Knowles Corporation

And welcome to the NOS Corporation First Quarter 2021 Financial Results Conference Call. At this time, all participants are in Arizona mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. With that said, here with opening remarks is Knowles, the Vice President of Investor Relations. Mike Knapp, please go ahead.

Thanks, Sunidra, and welcome to our Q1 21 earnings call. I'm Mike Knapp, and presenting with me on the call today are Jeff 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 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-K for the fiscal year ended December 31, 2020, 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 need to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's call can be found on our press release posted on our website at NOLS.com and in our current report on Quorum 8K filed today with the SEC. 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 here today. For Q1, we reported revenue of $201 million above the midpoint of our guidance and up 23% from the year-ago period on strong MEMS microphone demand in multiple end markets and improving trends to hearing health. Precision device revenues were in line with our expectations. Gross margins improved 330 basis points to 39%, and our earnings per share was above the high end of our guidance range at $0.29. Overall, another solid quarter highlighting our operating leverage as demand improves across a broad range of our end markets, coupled with our focus on high-value products to improve gross margins. Let me now provide some detail on the trends we are seeing by end market. In audio, sales were up 36% from the year-ago quarter, better than our expectations going into the quarter. We saw broad-based improvement year-over-year in the MEMS microphone sales across non-mobile and mobile end markets. sales to non-mobile applications were driven by work from home and remote schooling, as well as the ongoing trend towards applications requiring high-performance audio solutions. We expect these favorable trends to continue throughout 2021 and in the years to come. Since our last call, we made two new product announcements which support our focus on non-mobile applications. First, we announced AISonic Bluetooth Standard Solution, a new, complete development solution that enables fast and easy voice integration into Bluetooth devices. The development kit includes a null CSP coupled with multiple microphones to enable OEMs to build voice-activated calling, control, and far-field speech recognition capabilities into Bluetooth devices. We also announced earlier this month the availability of two new MEMS microphones for automotive applications. The new microphones are engineered to a higher standard of quality to support the increasing demands of the automotive market for hands-free calling, advanced voice assistance, and in-cabin noise cancellation. In mobile, stronger sales to Chinese OEMs and North American OEMs drove the majority of the year-over-year increase. Trends in Q1 were better than normal given the timing of product launches last year and improved demand from Chinese OEMs. In Q2, we expect demand in mold to decrease sequentially due to product cycle timing from last year's launches. While we expect sequential improvement in mobile for Q3, third-party data enhanced expectations for the second half of 2021 indicate that year-over-year rate of growth will moderate and be more aligned to what we have seen over the last few years. This validates our focus on faster growing non-mobile applications, which reduces our reliance on growth from the mobile market. For hearing health, shipments were slightly higher than expectations for the quarter. March data showed improved momentum in the VA hearing aid channel, indicating continued gradual improvement in the hearing aid market as vaccinations roll out and private practice audiologists remain open. While demand from the audiophile portion of this market remains soft versus pre-pandemic levels, we have seen some improvement and are optimistic we will see demand accelerate in the second half of the year. In precision devices, Q1 sales were down about 12%, as expected, as COVID continued to impact our med tech and defense end markets. At the same time, we saw record bookings in PD during the quarter, driven by improved demand in our defense and med tech and markets and sustained strength in demand from electric vehicles and industrial customers. This gives me increased confidence that we can grow precision devices revenue again this year as the med tech and defense end markets recover throughout the rest of 2021. We were off to a great start in 2021, and I believe our leadership positions across the markets we serve and our strategy to deliver high-value, differentiated solutions to a diverse set of growing end markets, positions as well for future growth. With that, I'll turn it over to John to expand on our financial results and provide the guidance for the second quarter. John? Thanks, Jeff. We reported first quarter revenues of $201 million, up 23% from the year-ago period, driven by increased shipments in the audio segments. Audio revenues of $163 million were up 36% due to increased shipments of MEMS microphones across multiple end markets and a recovery in the hearing health market to pre-pandemic levels. The precision device segment delivered revenues of $38 million in line with our expectations and down 12% from Q1 2020 levels as shipments into the med tech and defense markets were negatively impacted by COVID-19. First quarter gross profit margins were 39% at the high end of our guidance range and up 330 basis points versus the same period a year ago. Audio segment gross margins improved 470 basis points driven by favorable product and customer mix, higher factory capacity utilization, and lower factory spending. In the precision devices segment, gross margins were 150 basis points below the prior year capacity utilization. R&D expense in the quarter was $20 million, in line with expectations and audio, partially offset by higher incentive compensation costs and increased spending in MEMS microphones. SG&A expenses were $25 million, in line with our guidance. and down almost $9 million from prior year, driven by a $4 million reduction of legal expenses, reduced spending in intelligent audio, and the impacts of restructuring actions taken in the second quarter of 2020. For the quarter, adjusted EBIT margin was 17%. At the high end of our guidance range and up more than a year ago, driven by increased shipment volume, higher gross margins, and operating expense reductions.