KN Q3 Deep Dive: Design Wins and Specialty Film Expansion Drive Outlook

Electronic components manufacturer Knowles (NYSE:KN) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 7.3% year on year to $152.9 million. Guidance for next quarter’s revenue was better than expected at $156 million at the midpoint, 1.1% above analysts’ estimates. Its non-GAAP profit of $0.33 per share was 7.3% above analysts’ consensus estimates.

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StockStory’s Take

Knowles delivered a third quarter that surpassed Wall Street’s expectations, with management highlighting strong design win momentum and execution in both core segments. CEO Jeffrey Niew attributed the company’s performance to robust growth in the Precision Devices segment, particularly accelerated demand from defense, industrial, and electric vehicle markets. He emphasized that increased customer engagement around new applications—especially in areas requiring high-performance capacitors and RF microwave solutions—boosted revenue and supported improved operating margins. Management pointed to normalized channel inventories and sustained operational discipline as additional factors strengthening the quarter’s results.

Looking ahead, Knowles’ guidance reflects management’s confidence in continued top-line and earnings growth, driven by specialty film capacity expansion and a healthy pipeline of new orders. Niew expects the specialty film line to ramp significantly in the coming quarters, fueled by large energy sector contracts and growing demand in medical and defense applications. CFO John Anderson noted that sequential margin improvements are anticipated as higher utilization rates offset elevated start-up costs, stating, “We expect gross margins to improve quarter-to-quarter as the specialty film business scales up.” Management’s outlook is underpinned by an expectation of high-single-digit organic growth, supported by design wins and ongoing investment in advanced manufacturing capabilities.

Key Insights from Management’s Remarks

Management cited robust demand in Precision Devices and new specialty film applications as primary factors behind Knowles’ performance, while highlighting the positive impact of operational improvements and normalized inventories.

• Precision Devices growth: Management reported that the Precision Devices segment experienced double-digit growth, with strong demand from defense, industrial, and EV customers. CEO Jeffrey Niew emphasized that design wins in electronic warfare and next-generation military systems were a key catalyst, as Knowles’ RF microwave solutions and specialized capacitors are increasingly specified for critical applications in radar, detection, and secure communications.
• Specialty film ramp: The company is expanding capacity to support a major energy sector contract and noted an active pipeline of additional specialty film orders. Specialty film capacitors are used in pulse power applications—such as defibrillators, radiotherapy, and experimental defense systems—requiring rapid bursts of energy, which management described as an emerging area of growth with applications expanding into new markets like downhole drilling.
• Normalized channel inventories: CFO John Anderson stated that channel inventories have returned to normal levels, allowing sales to better reflect true end-market demand. He noted that distribution bookings and backlog remain strong, with order activity particularly robust in defense and through distributor partners.
• Operational discipline and margin improvement: Knowles delivered year-over-year operating margin expansion, with Anderson highlighting sequential improvement in specialty film gross margins as production output and utilization improved. Management expects further margin gains as the specialty film line ramps and overhead costs are absorbed by higher volumes.
• Disciplined capital allocation: The company executed $20 million of share repurchases and reduced bank borrowings, maintaining a net leverage ratio of 0.6x. Management reiterated a focus on targeted M&A to complement organic growth, but emphasized that any acquisitions must be highly strategic and additive, reflecting a disciplined approach given the strong balance sheet.

Drivers of Future Performance

Management’s outlook centers on specialty film expansion, sustained design win momentum, and margin improvement as key drivers of growth over the next year.

• Specialty film capacity expansion: Knowles is bringing new specialty film production online to meet robust demand, with management expecting these products to generate over $55 million in revenue next year. This ramp is supported by a major energy sector contract and a growing backlog from medical and defense applications, positioning the segment as a primary engine of future growth.
• Design wins and customer diversification: The company anticipates high-single-digit organic growth, driven by continued success in securing design wins across defense, industrial, and electric vehicle markets. Management believes that application-specific product development, combined with closer customer engagement, will sustain this momentum and broaden the end-market mix.
• Margin improvement and risk management: Sequential gross margin gains are expected as specialty film utilization rises and start-up costs are absorbed. However, management acknowledged potential headwinds from volatile input costs—such as palladium—and noted that pre-purchasing strategies and pricing flexibility should mitigate near-term risk.

Catalysts in Upcoming Quarters

Over the next several quarters, our analysts are monitoring (1) the pace of specialty film production ramp and its contribution to overall revenue, (2) the realization of sequential margin improvements as capacity utilization rises, and (3) the conversion of recent design wins into large-scale, recurring orders across defense, medical, and energy markets. We will also watch for further updates on M&A activity and the company’s ability to navigate raw material cost volatility.

Knowles currently trades at $23.60, down from $24.01 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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