Knowles Q4 2024 Earnings Report

Knowles EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.23
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: N/A

Knowles Revenue Results

• Actual Revenue: $142.50 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Knowles Announcement Details

• Quarter: Q4 2024
• Date: 2/13/2025
• Time: After Market Closes
• Conference Call Date: Thursday, February 13, 2025
• Conference Call Time: 4:30PM ET

Knowles (NYSE:KN) offers capacitors, radio frequency (RF) filtering products, balanced armature speakers, micro-acoustic microphones, and audio solutions in Asia, the United States, Europe, other Americas, and internationally. It operates through three segments: Precision Devices (PD); Medtech & Specialty Audio (MSA); and Consumer MEMS Microphones (CMM). The PD segment designs and delivers film, electrolytic, and mica capacitor products for use in power supplies and medical implants; electromagnetic interference filters; and RF filtering solutions for use in satellite communications and radar systems for defense applications. The MSA segment designs and manufactures balanced armature speakers and microphones for the hearing health, audio, and True Wireless Stereo (TWS) markets. The CMM segment designs and manufactures micro-electro-mechanical systems (MEMS) microphones and audio solutions used in applications that serve the ear, mobile, TWS, Internet of Things, computing, and smartphones markets. The company serves the defense, medtech, electric vehicle, industrial, communications, and consumer electronics markets through original equipment manufacturers, their contract manufacturers, suppliers, sales representatives, and distributors. Knowles Corporation was founded in 1946 and is headquartered in Itasca, Illinois.

Knowles Q4 2024 Earnings Call Transcript

Key Takeaways

• Knowles delivered Q4 revenue of $143 million and non-GAAP diluted EPS of $0.27, both within guidance, while generating $35 million in operating cash flow.
• On a continuing operations basis, full-year 2024 revenue grew 21% and non-GAAP EPS grew 32% from 2023, driven by strength in medtech, specialty audio and the addition of film, mica and electrolytic capacitors from the Cornell acquisition.
• The specialty film capacitor line faced a >$3 million shipment shortfall due to plant consolidation and ramp-up delays, but output is expected to improve through H1 2025 and is supported by a new >$75 million energy-sector order with initial shipments in 2026.
• The MedTech & Specialty Audio segment grew 8% in revenue and 13% in adjusted EBIT for 2024, led by hearing-health demand and anticipated pricing gains of $2–3 million in 2025.
• Knowles generated $130 million of operating cash flow in 2024, exited the year with net leverage of 0.6× and secured board authorization for an additional $150 million in share repurchases, targeting >15% of revenue in cash flow for 2025.

Presentation

[Operator]

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knowles Corporation Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

[Operator]

After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Sarah Cook. Please go ahead.

[Sarah Cook, Vice President, Investor Relations at Knowles]

Thank you, and welcome to our fourth quarter and full year twenty twenty four earnings call. I'm Sarah Cook, Vice President of Investor Relations and presenting with me today are Jeffrey New, 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 ks for the fiscal year ended 12/31/2024, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.

[Sarah Cook, Vice President, Investor Relations at Knowles]

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 measures referenced during today's conference call can be found in our press release posted at our website at nolas.com and in our current report on Form eight ks filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non GAAP continuing operations basis unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the Investor Relations section of our website.

[Sarah Cook, Vice President, Investor Relations at Knowles]

With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

[Jeffrey Niew, President & CEO at Knowles]

Thanks, Sarah. And thanks to all of you for joining us today. For the prepared remarks, we will provide our normal commentary on Q4 results as well as what we're seeing in our markets for Q1 and beyond. I will also summarize some highlights in 2024, turn the call over to John to provide financial details on Q4 and guidance for Q1 and then close with some exciting things we have going on, which gives us confidence in 2025 being another year of revenue and EPS growth with continued strong cash flow. I think it's also important to note that with the completion of the sale of the consumer MEMS microphone business in late twenty twenty four, there is a significant amount of historical financial information being released for our continuing operations in both the 10 ks as well as the supplemental slides associated with this call.

[Jeffrey Niew, President & CEO at Knowles]

This is the first time we've been writing this information, and it demonstrates the revenue and earnings growth of our business. Now turning to results. For the fourth quarter, revenue of $143,000,000 was within the guided range. Non GAAP diluted EPS of $0.27 was also within the guided range, and we delivered cash from operations of $35,000,000 inclusive of CMM. The revenue and earnings shortfall to the midpoint in Q4 was driven entirely by challenges in a plant consolidation and ramping production of new products within our specialty film capacitor line, not from a lack of shippable orders.

[Jeffrey Niew, President & CEO at Knowles]

I will provide more detail on these challenges in my commentary within the precision device section. For the full year, on a continuing operations basis, revenue grew 21% and non GAAP diluted EPS grew 32% from twenty twenty three levels, driven by the strength in medtech and specialty audio and the addition of film, mica and electrolytic capacitors from Cornell to our product portfolio. Now for our segments. In Q4, medtech and specialty audio revenue grew 9% sequentially when it was flat on a year over year basis. 2024 revenues grew by 8% and adjusted EBIT by 13% from 2023 levels.

[Jeffrey Niew, President & CEO at Knowles]

By partnering with our customers to create innovative solutions, enhancing the performance of their products, we continue to drive growth. This coupled with our ability to leverage our fixed overhead drove adjusted EBIT growth. I continue to be very excited about the opportunities we have in MSA segment ahead of us and expect another year of growth in 2025 as we continue to introduce new innovative custom solutions to our customers and be a world class manufacturer of these products. We're also beginning to see new opportunities to accelerate growth beyond 2025 by leveraging core competencies in medical markets, and we'll share more on this later this year as we close new design wins. In the Precision Device segment, Q4 revenues grew 4% year over year.

[Jeffrey Niew, President & CEO at Knowles]

As I stated earlier, challenges with shipments in specially built capacitor products resulted in a greater than $3,000,000 shortfall in our shipment plans. There were two causes. First, as part of our synergies from an acquisition from the acquisition of Cornell, we were consolidating facilities for specialty film to improve margins. Even though the production transfer was completed in Q4, it took longer than expected and resulted in shipment challenges. With delays in production transfers and the order book in specialty film consisting of numerous new custom products ramping at once, we fell short of our shipment targets.

[Jeffrey Niew, President & CEO at Knowles]

Shipments are expected to improve throughout the first half of twenty twenty five. I have confidence in the team who will resolve the production challenges, and I'm very excited about the demand we have for these custom specialty film products. We expect this product category to drive meaningful growth in 2025 and beyond. What gives me confidence in significant growth for this product line is all the new customers and products that are coming to market and one in particular that will drive significant growth in 2026. We received an order this month for more than $75,000,000 with a sizable prepayment for a new customer in the energy sector.

[Jeffrey Niew, President & CEO at Knowles]

We expect at least $25,000,000 of this order to ship in 2026. We will provide additional details about this exciting work and the rest of the opportunities ahead of us throughout 2025. For the rest of the Precision Device segment, revenue was in line with expectation. In Q4, PD demonstrated a noticeable acceleration in orders from Q3, driven by medical and defense, with both markets having their strongest bookings quarter of the year. It's noteworthy that our distribution book to bill trend was positive in Q4 as we're finally seeing signs of abatement of excess gels inventory in the industrial end markets.

[Jeffrey Niew, President & CEO at Knowles]

For Precision Devices, on a full year basis, revenue grew 36% compared to 2023 as our capacitor portfolio expanded with the addition of Cornell. An additional twenty twenty four highlight, which John will go into more detail, is about our cash from operations. Our continued robust cash generation coupled with our strong balance sheet gives us optionality of capitalizing on M and A opportunities and returning capital through share buybacks. The board continues to be supportive of our share buyback program, authorizing an additional $150,000,000 in capacity to repurchase stock. Before moving on, I would like to touch on the fluid tariff situation we are all hearing so much about.

[Jeffrey Niew, President & CEO at Knowles]

First, the sale of CMN significantly reduced our manufacturing footprint in China as well as our exposure to the China markets. On a continuing operation basis in 2024, approximately 5% of revenue could be subject to tariffs on importing goods from either China or from Mexico. While the exposure, as we understand today, is limited, we will continue to explore alternatives to mitigate the impact of these tariffs. Now let me turn the call over to John to detail our quarterly results to provide Q1 guidance. After hearing from John, I will share my thoughts on 2025 in Vienna.

[John Anderson, SVP & CFO at Knowles]

Thanks, Jeff. We reported fourth quarter revenues of $143,000,000 up 2% from the year ago period and within our guidance range. EPS was $0.27 in the quarter, up $0.05 or 23% from Q4 of twenty twenty three, also within our guidance range. In the medtech and specialty audio segment, Q4 revenue was $70,000,000 flat compared with the year ago period. On a full year basis, revenue in the medtech and specialty audio segment increased by 8% over prior year levels, driven by increased shipments into the hearing health market.

[John Anderson, SVP & CFO at Knowles]

Q4 gross margins were 51.4%, down 130 basis points versus the year ago period, driven by lower average pricing on mature products and higher factory cost. The Precision Devices segment delivered fourth quarter revenues of $73,000,000 up 4% from the year ago period. Shipments of high performance capacitors were lower than expected due to a slower than expected ramp up of our specially film product line. As Jeff noted, we have a strong backlog for this product line and we expect production output to increase throughout the first half of the year, driving a return to total company revenue and earnings growth beginning in the second quarter. Segment gross margins were 38%, up two forty basis points from the fourth quarter of twenty twenty three as factory productivity improvements in our legacy Precision Device business were partially offset by higher scrap cost and production inefficiencies as we ramp up the specialty film product line.

[John Anderson, SVP & CFO at Knowles]

On a total company basis, R and D expense in the quarter was $9,000,000 up $1,000,000 from Q4 of twenty twenty three, driven by increased investments in both the MedTech and Specialty Audio and Precision Device segments. SG and A expenses were $26,000,000 up $1,000,000 from prior year levels driven by higher incentive compensation costs. Interest expense was $3,000,000 in the quarter and flat with the prior year. Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $35,000,000 in cash from operating activities at the midpoint of our guidance.

[John Anderson, SVP & CFO at Knowles]

For full year 2024, we generated cash from operating activities of $130,000,000 Note that cash from operations for the three and twelve months ended December 31 includes $2,000,000 and $24,000,000 respectively generated by the consumer MEMS microphone business. Capital spending was 3,000,000 in the quarter. During the fourth quarter, we repurchased 1,300,000.0 shares at a total cost of 24,000,000 and reduced our debt balance by 23,000,000. We exited the quarter with a with cash of 130,000,000 and $2.00 3,000,000 of debt that includes borrowings under our revolving credit facility and an interest free seller note issued in connection with the Cornell acquisition. Lastly, our net leverage ratio based on trailing twelve months adjusted EBITDA was 0.6 times.

[John Anderson, SVP & CFO at Knowles]

For the full year, we repurchased 3,000,000 shares at a total cost of 54,000,000. In addition, the Board of Directors recently authorized 150,000,000 increase to our stock purchase plan. Moving to our guidance. For the first quarter of twenty twenty five, revenues are expected to be between $124,000,000 and $134,000,000 R and D expenses are expected to be between $8,000,000 and $9,000,000 selling and administrative expenses are expected to be within the range of $23,000,000 to $25,000,000 down $2,000,000 year over year on actions taken to reduce our fixed cost base in order to support the needs of our continuing operations. We're projecting adjusted EBIT margin for the quarter to be within a range of 16% to 18%.

[John Anderson, SVP & CFO at Knowles]

Interest expense in Q1 is estimated at $2,000,000 to $3,000,000 and includes non cash imputed interest and we expect an effective tax rate of 13% to 17%. We're projecting EPS to be within a range of $0.16 to $0.2 per share. This assumes weighted average shares outstanding during the quarter of 91,000,000 on a fully diluted basis. We're projecting cash utilized in operating activities to be within the range of $15,000,000 to $5,000,000 and capital spending is expected to be $4,000,000 Cash used in operating activities includes $12,000,000 to settle supplier obligations related to the consumer MEMS microphone business. We expect an additional payment of 12,000,000 in Q2.

[John Anderson, SVP & CFO at Knowles]

These payments represent substantially all remaining supplier obligations related to the CMM business. In conclusion, based on recent order trends and existing backlog, we expect to resume year over year revenue and earnings growth beginning in the second quarter of this year and expect to deliver operating cash flow of more than 15% of revenues from continuing operations for full year 2025. I'll now turn the call back over to Jeff to share his thoughts on '25 and beyond. Jeff?

[Jeffrey Niew, President & CEO at Knowles]

Thanks, John. Now let me close with some thoughts on the strategic positioning of the company. As I look forward, design activity has never been higher for the company. We have a healthy pipeline of new opportunities ramping into production in 2025 across our end markets. Starting with med tech, the end market for our hearing health products remains strong and our MSA business is expanding the product offering to our customers, positioning them for continued growth.

[Jeffrey Niew, President & CEO at Knowles]

In the defense market, our high performance capacitor business is seeing orders for new and expanding programs. Demand for our specialty film capacitors is high with shipments and orders for these products expecting significant growth through 2025. With this new $75,000,000 plus order in the energy sector, we expect even further acceleration of growth in 2026. As our operation teams, increase the output and customer deliveries in specialty film, we expect to see growth in both industrial and energy markets in 2025. Further, we believe the industrial end markets have stabilized as inventory levels within our distribution partners has started to decline.

[Jeffrey Niew, President & CEO at Knowles]

Based on all the activities we are experiencing, I'm confident our ability to grow revenue and profitability again in 2025. We ended 2024 with the sale of the consumer MEMS microphone business closing in late December. The sale culminates a strategic transformation we have been embarking on for a number of years. We strengthened our balance sheet, invested in our core businesses where we have higher returns, completed an acquisition that expanded our portfolio and our serviceable market and provided new growth vectors. Lastly, we returned capital to shareholders through stock buybacks.

[Jeffrey Niew, President & CEO at Knowles]

Knowles has been built on several pillars that guided us through this transformation and will guide us as we move forward. First, through deep engineering and customer application expertise, our high performance technologies drive us as we create new products that solve difficult problems in the real world. Second, after we customize these technologies to create solutions, we leverage our world class manufacturing operations to be a trusted, high quality supplier to a blue chip set of customers. Finally, we use our expertise to serve niche applications within large growing markets such as medtech, defense, industrial, electrification and energy. These fundamental pillars create value for our organization, our customers and our shareholders.

[Jeffrey Niew, President & CEO at Knowles]

For continued operations, we achieved a revenue CAGR of 12% over the past five years through a combination of organic growth and acquisitions as presented on Slide nine in the supplemental materials today. Our ability to differentiate our products coupled with our ability to leverage overhead allowed us to achieve adjusted EBITDA CAGR of 36% over the same period. I'm excited about the progress we've made to date in our future. I look forward to our investor forum, which we expect to host in Q2 of this year. There, I will go into further detail on our strategy and plans for future growth.

[Jeffrey Niew, President & CEO at Knowles]

Now, let me turn the call over to the operator for the Q and A session. Operator?

[Operator]

Thank you. We will now begin the question and answer session. We'll take our first question from Anthony Stoss at Craig Hallum.

[Anthony Stoss, Analyst at Craig-Hallum Capital Group LLC]

Hey, guys. Jeff, a couple of questions. I just wanted to focus in on you commented about pricing pressure. Is it in a particular segment or is it across kind of all the product lines? And then maybe for John, in terms of the inventory, I know you said it's starting to come down, but maybe you can give us a sense of how many months it still is and then I have one or two others.

[Jeffrey Niew, President & CEO at Knowles]

Yes. So, first on pricing pressure, I would sit there and say, generally speaking, in the Precision Device segment, I'd say pricing net net is a positive. I think we talked about the Cornell acquisition, how we've got about $5,000,000 to $6,000,000 of pricing increase in 2024. I would expect that we would probably have maybe in the neighborhood of $2,000,000 to $3,000,000 in Cornell in 2025. And in the rest of Precision Devices, I would say net net prices were positive.

[Jeffrey Niew, President & CEO at Knowles]

I would sit there and say there's been a little bit more pressure in the MSA business on pricing. Nothing that gets me overly worried. It's mainly on mature products, it's not about new products. It's really about product mix. And so I think we still are very confident, that Give Us a business will be north of 50% gross margin going forward

[Jeffrey Niew, President & CEO at Knowles]

just as it's been in the past.

[Jeffrey Niew, President & CEO at Knowles]

On the inventory, I think here's what I'd say. When we look back last quarter, I kind of talked about there being about six months' worth of inventory at the end of Q3 in the inventory in the distribution channel. We think that numbers come now down at the end of Q4 down to about 4% to 4.5%. And what I would say is, we had a pretty strong bookings quarter in Q4. Our bookings accelerated quite a bit in Q4 in the Precision Device segment.

[Jeffrey Niew, President & CEO at Knowles]

And looking at our flash reports already for Q1, January was also very strong in bookings as well. And that goes across not just distribution, but also with our OEM our direct OEM customers as well. So that's what's honestly giving us quite a bit of confidence in full year 2025 being another year of growth.

[John Anderson, SVP & CFO at Knowles]

Yes, Tony. In terms of inventory, just to clarify, Jeff's referencing the inventory at our customers, either distributors or OEMs versus our inventory. Our inventory is at a pretty normalized level. Yes.

[Jeffrey Niew, President & CEO at Knowles]

And I guess what I'd say is, again, six months at the end of Q3, '4 to '4 point '5 months at the end of Q4, We need to see it be below three months is where it needs to be. And so we'll see that where it ends at the end of this quarter. But I guess what gives me optimism, we're seeing a lot more orders from distribution that we weren't seeing in Q3, came in Q4 and actually already into January, we're seeing some pretty strong orders.

[Anthony Stoss, Analyst at Craig-Hallum Capital Group LLC]

Okay. And then just two follow ups. Jeff, you made a comment that on the specialty film that you have confidence that they'll get this fixed. Is it it's still ongoing? Is it another month or two?

[Anthony Stoss, Analyst at Craig-Hallum Capital Group LLC]

Or how long do you think before that's fixed? And then maybe, John, can you just remind us what the consumer business did on an annual revenue basis?

[Jeffrey Niew, President & CEO at Knowles]

So, on specialty film business, we're definitely going to see sequential improvement in output, but it's not yet in Q1 where we want it to be. I think it's probably going to take us into the fully into the second quarter near the head of the first half in order to really start catching up. I mean, that's I think where we're at. But I think what the real positive here is, Tony, is, we have a big backlog of orders for shipment already in 2025. This is a really exciting area for us in terms of applications, especially film area.

[Jeffrey Niew, President & CEO at Knowles]

And I think what also gives us really excited about is and we called it out in the press release is we got a 75 order already in Q1. I know it doesn't start shipments till 2026, but this is a real order. We got a pretty significant and millions of dollars prepayment to start ramping this up. This is going to be a very big product line for us going forward. And we'll talk more about it as we get closer to

[Jeffrey Niew, President & CEO at Knowles]

the shipment dates.

[John Anderson, SVP & CFO at Knowles]

Yes, Tony, in response to your question on the CMM revenues for the period January 24 through December 27 when we closed, roughly $260,000,000 Got it.

[Anthony Stoss, Analyst at Craig-Hallum Capital Group LLC]

Thanks, guys. Appreciate it.

[Operator]

We'll go next to Bob Labick at CJS Securities.

[Bob Labick, President at CJS Securities]

Hi, good afternoon. Thanks for taking our questions. Hey, Bob. Hey, so looking at, we'll call it Knowles two point zero, we estimate maybe 40% of revenues are going to come from med tech, forty percent industrial and 20 defense. But the industrial is the harder one to break down.

[Bob Labick, President at CJS Securities]

Can you give us a sense of the biggest end markets there and the trends kind of across those?

[Jeffrey Niew, President & CEO at Knowles]

Yes. Bob, I think you kind of see this. This is kind of like the story of it's a lot of the distribution business, right? And where we estimate that we ship it on an annual basis to north of 30,000 customers. I think one of the beauties of this market is we don't really have reliance.

[Jeffrey Niew, President & CEO at Knowles]

And that's areas where we think because we have so many smaller customers, we have a pretty unique opportunity here to continue to look at strategic pricing in this area. What I would say again, kind of what I said earlier is we are starting to see a stabilization. And if I look at our industrialdistribution business, I think we believe right now what we see is we've kind of hit the bottom on that and we're starting to rise sequentially in Q1, not to the extent yet where we want to be yet, but the bookings trend is in the right direction. And I think that's what we're kind of looking at, Bob. And so it's really hard.

[Jeffrey Niew, President & CEO at Knowles]

I think we can kind of lay out a lot of these different markets, but there's no one market that really does like is very, very large for us in the industrial sector.

[John Anderson, SVP & CFO at Knowles]

Yeah.

[John Anderson, SVP & CFO at Knowles]

I'd say a couple areas that we play in are automation areas, HVAC areas, downhole pumps in the energy. But semiconductor equipment, there's semiconductor equipment.

[John Anderson, SVP & CFO at Knowles]

I mean, there's a lot of markets in here. I mean, like not just like two or three, there's quite a few markets we're in.

[Bob Labick, President at CJS Securities]

Okay, great. And then obviously, you mentioned the new specialty film products, and the impact on the quarter and whatnot. Maybe give us a little more color on that product, what areas that's going to be sold in? And then R and D investments in general, obviously, if you're rolling out new products, we should see some acceleration in growth going forward as you've talked about. So give us a sense of what the R and D and innovation is being spent on.

[Jeffrey Niew, President & CEO at Knowles]

Yes. So, I mean, I think what we have a core in especially film area, we have a core capability. And the applications that we're selling into is what we call pulse power applications. It's applications that require a significant amount of energy in a very, very short period of time. And, what they're doing is this application is buying a lot of capacitors, fully charging them and then releasing the energy all at once.

[Jeffrey Niew, President & CEO at Knowles]

It's a very unique capability that we have, and we're ramping this up. Again, I feel very confident about the shipments from this order starting in 2026, we'll be ramping this up. But you can kind of see that right now we're ramping up for a whole bunch of smaller customers and then we have this one big customer who's going to drive a lot of growth in 2026.

[Bob Labick, President at CJS Securities]

Got it. Okay, great. Thank you very much.

[Operator]

And that concludes the question and answer session. Thank you for your participation in today's conference. You may now disconnect.

Participants

Executives

• Sarah Cook, Vice President, Investor Relations
• Jeffrey Niew, President & CEO
• John Anderson, SVP & CFO

Analysts

• Anthony Stoss, Analyst at Craig-Hallum Capital Group LLC
• Bob Labick, President at CJS Securities