Knowles Corporation

Good morning, and welcome to Knowles Corporation fourth quarter 2020 financial results conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during that time, you will need to press star and the number one on your telephone keypad. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star zero. With that said, here with opening remarks is NOLS Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks, Helene, and welcome to our earnings call. I'm Mike Knapp, and presenting with me on the call today are Jeffrey New, our President and Chief Executive Officer, and John Anderson, our Senior Vice President and Chief Financial Officer. Our call today will include remarks about future expectations, plans, and prospects for NOLS, 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, included but not limited to the annual report on Form 10-K for the fiscal year into December 31st, 2019, 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 NOLS 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 on our website at nols.com. and in our current report on Form 8-K filed with the FCC today, including a reconciliation to the most directly comparable GAAP measures. All references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also, we've made selected financial information available in webcast slides, which can be found in the IR section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results.

Jeff. Thanks, Mike. Thanks to all of you for joining us today. For Q4, we reported revenue of $243 million, up 18% sequentially, and up 4% from the year-ago period. As we mentioned in our pre-announcement release, stronger than expected MEMS microphone demand in multiple end markets and improving trends in hearing health solutions drove the upside. Gross margins improved 130 basis points to 38%, and our earnings per share was above the high end of our guidance range at $0.41. Overall, a very solid quarter where we saw improving demand in audio in combination with solid operational execution across our businesses. Now let me update you on current customer demand across our end markets. In audio, sales were up 22% from the prior quarter versus our expectations of more than 7%. In the second half of 2020, we saw broad-based sequential improvement in MEMS mic sales across mobile and non-mobile end markets. In mobile, stronger sales to North American and Chinese OEMs drove the majority of the increase as 5G phone shipments accelerated. Non-mobile applications also increased with sales into ear, IoT, and computing markets driven by work from home and remote schooling trends. We expect these trends in non-mobile applications to continue to be favorable for MEMS microphones in the first half of 2021. For hearing health, shipments were higher than expected going into the quarter, but remained lower than the year-ago period as COVID challenges persist. Data from the Hearing Industry Association shows that unit sales of hearing aids in the U.S. declined by 7.5% year-over-year in Q4, with only modest improvement in the V8 channels during the quarter. Under the umbrella of our hearing health business, we also sell high-performance microphones and speakers to premium audio companies as well as many smaller customers for a diverse set of niche applications unrelated to hearing health. One example is in-ear headset monitors used by musicians in live music performances. These type of customers have been severely impacted by COVID and account for the majority of the shortfall relative to pre-pandemic sales. We remain confident that the hearing health business will fully recover in the near future as the COVID vaccine becomes more widely available. In precision devices, Q4 sales were flat sequentially, as expected, as COVID continued to impact our med tech and defense end markets. Shipments of high-performance capacitors into the med tech market continue to be negatively impacted by COVID-related delays in elective surgeries. We are confident this market will recover as the vaccine becomes more widely distributed. In defense, COVID-related program blades were a drag on growth in 2020, but we are beginning to see a recovery as bookings in this market have improved in the last two months. These products have longer lead times, and we expect these shipments to begin to positively impact Q2. Overall, I was pleased we were able to grow precision device revenue in 2020 despite headwinds from the pandemic, with growth coming from electric vehicles, defense, and industrial, partially offset by MedTech. I anticipate we will return to more robust growth in PD as MedTech and defense markets recover. I'm very proud of our team's execution during these challenging times. We not only weathered an extremely difficult first half of 2020, we also took significant actions to improve our business. As our MEMS microphone business fully recovered in the second half of 2020, We saw the strong operating leverage and cash flow potential inherent in our business model, even while COVID is still having a negative impact on a number of our end markets. I believe the leadership position across the markets we serve and our strategy to deliver high-value, differentiated solutions to a diverse set of growing end markets will enable us to come out of this pandemic well-positioned to take advantage of future growth. In addition, we have several opportunities to improve our gross margin that I expect will drive additional earnings in 2021 and beyond. With that, I'll turn it over to John to expand on our financial results and provide guidance for the first quarter. Thanks, Jeff. We reported fourth quarter revenues of $243 million, up 18% sequentially and 4% from the year-ago period, driven by increased shipments in the audio segment. Audio revenues of $202 million were up 22% sequentially, due to increased shipments of MEMS microphones across multiple end markets and continued recovery in the hearing health market. The precision device segment delivered revenues of $41 million, flat sequentially and in line with our expectations. Fourth quarter gross profit margins were 38%. At the high end of our guidance range and up 130 basis points sequentially, audio segment gross margins improved 260 basis points, driven by higher factory capacity utilization and lower cost, as well as favorable product mix related to increased shipments into the hearing health market. In the precision devices segment, gross margins were lower sequentially due to lower factory capacity utilization and unfavorable product mix. R&D expense in the quarter was $20 million, up $1 million sequentially, as higher incentive compensation costs and a non-recurring supplier payment was partially offset by reduced spending in intelligent audio. SG&A expenses were $27 million flat sequentially and $2 million above our guidance due to higher incentive compensation costs. For the quarter, adjusted EBIT margin was 18% at the high end of our guidance range and up 430 basis points sequentially, driven by increased shipment volumes, higher gross profit margins, and improved operating leverage. EPS was $0.41 above our guidance range due to higher revenue and gross margins and a $0.03 discrete tax benefit, partially offset by higher incentive compensation costs. Further information, including a detailed reconciliation of GAAP to non-GAAP results, is provided in the financial tables of today's press release and can also be found on our website at Knowles.com. Now I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $148 million at the end of Q4. For the fourth quarter of 2020, cash generated by operations of $76 million was a record high and well above our guidance range due to higher EBITDA and lower than expected net working capital. Capital spending was $12 million in the quarter. For full year 2020, cash generated from operations was $128 million and free cash flow was 96 million, representing more than 12% of revenues. We exited the year with net debt of less than 25 million and repurchased 1.1 million shares in 2020. Moving to the first quarter of 2021, we expect total company revenue to be between 190 and 210 million, up 23% at the midpoint versus the same period a year ago. Revenue from the audio segment is expected to be up approximately 35% from Q1 2020 due to increased MEMS microphone shipments into non-mobile applications as work from home and remote learning trends continue. In addition, we expect higher mobile microphone demand at both our largest customer and Chinese OEMs. Precision device revenue is expected to be down approximately 12% over prior year levels driven by defense project pushouts and the continued impacts of COVID-19 on elected medical procedures, specifically for implantable devices. As Jeff noted, defense bookings have strengthened over the last two months, and we're optimistic about growth in this market in 2021. We estimate gross margins for the first quarter to be approximately 37% to 39%, up 230 basis points from the year-ago period. driven by increased audio demand and improved factory capacity utilization in our MEMS microphone business, partially offset by price erosion and unfavorable FX impacts. R&D expense is expected to be between $19 and $21 million, down $2 million from prior year levels due to a reduction in spending related to intelligent audio products, partially offset by increases in MEMS microphone and precision device spending. We're projecting selling and administrative expense to be between $24 and $26 million, down $9 million from the year-ago period due to a $4 million reduction in legal expense and the impact of restructuring actions taken in the second quarter of 2020. We're projecting adjusted EBIT margin for the quarter to be in the range of 13% to 17% and expect EPS to be within a range of $0.23 to $0.27 per share. This assumes weighted average shares outstanding during the quarter of $95.1 million on a fully diluted basis. We're forecasting an effective tax rate of 14% to 18% for the quarter. Please refer to our press release and to our Form 8K filed today with the FCC for a GAAP and non-GAAP reconciliation. For the quarter, we expect cash generated by operations to be between $25 and $35 million and capital spending to be approximately $10 million. I'll now turn the call back over to Jeff for closing remarks, and then we'll move to the Q&A portion of the call. Jeff? Thanks, John. Our company remains uniquely positioned across a diverse set of end markets poised to grow over the next several years. We remain the leader in hearing health solutions and expect recovery to 2019 levels in the next few months. In MEMS likes, we expect non-mobile applications to drive future growth and the mobile market stabilized as more 5G phones introduced. For precision devices, we expect revenue to grow in 2021, driven by continued momentum in defense and electric vehicles and recovery in the medtech market. As we look further into 2021 and our markets continue to recover, I believe we can drive shareholder value by delivering earnings and cash flow above pre-COVID levels. Operator, we can now take questions.