Knowles Corporation

Quarter 2025 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 product, 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, 2024, 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 today's conference call, and NOLS declaims 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 today with the SEC. This will include a reconciliation to the most directable, 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. With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

Thanks, Sarah, and thanks to all of you for joining us today. Before I provide our commentary on the Q1 results and report on what we are seeing in our markets for Q2 and beyond, I would like to touch on the tariff situation we are all hearing so much about. Obviously, there's a lot going on in the markets over the last few weeks. It has been and continues to be fluid, and while I'm being cautious about how it could impact our business, I believe Knowles is well-positioned to continue to deliver growth in earnings and revenue despite the current tariff environment. The tariff situation can be easily explained by breaking things into three major areas that could affect NOLS. First, and most simply, our direct tariff exposure. That is a revenue that could be subject to tariffs. Generally speaking, NOLS is a proximity manufacturer, meaning the vast majority of product built in the U.S. is shipped within the U.S., and product built in Asia ships to customers in Asia. Based on this proximity manufacturing strategy and our associated footprint, we estimate that less than 5% of revenue are subject to the current tariffs. In our markets of MedTech, defense, and industrial, our expectation is we can pass these tariffs onto our customers without significant loss of business. Second, there's an indirect tariff exposure or impact on our sourcing of raw materials for our different manufacturing locations. We have a world-class global supply chain team that, when possible, procures materials geographically close to our production facilities. We believe that less than 3% of our cost of goods sold will be impacted by current tariffs. We also anticipate being able to recover substantially all tariff impacts through price increases and surcharges. Finally, there is an impact on our customers' end market demand. This is the most difficult to predict at this moment, and while no company will be immune to the effect of tariffs, I believe the markets we serve in medtech, defense, and industrial sectors will be relatively insulated from tariff impacts. Let me explain a bit. The applications that our products serve in the medtech market have traditionally been considered essential. Our capacitors are in implantable devices, imaging, and ventilators, to name a few. Hearing aids have also been considered essential devices. Our historical experience shows economic shocks and subsequent recessions can have modest short-term impacts on these markets, but tend to have very little impact over the course of a year. I also believe that the defense programs we participate in are secure. In the past, the RF filters and capacitors that we sell in the defense space have generally been insulated from economic downturns. Lastly, in the industrial market, it is and has been more sensitive than men tech and defense recessions. but we are not currently seeing any impact on demand. We are obviously monitoring this closely, as this could change based on the macroeconomic environment. Now I'll turn to our results. We started 2025 on solid footing in Q1, delivering revenue of $132 million at the high end of our guided range. EPS of $0.18 was at the midpoint of the guided range, and we delivered cash from operations exceeding the high end of the guided range. Turning to our segments, in Q1, MedTech and specialty audio revenue was $60 million, up slightly on a year-over-year basis and seasonally down from Q4. Hearing health revenue was seasonally down, which was offset by strength in our specialty audio business and our supply of metal cans in connection with the sale of the consumer MEMS microphone business. As it relates to the current tariff environment, Our historical experience shows that during times of economic uncertainty, there is often a short-term decline, followed by a rebound in demand in our hearing health business. By the way of example, in 2000, during the dot-com bubble burst, in 2008, during the financial crisis, and in 2020, during COVID, the market contracted for one or two quarters in response to the economic uncertainty, with demand returning quickly to normalized levels. This is evidenced by hearing health markets growing 2% to 3% annually over the last 20 years. That all being said, our backlog for the MedTech and specialty audio segment for Q2 is strong. Our partnership with our customers is leading to continued innovations, innovative solutions, enhancing the performance of their products. This coupled with our strong performance in the specialty audio business and new opportunities utilizing core competencies and medical markets leads us to continue to believe in our ability to grow throughout 2025 with year-over-year revenue growth accelerating in the second quarter. In the precision device segment, Q1 revenues was $73 million, flat to Q4. This was expected while we continue to work through production challenges in our specialty film line. Progress is being made. Our new prototype production line is up and running, improving the production flow. Yields are improving, and I have confidence in the team to continue to incrementally improve shipments throughout the first half of the year, with a larger ramp-up coming in the second half of the year. We are well-positioned for growth in 2025 as the specialty film line ramps to full production. Additionally, we have strong design and quoting activity, especially in medtech, defense, and EV markets with our ceramic capacitors. In Q1, bookings trends for precision device segment, independent of our previously announced 75 million plus energy order, was strong for the second consecutive quarter. The bookings strength was broad-based across most of our end markets as we believe inventory levels are normalizing. It's noteworthy that bookings and shipments to our distribution partners across all our capacitor products were favorable as we continue to see their inventory levels reducing. This gives me confidence in the precision device segment expected return to year-over-year growth in the second quarter of 2025. In the first quarter, we purchased $5 million in shares and reduced our debt level by $15 million as our cash generation from operations exceeds the high end of our guidance range. We expect to generate robust cash from operations throughout 2025. This will allow us to continue to explore acquisition opportunities, buyback shares, and keep our debt at manageable levels. As we close out the first quarter of 2025, I'm excited about the opportunities we have in front of us. We continue to see strong design wins across our product portfolio. With distribution orders increasing and inventory levels normalizing in the industrial markets, coupled with increasing backlog and demand for our products, I have greater confidence that we will see year-over-year growth for 2025. On May 13, we will be hosting our Investor Day, where we will have the opportunity to lay out our plans for future growth in detail. I'm excited you will have the opportunity to hear from several members of our senior leadership team as they will discuss our competitive advantages and why we win across the markets we serve. Now, let me turn the call over to John to detail our quarterly results and provide our Q2 guidance.

Thanks, John. We reported fourth quarter revenue of $132 million, down 1% from the year-ago period and at the high end of our guided range. EPS was $0.18 in the quarter, flat from the year-ago period, and at the midpoint of our guidance range. In the MedTech and specialty audio segment, Q1 revenue was $60 million, up slightly compared with the year-ago period. Q1 gross margins were 48.7%, down 450 basis points versus the year-ago period. As part of our supply agreement with Cintia, we produced and supplied metal cans on a cost-plus basis, which negatively impacted gross margins by nearly 200 basis points in the quarter. The remainder of the year-over-year decline in gross margin was driven by unfavorable customer mix and the absence of a one-time benefit, which was recorded in Q1 2020. While the supply agreement with Cintia is expected to continue through the remainder of 2025, we expect MSA gross margins driven by mix improvements and higher capacity utilization, resulting in full-year gross margins in the low 50% range. The precision devices segment delivered first quarter revenues of $73 million, down 2% from the year-ago period and slightly above our expectations going into the quarter. Segment gross margins were 35.7%, flat from the first quarter of 2024 and as factory productivity improvements in our legacy precision device business were partially offset by factory inefficiencies as we ramp up the specialty film product line. On a total company basis, R&D expense in the quarter was $8 million, flat with Q1 2024 levels. SG&A expenses were $25 million, down $2 million from prior levels, driven by cost reduction actions taken to right-size spending in connection with the sale of the consumer microphone to Interest expense was $3 million in the quarter and down $2 million from the year-ago period as we continue to reduce our debt levels. Now I'll turn to our balance sheet and cash flow. In the first quarter, we generated $1 million in cash from operating activities, exceeding the high end of our guided range, driven by higher-than-expected customer prepayments. It is important to note that cash from operations for the three months ended March 31st includes $21 million in cash used to support to settle supplier obligations related to the consumer men's microphone business, which was sold last year. Capital spending was $4 million in the quarter. During the first quarter, we repurchased 300,000 shares at a total cost of $5 million and reduced outstanding borrowings under our revolving credit facility by $15 million. We exited the quarter with cash of $102 million and $189 million 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 12 months adjusted EBITDA was 0.7 times, and we have liquidity in excess of $350 million as measured by cash on hand plus unused capacity under our revolving credit facility. Moving to our guidance. For the second quarter of 2025, revenues are expected to be between 135 and 145 million. R&D expenses are expected to be between eight and 10 million. Selling and administrative expenses are expected to be within the range of 23 to 25 million. We're projecting adjusted even margin for the quarter to be within a range of 19 to 21%. Interest expense in Q2 is estimated at 3 million and includes non-cash imputed interest. We expect an effective tax rate of 13 to 17%. We're projecting EPS to be within a range of 21 to 25 cents per share. This assumes weighted average shares outstanding during the quarter of 90.1 million on a fully diluted basis. We're projecting cash generated by operating activities to be within the range of 10 to 20 million which includes $9 million to settle supplier obligations related to consumer MEMS microphone business. Capital spending is expected to be $7 million. We expect full-year capital spending to be 5% of revenues as we increase our investments associated with capacity expansion relating to our specialty film line. In conclusion, based on increasing order activity and our growing backlog, we expect to resume year-over-year revenue and earnings growth in the second quarter. Additionally, we expect another year of strong cash generation in 2025. With that, we'll move to the Q&A portion of the call.