• Revenue: $143 million, up 32% year-over-year, driven by Cornell acquisition and 4% organic growth.
• Adjusted EBITDA Margins: 24.6% for the total company.
• EPS: $0.26, at the midpoint of guidance range, up 30% from Q3 2023.
• Cash from Operations: $53 million, exceeding the high end of guidance range.
• MedTech and Specialty Audio Revenue: $64 million, up 10% year-over-year.
• Precision Devices Revenue: $79 million, up 57% year-over-year due to Cornell acquisition.
• Gross Margins (MedTech and Specialty Audio): 53.1%, down 60 basis points year-over-year.
• Gross Margins (Precision Devices): 40%, down 40 basis points year-over-year.
• R&D Expense: $8.9 million, up $1 million from Q3 2023.
• SG&A Expenses: $24 million, $5 million higher due to Cornell acquisition.
• Interest Expense: Up $3.3 million year-over-year due to higher bank borrowings.
• Cash Balance: $93 million at quarter end.
• Debt: $225 million, including revolving credit facility and seller note from Cornell acquisition.
• Net Leverage Ratio: 1.0x based on trailing 12 months adjusted EBITDA.
• Q4 Revenue Guidance: $141 to $151 million, up 5% year-over-year.
• Q4 EPS Guidance: $0.26 to $0.30 per share.
• Q4 Cash from Operations Guidance: $30 to $40 million.

• Warning! GuruFocus has detected 7 Warning Signs with KN.

Release Date: October 24, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Knowles Corp (NYSE:KN) reported third-quarter revenue of $143 million, at the high end of their guidance range, representing a 32% year-over-year growth.
• The company achieved a total adjusted EBITDA margin of 24.6%, indicating strong operational performance.
• MedTech and specialty audio revenue grew 4% sequentially and 10% year-over-year, driven by new product adoption and cutting-edge technology.
• The acquisition of Cornell contributed significantly to revenue growth and margin improvement, with a 57% year-over-year increase in the precision devices segment.
• Knowles Corp (NYSE:KN) generated $53 million in cash from operations in the third quarter, exceeding the high end of their guidance range.

Negative Points

• Gross margins in the MedTech and specialty audio segment decreased by 60 basis points year-over-year due to unfavorable product mix and lower production yields.
• The precision devices segment faced continued headwinds from elevated inventory levels in the industrial markets and distribution channels.
• Despite improvements, Cornell's gross margins remain below Knowles Corp's legacy precision device business.
• Interest expenses increased by $3.3 million compared to the prior year due to higher bank borrowings associated with the Cornell acquisition.
• Bookings in the industrial end market remain inconsistent, with no sustained recovery observed yet.

Q & A Highlights

Q: Can you provide an update on the demand in the Precision Devices (PD) segment and the strongest and weakest end markets? A: Jeffrey Niew, President and CEO, explained that the defense market remains strong, with some lumpiness in order timing. MedTech is showing growth, particularly in the PD area. However, the industrial market and distribution partners are experiencing weakness, with inconsistent bookings. Recovery is expected in late Q1 or Q2 of 2025. Despite these challenges, PD gross margins have expanded, with further opportunities for expansion through synergies and capacity utilization improvements.

Q: What is the expected level of capital expenditure for the company going forward? A: John Anderson, CFO, stated that over a cycle, capital expenditure is expected to be around 3% of revenue. There could be periods where it is slightly above or below this range, depending on expansion needs. For 2024, it is likely to be slightly under 3%.

Q: Can you discuss the M&A environment and future acquisition plans? A: Jeffrey Niew highlighted that M&A is a core part of their strategy, with several opportunities currently being assessed. The company is being selective to ensure acquisitions make strategic sense. The transformation into a higher-margin business has expanded their multiple, providing more options for accretive acquisitions.

Q: What are the opportunities for further margin improvement in the Cornell business? A: Jeffrey Niew noted that significant margin improvement has been achieved through pricing, with over $5 million in price increases expected this year. Further improvements are anticipated through manufacturing efficiencies and operational synergies. John Anderson added that supply chain savings and Oracle integration will also contribute to margin expansion.

Q: How is the industrial market performing, and what are the geographic trends? A: Jeffrey Niew mentioned that the industrial market, particularly in North America and Europe, has about six months of inventory, which needs to reduce by half for normal ordering patterns to resume. Electrification is flat year-over-year, with new design wins offsetting market weakness. The company is not heavily involved in electrification in China.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.