest Coverage Ratio, Total Net Leverage Ratio), though the company states it is currently in compliance.
- Non-GAAP Reconciliation: Review the reconciliation of Non-GAAP Adjusted EBIT ($66.2M) to GAAP Operating Earnings ($40.6M) to understand the impact of stock-based compensation and amortization.