Knowles Corp (KN) 2025 Q4 法說會逐字稿

Good day, everyone, and welcome to Knowles Corporation's fourth quarter and full year 2025 earnings conference call. At this time, I would like to hand the conference over to Ms. Sarah Cook. Please go ahead, Sarah.

Thank you and welcome to our 4th 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 calls today will include remarks about future expectations, plans, and prospects for KOL, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal security 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 10k for the fiscal year ended December 30th, 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 the date of this call, and Knowles disclaims any duty to update such statements except as required by law.

In addition, pursuant to Red Ge, 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 in Form 8K 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.

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

Thanks, Sarah. 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.

Our organic growth in 2025 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 and high growth markets that value our solutions.

Before I discuss this a little more in detail, let me cover our Q4 2025 results. Before it 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% year over year and above the midpoint of our guided range. Cash from operations was $47 million, also exceeding the high end of our guided range.

On a full year basis, revenue of 593 million. Up 7% year over year and EPS was $1 up 21% compared to 2024. As I said last quarter, I believe our results continue to demonstrate that our focus on markets and products will have significant competitive advantages that result 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% to 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 technologies coupled with strong intimacy with our customers' applications is allowing us to win next generation designs for members microphones as well as Balanced Amateur speakers.

We also see the opportunity to increase our content of the device in next generation hearing health products. Beyond the hearing health market, we remain optimistic about the future growth opportunities within our micro solutions group that we detail at our investor day.

In the Precision device segment, Q4 revenue was $90 million up 23% year over year. As channels inventory levels are now normalized and orders are matching and 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 68% 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 med tech, defense, industrial, EV, and energy with revenue growing year over year. Let me provide a little color by Ed Market.

In the med tech market, we have new design winds ramping and 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 or custom reliability capacitors can be found in 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. Or volumes continue to grow. As I mentioned on our last earnings call, our capacitors and RF microwave solutions 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 normalized at our distribution partners. Our high 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 our new specialty film line expected to start producing and delivering high volume pulse power capacitors late in the second quarter of this year.

On a more quantitative basis to summarize, even with extremely strong shipments in Q4, we saw another quarter of healthy bookings with a book to build greater than 1 in our precision devices segment. Our continued collaboration with our customers have led to a robust pipeline of new design winds as our customers continue to choose our innovative and differentiated solutions.

This coupled with strong secular growth trends in the markets reserve gives me confidence in our ability to continue to grow revenue throughout 2026 and beyond. Across the company we are leveraging our unique technologies, creating custom products through our customer application intimacy, and then scaling into production with our world-class operational capabilities for end markets with strong secular growth 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 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.

Well, the first quarter of the year is typically seasonally low. I expect to see strong year over year growth in the first quarter.

New design winds are ramping. We have a very healthy backlog of existing orders, and we are seeing increased 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 while keeping our debt at very manageable levels.

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.

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. EPFs was $0.36 in the quarter, up $0.09or 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 networking capital.

In the med tech and specialty audio segment, Q4 revenue was $73 million up 4% compared with a year ago period, driven by increased shipment volume. On a full year basis, revenue increased by 4% over prior year levels due 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, segment gross margins for a full year of 2025 were above 50%.

The precision devices segment delivered fourth quarter revenues of $90 million up 23% from the year ago period. On a full year basis, revenue increased by 10% over prior year levels, driven by strength across all our end markets and product lines. Revenue accelerated throughout the back half of the year as inventory levels normalized at our distribution partners.

Segment gross margins were 40.1%, up 230 basis points from the fourth quarter of 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 filmed line.

For the full year, segment gross margins improved 140 basis points from 2024 levels despite headwinds from our specialty filmed line. We experienced production volume increases in RF microwave products and ceramic capacitors driving the gross margin improvement.

I'm confident in our ability to continue to improve segment margins further in 26 as capacity utilization increases and efficiencies in connection with our specialty film line are realized.

On a total company basis, R&D expense in the quarter was 9 million flat with Q4 2024 levels. SG&A expenses were $27 million up $2 million from prior levels driven primarily by higher incentive compensation costs. Interest expense was 2.25% and down $2 million from a year ago period as we continue to use 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. During the fourth quarter we repurchased 451,000 shares 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 was 0.4 times, and we have liquidity of more than $340 million as measured by cash plus unused capacity under our revolving credit facility. Before turning to Q1 guidance, I want to briefly highlight our performance relative to our full year 2025 outlook and five year targets that we provided at our May 2025 analyst Day. Full year revenue was $593 million and up 7% versus 2024, which was above the high end of our outlook of $560 million to $590 million. Revenues exceeded the high end of our organic growth target of 4% to 6%.

From a segment perspective, MedTech and specialty audio revenue grew by 4%, and precision device revenue grew by 10%, with full segments meeting or exceeding the organic revenue growth targets of 2% to 4% and 6% to 8% respectively. Adjusted EBITDA from continuing operations was $140 million up 9% from 2024, driven by higher gross profit margins and increasing operating leverage. And within the 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 2026, revenues are expected to be between 143 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 to $27 million. We're projecting adjusted even margin for the quarter to be within the range of 18% to 20%.

Interest expense in Q1 is estimated at $2 million and we expect an effective tax rate of 15% to 19%.

We're projecting EPS to be within a range of 22 to $0.26 per share, up $0.06 or 33% year to year at the midpoint. This assumes weighted average shares outstanding during a quarter of $88 million on a fully diluted basis.

We're projecting cash from operating activities to be within the range of 5 to $5 million. Capital spending is expected to be $10 million. We expect full year capital spending to be approximately 4% to 5% of revenues as we continue investments associated with capacity expansion related to the large energy order we received in 2025.

In conclusion, we delivered strong year over year revenue, earnings, and cash flow growth in the 4th 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 ‘26 and beyond.

I'll now turn the call back over to the operator, put a Q&A portion of our call operator.

Thank you, sir. (Operator Instructions) Christopher Rolland from Susquehanna.

Hi guys, thanks for the question, and yeah, I guess the large energy order and the thin film capacity.

Products, I guess just first an update there, have you guys seen a broadening in new customers for that product, and if you could remind us on your capacity addition plans and timing of revenue and, any cam detail or something, around that would be great as well.

Thank you.

So you know first. On the energy order being no different than we've kind of talked about, earlier, last year, which, we expect this to be in the neighborhood of 25 north of $25 million of revenue, this year and really getting going, in the back half. Well, we should have it fully ramped in Q2 and so that's a lot of the by the end of Q2.

So, I think you'll see more of that, a big portion of that 25 in the back half of the year overall for the special. Fill in line, I think we are seeing a definitely broadening of the customer base, beyond, some of the medical applications, defib, radiotherapy, down hole fracking, military applications like rail guns, there's a definite broadening of the applications and I think we had talked about this a few quarters ago, that overall including the energy order, our expectations we're in that.

I would say $50 million to $65 million dollar 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 I think what I kind of see here is, that the specialty film line including energy really has a bright future as we look toward the future, Chris.

Excellent, great, and then.

As we start thinking about the future, kind of what your next big hit might be. I guess first of all, do you have some prospects that you've identified organically or internally, some next kind of big hits and or are you really looking outside, you did mention acquisitions. If you could give us an update there, are you finding some high value targets here and speaking of valuation, are they reasonable?

Yeah I mean obviously it's very hard to comment like specifically but you know our pipeline continues to be good on the acquisition front, but to be H1st with you, our organic opportunities. Over the next 24 to 36 months look pretty promising and I'll just kind of go back to beyond the energy or, situation and the pulse power, especially film line, a couple other things that, we talked about on the investor day to give a brief update. First on our micro solutions within MSA. That's where we are taking our existing technologies, 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 Med tech designs are typically 3 to 5 year design.

And you know we're getting to the beginning of that 3 years in the 2027 year time frame 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, with our RF and our capacitive products. I think 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 what 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 I, generally. Thinking, I think I've been pretty positive. We said our organic growth, of 4% to 6%, our 1st year out of the gate, we're at 7%. I think we're pretty excited about, how we think about our organic growth opportunities over the next 24 to 36 months.

Thank you so much guys congrats.

Anthony Stoss, Craig-Hallam.

Hey, Jeff, John, and Sarah. First off, on John, maybe I missed it, gross margin guide.

For March, I think in the past you were thinking about 42%. You maybe just confirm that andI'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.

Yeah Tony, we really, we kind of moved away as we transitioned to an industrial tech company. We kind of moved away from gross margin, so the guide, the focus on our guide is obvious revenue, EPS, and cash flow. I would say from if you give a little detail on gross margin, we're at call it full year 2025, we're at 45.5%. And MSA was, as I mentioned, above 50%. I think the MSA margins are going to kind of hold in that area in '26, 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 they're again.

There's an opportunity to increase above that 44.5% in '26 by and call it 50 to 75 basis points but waited toward the back half of the year.

Got it. Thanks for that. And Jeff.

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 the military, and I'm curious if you have exposure on the satellite side as well.

We do have some exposure to satellite, but just a comment, I think, I mentioned on the prepared remarks, that we had a very strong PD had a very strong bookings quarter. And even with that, the book, the bill was 1.06 even with that very strong shipment quarter and you know I think we're already we're already through January. We had a very strong January bookings month as well and so and it's pretty broad based, you know. We tried to cut this up a number of different ways, in terms of, our key markets of being, defense, med, industrial, then we put ED and energy together. All of them are looking pretty strong right now. The bookings have been strong in supporting that.

And so, I think from our perspective it's very broad based and I, if I look, OEM versus distribution, same thing. Both our OEM business and distribution business is doing very well. And so, I think to pick one out and sit there and go, this one's doing the best, I mean defense is doing well, but so is a med tech. MedTech business is doing well, the energy story, and I think the one that we're seeing more and more momentum in is energy. Sorry, industrial.

We're seeing more momentum in industrial than we did 6 months ago.

So I think that that seems to be a pretty big positive change since the last 6 months.

Perfect. Congrats. Nice execution.

Thank you.

Robert Labick, CJS Securities.

Hey, this is Robert Labick, I know you talked about the timeline of the energy orders, but can you talk more specifically about the production build out? Has the new capacity been completed, tested? Where does it stand?

Yeah, so I mean, we have weekly calls with the team. This is obviously happening in, outside of Greenville, South Carolina. And so we have weekly calls. It's like every week there's something new, a couple weeks ago we got the permits to start producing, product 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 manufacturing engineering team from across the globe and 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 you know the goal here is we're going to ramp this up like 10x in the next five months from where we are today. So, you know I think we're on track, a lot to be done here, but we're on track in order to get it by the end of Q2.

The full volume production that we committed to and again I think you know it depends on a lot about on you know auto orders and the rest of the specialty film business, exactly what we deliver on this energy order but you know I think we're thinking in that, $50million to $65 million dollar range from in the 20s, this year for 2025.

And I will say very modest amount in Q1, so, it will help drive sequential growth from Q1 to Q2 as we ramp.

Up. Yeah, so I think that's a good point. I think, obviously we're guiding to pretty decent organic growth year over year but that's not really being driven by the energy order obviously.

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

Yeah, the, I mean like how we're setting this up, quite frankly is we're setting it up probably in the 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 you will make the standard. Specialty line, 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 like I call higher mix customers.

That's all for me, thank you.

(Operator Instructions) Tristan Gerra, Baird.

Hi, this is Tyler Bomba on for Tristan. Thanks for taking the questions. You touched on it briefly already, but could you give us a more detailed update on the supply demand dynamics and 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?

Yeah, so, when I look at like our numbers, in our forecast here, I think.

We expect in the first half right now, we expect pretty strong industrial shipments in the 1st half 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 more right now it looks more flattish to the back half of 2025 industrial for industrial specifically, but overall we expect growth for industrial for the full year. So, like obviously if you go back to, Tyler to when we were talking earlier last year.

The first half in industrial of 2025 was still relatively, meagerly weak. We're seeing a fair amount of growth in the, 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 we're going to be flattish year over year in the back half.

It'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 are the supply constraints expected to possibly impact price in the second half?

Well, I mean, we're always looking at price, Tyler. So I think you're absolutely right. I mean, there, there's a number of things here, that dynamics that I think are going on and we continue to see, I mean, like I said, in the previous question, with the book to bill, when we were having these strong book to bills in the front half of '25. It was off of weak shipments, so you could, you got to take that book to build with a grain of salt. But when you look at, the Q4 numbers in terms of the revenue being $90 million and you still look, at a book to build 1.06, and I said, January is already in the books and the bookings in January were already strong again and so it's definitely a topic here about capacity utilization, pricing.

All intermixed and to be H1st with you I would sit there and say 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 you know I think you know if this demand continues at this rate.

Great, that's all for me thanks. Great.

And 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.