Knowles - Q4 2025

Transcript

Operator (participant)

Good day, everyone, and welcome to Knowles Corporation's fourth quarter. I would like to hand the conference over to Ms. Sarah Cook. Please go ahead, Sarah.

Sarah Cook (VP of Investor Relations)

Thank you, and welcome to our fourth quarter and full year 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations, 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 including 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 current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, including but not limited to December 31st, 2024, periodic reports filed 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 requested.

Any non-GAAP financial measures 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 and Form 8-K 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, with the exception of cash from operations or 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. Jeff?

Jeffrey Niew (President and CEO)

Thanks, Sarah, and thanks to all of you for joining us today. 2025 was a breakthrough year for Knowles, marked by the completion of our portfolio transformation at the end of 2024 and the beginning of our journey as an industrial technology company. Exceeded our Investor Day expectations and demonstrates 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. Before I discuss 2025 results, 2024 was another quarter of strong financial performance. Revenue was $162 million, up 14% year-over-year, exceeding the high end of our guided range. EPS was $0.36, up 33%. Cash from operations was $47 million, also exceeding the high end of our guided range. On a full year basis, revenue was $593 million, up 7% year-over-year, and EPS was $1.11, up 21%.

I believe our results continue to demonstrate that our focus on markets and products will be of significant competitive advantages, resulting in increased organic growth and positions us well for future growth. Now turning to our segment results. In Q4, MedTech and Specialty Audio revenue was $73 million, up 4% year-over-year. Full year revenue was $264 million, up 4% from 2024, and at the high end of the organic growth target of 2%-4% we presented at our investor day in May last year. In hearing health, Knowles is known for its superior technology and reliability. Our customers depend on our ability to deliver unique solutions to improve comfort of fit and performance with extremely low power. Our unique solutions are allowing us to win next-generation designs for MEMS microphones as well as balanced armature speakers.

We also see the opportunity to increase our content for device in next-generation hearing health products. Beyond the hearing health market, we remain. That we detailed at our Investor Day. In the Precision Devices segment, Q4 revenue was $90 million, up 23% year-over-year. As channel inventory levels are now normalized and orders are matching end-market demand, we saw strength across all our key end markets, leading to an acceleration of revenue in the second half of the year. Full year revenue grew 10% year-over-year, exceeding the high end of the organic growth target of 6%-8% we presented at our Investor Day in May last year. Within Precision Devices, as I stated earlier, we saw growth in all our end markets: MedTech, Defense, Industrial, EV and Energy, with revenue growing year-over-year. Let me provide a little color by end markets.

Repeat orders and production spanning across multiple product lines such as high-performance ceramic capacitors and pulse power film capacitors. The number of medical devices being used to extend life expectancy and to ensure sustained quality of life is on the rise. A multitude of implantable devices, medical imaging, and life-extending treatments. Our Defense business continues to be strong. As a sole-source supplier on a number of key programs, order volumes continue to grow. As I mentioned on our last. Serve a wide variety of military applications, spanning from radar to communications to munitions. Defense spending is increasing and shifting toward electronic warfare, where our products are in high demand. In the Industrial markets, we have seen inventory levels increase. Performance ceramic film electrolytic capacitors serve a diverse set of applications, from robotics to welding and induction heating in the industrial sector.

The Energy market continues to be an exciting opportunity for growth in 2026 and beyond, with high-volume pulse power capacitors late in the second quarter of this year. On a more quantitative basis, we saw another quarter of healthy bookings with a book-to-bill greater than 1x. Collaboration with our customers has led to robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions. This gives me confidence in our ability to continue to grow revenue throughout 2025. We are using unique technologies, creating custom products through our customer application intimacy, and then scaling into production with our world-class trends. Our 2025 results demonstrate this is a winning combination, leading to revenue and EPS growth on a year-over-year basis. I would like to reiterate what I had previously said. I'm excited about the momentum and strength of our business.

We have entered 2026 positioned well for continued strong organic revenue growth above historic levels. While the first quarter of the year is typically seasonally low, I expect to see strong year-over-year growth in the first quarter. New designs can increase demand for our products. Our organic growth and increasing EBITDA continues to produce robust cash generation, resulting in a very strong balance sheet, which will allow us to pursue synergistic acquisitions and continue to buy back shares well. To close, we are laser-focused on what we do best: designing custom-engineered products and delivering them at scale for customers and markets that value our solutions, positioning as well for growth in 2026 and beyond. Now let me turn the call over to John to detail our financial results and provide our Q1 guidance.

John Anderson (SVP and CFO)

Thanks, Jeff. We reported fourth quarter revenues of $162 million, up 14% from the year-ago period and above the high end of our guidance range. EPS was $0.36 in the quarter, up $0.09, or 33% from the year-ago period and above the midpoint of our guidance range. Cash generated by operating activities was $47 million, also above the high end of our guidance range, driven by both increased EBITDA and lower-than-expected working capital. In the MedTech & Specialty Audio segment, Q4 revenue was driven by increased shipment volume. On a full year basis, revenue increased by 4% over prior year levels, primarily to growth in Specialty Audio and an increase in shipment volume of stamped metal cans. Q4 gross margins were 51.9%, up slightly from the year-ago period, as expected, 50%. The Precision Devices segment delivered fourth quarter revenues of $90 million, up 23%.

10% over prior year levels, driven by strength across all. Throughout the back half of the year as inventory levels normalized at our distribution partners. Segment gross margins were 40.1%. 2024, as higher end-market demand and production volumes in ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. This was partially offset by higher scrap cost and production inefficiencies in connection with our specialty film line. For the full year, segment gross margins improved 140 basis points from 2024 levels, despite headwinds from our specialty film line. We experienced production volume increasing. The gross margin improvement. I'm confident in our ability to continue to improve segment margins further in 2026 in connection with our specialty film line. Are realized. Flat with Q4 2024 levels. SG&A expenses were $27 million, up $2 million from prior year levels, driven primarily by higher incentive compensation cost.

Interest expense was $2 million in the quarter. We used cash generated by operations to reduce our debt levels. Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $47 million in cash from operating activities, and capital spending was $15 million at a total cost of $10 million. We exited the quarter with cash of $54 million and $114 million of borrowings under our revolving credit facility. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA. Million as measured by cash plus unused capacity under our revolving credit facility. Before turning to our full year 2025 outlook and five-year target, full year revenue was $593 million and up 7% versus 2024, which was above the high end of our. Revenues exceeded the high end of our organic growth target of 4%-6%.

From a segment perspective, MedTech and Specialty Audio revenue grew by 4%, and Precision Devices revenue grew by 10%, with both segments meeting or exceeding the organic revenue growth targets of 2%-4% and 6%-8%, respectively. Adjusted EBITDA from continuing operations was $140 million, up 9% from 2024, driven by higher gross. Outlook range we provided. Cash from operations was $114 million, or 19.2% of revenues, above the midpoint of our full year outlook. Moving to our Q1 guidance. For the first quarter of 2025. And $153 million, up 12% 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 $25 million-$27 million. We're projecting adjusted EBIT margin for the quarter to be within the range of 18%-20%.

Interest expense in Q1 is estimated at $2 million, and we expect an effective tax rate of 15%-19%. We're projecting EPS to be within a range of $0.22-$0.26 per share, up $0.06, or 33% year-over-year at the midpoint. This assumes weighted average shares outstanding during a quarter of 88 million on a fully diluted basis. Range of -5% to 5 million. Capital spending is expected to be $10 million. We expect full year capital spending. Continue investments associated with capacity expansion related to the large energy order we received in 2025. Revenue, earnings, and cash flow growth in the fourth quarter and for full year 2025.

As we exited the year, we have a robust backlog and increased order activity, which gives me confidence in our ability to continue to achieve revenue, earnings, and cash flow growth, which is expected to drive shareholder value throughout 2026 and beyond. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator?

Operator (participant)

Thank you, sir. Everyone, if you would like to ask a question today, please press star one on your telephone keypad. Once again, that is star one if you have a question today. We'll take the first question from Christopher Rolland from Susquehanna.

Christopher Rolland (Senior Equity Analyst in Semiconductors)

Hi, guys. Thanks. Energy order and the thin-film capacitor products. I guess just first an update on new customers for that product. And if you could remind us on your capacity addition plans and timing of revenue and any TAM detail or something around that would be great as well. Thanks, Jeff.

Jeffrey Niew (President and CEO)

Yeah. Yeah. Yeah. So first, on the energy order, no different than we've kind of talked about earlier last year, which we expect this to be in the neighborhood of. Really getting going in the back half. Well, we should have it fully ramped in Q2. And so that's a lot of.

John Anderson (SVP and CFO)

By the end of Q2.

Jeffrey Niew (President and CEO)

Yeah. By the end of Q2. By the end of 2025 in the back half of the year. Overall, for the specialty film. Of the customer base, beyond some of the medical applications, Defib, radiotherapy, downhole fracking, military applications like railguns, there's a definite broadening. So that overall, including the energy order, our expectations, we're in that, I would say, $50 million-$65 million range for revenue off this product category in 2026. I think that still holds, that we're still in that range for this year. So specialty film line, including energy, really has a bright future as we look toward the future, Chris.

Christopher Rolland (Senior Equity Analyst in Semiconductors)

Excellent. Great. And then as we start thinking about the future, kind of what your next overall, do you have some prospects that you've identified organically or internally, some next kind of big hits. Besides, you did mention acquisitions. If you could give us. And speaking of valuation, are they reasonable?

Jeffrey Niew (President and CEO)

Yeah. I mean, obviously, it's very hard to comment specifically, but our pipeline continues to be good on the acquisition front. But to be honest with you, our next month looks pretty promising. And I'll just kind of go back to beyond the energy situation and the pulse power, especially film line, a couple of other things that we talked about on the Investor Day to give a brief update. First, on our microsolutions. Our existing capacity, our existing R&D capability that we use for our hearing health and putting that into other medical applications. I would say I'm incrementally more positive about this than I was, say, two quarters ago. We got a lot of new medical applications where we're collecting NREs at this moment that we should start ramping into higher volume production in 2027.

I mean, it's not going to generate a ton of revenue this year, but remember, these. And we're getting to the beginning of that three years in the 2027 year timeframe when we started this. So that's pretty positive. Defense spending, I just sit there and I see you read it every day. We're well-positioned with defense spending. That's more of a secular growth trend where we have some very differentiated products. And then lastly, I think we're doing some work in terms of ceramic caps, in terms of doing, I would say, in Defense under munitions. We're doing some assembly work. There's a lot of good stuff going on here. And so generally speaking, I think I've been pretty positive. We said our organic growth of 4%-6%. Our first year out of the gate, we're at 7%. I think.

Organic growth opportunities over the next 24-36 months.

Christopher Rolland (Senior Equity Analyst in Semiconductors)

Thank you so much, guys. Congrats.

Jeffrey Niew (President and CEO)

Yep.

Operator (participant)

The next question today comes from Anthony Stoss, Craig-Hallum.

Anthony Stoss (Senior Research Analyst)

Hey, Jeff, John, and Sarah. First off, John, maybe I missed it. Gross margin guide for March, I think in the past, you were thinking about 42%. Can you maybe just confirm that? And then I'm just curious what you think the June quarter gross margin might look like. If the ramp is going to occur until late Q2, does that spill into the June quarter gross margins? Thanks.

John Anderson (SVP and CFO)

Yeah, Tony, we kind of moved away as we transitioned to an industrial tech company. We kind of moved away from gross margin. So the focus on our guide is obviously revenue. Give a little detail on gross margin. We're at, call it, full year 2025. We're at 45%-50%. I think the MSA margins are going to kind of hold in that area in 2026, but there is potential for margin expansion, especially in the back half of 2026 as we get to higher production volumes or ramped up production volumes on that specialty film line. So I think there, again, there's an opportunity to increase above that 44.5% in 2026 by, call it, 50-75 basis points, but weighted toward the back half of.

Christopher Rolland (Senior Equity Analyst in Semiconductors)

I'm curious if you could kind of highlight the fastest growing markets or what you expect for 2026. I got to believe it's military, and I'm curious if you have exposure on the satellite side as well.

Jeffrey Niew (President and CEO)

We do have some exposure in the satellite, but just to comment, I think I mentioned on the bookings quarter. Even with that, the book-to-bill was 1.06x, even with that very strong shipment quarter. I think we're already through January. We had a very strong January bookings month as well. And so, in terms of our key markets being Defense, Med, Industrial, and then we put EV and Energy together, all of them are looking pretty strong right now. The bookings have been strong and supporting that. And so OEM versus distribution, same thing. Both our OEM business and distribution business is doing very well. And so Defense is doing well, but so is MedTech. Our MedTech business is doing well. You know the Energy story. And I think the one that we're seeing more and more momentum in is energy. Sorry. Sorry. Industrial.

We're seeing more momentum in Industrial than we did six months ago. I think that seems to be a pretty big positive change since the last six months.

Christopher Rolland (Senior Equity Analyst in Semiconductors)

Perfect. Congrats. Nice execution.

Jeffrey Niew (President and CEO)

Thank you.

John Anderson (SVP and CFO)

Thanks, Tony.

Operator (participant)

The next question comes from Robert Labick from CJS Securities.

Will Gildea (Equity Research Associate)

Hey, this is Will on for Bob. I know you talked about the timeline of the energy orders, but can you talk more specifically about the production buildout? Has the new capacity been completed, tested? Where does it stand?

Jeffrey Niew (President and CEO)

Yeah. So it is obviously happening outside of Greenville, South Carolina. We have weekly calls. It's like every week there's something new. In the facility, the equipment's being moved in. We've got a team actually in Greenville from all over the world to help support this ramp-up. We're bringing in a manufacturing engineering team from across the globe to help with the ramp-up. So there's a lot going on. Plus, at the same time, we're still delivering low-volume units on this order. But the goal here is we're going to ramp this up 10x in the next five months from where we are today. So I think we're on track. A lot to be done here, but we're on track in order to get to, by the end of Q2, the full-volume production that we committed to.

Again, I think it depends on a lot about the auto orders and the rest of the specialty film business, exactly what we deliver on this energy order. But I think we're thinking in that $50 million-$65 million range from in the 2020s this year from 2025.

John Anderson (SVP and CFO)

Will, I will say, very modest amount in Q1. It will help drive sequential growth from Q1 to Q2 as we ramp up.

Jeffrey Niew (President and CEO)

Yeah. So I think that's a good point. I think, obviously, we're driven by the energy order, obviously.

Will Gildea (Equity Research Associate)

That's very helpful. Thank you. Can you remind us, can that capacity be used for other pulse power applications beyond the energy order if the demand arises?

Jeffrey Niew (President and CEO)

Yeah. I mean, how we're setting up. Same facility, but a little separated because the normal specialty line is much higher mix. This is essentially a low-mix production. And we're working on a lot of things that will make the standard specialty film line more productive over time too, like automation. We're doing a lot of things that will help longer term with the standard specialty film line. But we're setting them up right next to each other as opposed to trying to build one high-volume customer against more, I call, higher-mix customers.

Will Gildea (Equity Research Associate)

That's all from me. Thank you.

Operator (participant)

As a reminder, everyone, please press star one. If you have a question, we'll go next to Tristan Gerra from Baird.

Tyler Bomba (Equity Research Associate)

Hi. This is Tyler Bomba on for Tristan. Thanks for taking the questions. You've touched on it briefly already, but could you give us a more detailed update on the supply-demand dynamics in Industrial? Do you expect the second half to see Industrial revenue rebounding if the first half is kind of back to supply and demand balance?

Jeffrey Niew (President and CEO)

Yeah. So when I look at our numbers and our forecast here, I think we expect pretty strong Industrial shipments in the first half off of what was pretty strong in the back half of 2025. And then I would sit there and say, right now, the back half of the year looks.

John Anderson (SVP and CFO)

2025. For Industrial.

Jeffrey Niew (President and CEO)

For Industrial specifically. But overall, we expect growth for Industrial for the full year. So obviously, if you go back, Tyler, to when we were talking earlier last year, the first half in Industrial of. We're seeing a fair amount of growth in the first half of 2026. And then I think it's a little early. Industrial is a lot more turns business. The lead times are shorter. But right now, I think what I see here is it's going to be flattish.

Tyler Bomba (Equity Research Associate)

That's very helpful. A quick follow-up. We're starting to hear about shortages of components across the industry. Is this impacting your demand and second half?

Jeffrey Niew (President and CEO)

Well, I mean, we're always looking at price, Tyler. That dynamics that I think are going on. And we continue to see I mean, like I said in a previous question, with the book-to-bill, when we were having these strong book-to-bills in the front half of 2025, it was off of weak shipments. So. The Q4 numbers in terms of the revenue being $90 million, and we still booked at a book-to-bill of 1.06x. And I said, January's already in the books, and the bookings in January were already strong again. And so it's definitely a topic here about capacity, capacity utilization, pricing. We are starting to see some concerns as we enter towards the back half of the year that we got to make sure we're prepared for all the orders we're receiving. So I think if this demand continues at this rate.

Tyler Bomba (Equity Research Associate)

Great. That's all from me. Thanks.

Jeffrey Niew (President and CEO)

Great.

Operator (participant)

Everyone, at this time, there are no further questions. That does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.