Participants

Sarah Cook; Vice President, Investor Relations; Knowles Corp

Jeffrey Niew; President, Chief Executive Officer, Director; Knowles Corp

John Anderson; Chief Financial Officer, Senior Vice President; Knowles Corp

Anthony Stoss; Analyst; Craig-Hallum

Bob Labick; Analyst; CJS Securities

Presentation

Operator

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knowles Corporation fourth-quarter and full-year 2024 earnings conference call. Today's conference is being recorded. (Operator Instructions)
At this time, I would like to turn the conference over to Sarah Cook.
Please go ahead.

Sarah Cook

Thank you, and welcome to our fourth-quarter and full-year 2024 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, 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 products, anticipated trends in company's 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 the date of this call, and Knowles disclaims any duty to update such statements, except as required by law.
In addition, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted at our website at knowles.com, and in our current report on Form 8-K filed today with the SEC.
This will include a reconciliation to the most directly comparable GAAP measures. All financial references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. We've made selective 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?

Jeffrey Niew

Thanks, Sarah, and thanks to all of you for joining us today. For the prepared remarks, we will provide our normal commentary on Q4 results as well as what we are seeing in our markets for Q1 and beyond. I will also summarize some highlights in 2024 and turn the call over to John to provide financial details on Q4 and guidance for Q1 and then close with some exciting things we have going on, which gives us confidence in 2025 being another year of revenue and EPS growth with continued strong cash flow.
I think it's also important to note that with the completion of the sale of the Consumer MEMS microphone business in late 2024, there is a significant amount of historical financial information being released for our continuing operations in both the 10-K as well as the supplemental slides associated with this call. This is the first time we be providing this information, and it demonstrates the revenue and earnings growth of our business.
Now turning to results. For the fourth quarter, revenue of $143 million was within the guided range. Non-GAAP diluted EPS of $0.27 was also within the guided range, and we delivered cash from operations of $35 million, inclusive of CMM. The revenue and earnings shortfall to the midpoint in Q4 was driven entirely by challenges in a plant consolidation and ramping production of new products within our specialty film capacitor line, not from a lack of shippable orders. I will provide more detail on these challenges to my commentary within the Precision Device section.
For the full year, on a continuing operations basis, revenue grew 21% and non-GAAP diluted EPS grew 32% from 2023 levels driven by the strength in med tech and specialty audio and the addition of film, MICA and electrolytic capacitors from Cornell to our product portfolio.
Now for our segments. In Q4, med tech and specialty audio revenue grew 9% sequentially when it was flat on a year-over-year basis. 2024 revenues grew by 8% and adjusted EBIT by 13% from 2023 levels. By partnering with our customers to create innovative solutions, enhancing the performance of their products, we continue to drive growth.
This, coupled with our ability to leverage our fixed overhead drop adjusted EBIT growth. I continue to be very excited about the opportunities we have in the MSA segment ahead of us and expect another year of growth in 2025 as we continue to introduce new innovative custom solutions to our customers and be a world-class manufacturer of these products.
We're also beginning to see new opportunities to accelerate growth beyond 2025 by leveraging core competencies in medical markets, and we'll share more on this later this year as we close new design wins.
In the Precision Device segment, Q4 revenues grew 4% year over year. As I stated earlier, challenges with shipments in specialty film capacitor products resulted in a greater than $3 million shortfall in our shipment plans.
There were two causes. First, as part of our synergies from an acquisition -- from the acquisition of Cornell, we were consolidating facilities for specialty film to improve margins. Even though the production transfer was completed in Q4, it took longer than expected, and resulted in shipment challenges.
When delays in production transfers and the order book in specialty film consisting of numerous new custom products ramping at once, we fell short of our shipment targets. Shipments are expected to improve throughout the first half of 2025. I have confidence in the team will resolve the production challenges, and I'm very excited about the demand we have for these custom specialty film products.
We expect this product category to drive meaningful growth in 2025 and beyond. What gives me confidence in significant growth for this product line is all the new customers and products that are coming to market and one in particular that will drive significant growth in 2026. We received an order this month for more than $75 million with a sizable prepayment for a new customer in the energy sector.
We expect at least $25 million of this order to ship in 2026. We will provide additional details about this exciting quarter and the rest of the opportunities ahead of us throughout 2025.
For the rest of the Precision Device segment, revenue was in line with expectations. In Q4, PD demonstrated a noticeable acceleration in orders from Q3 driven by medical and defense with both markets having their strong booking -- strongest bookings quarter of the year. It's noteworthy that our distribution book-to-bill trend was positive in Q4 and as we're finally seeing signs of abatement of excess sale inventory in the industrial end markets.
For Precision Devices on a full year basis, revenue grew 36% compared to 2023 and as our capacity portfolio expanded with the addition of Cornell. An additional 2024 highlights, which John will go into more detail, is about our cash from operations. Our continued robust cash generation, coupled with our strong balance sheet, gives us optionality of capitalizing on M&A opportunities and returning capital through share buybacks.
The Board continues to be supportive of our share buyback program authorizing an additional $150 million in capacity to repurchase stock. Before moving on, I would like to touch on the fluid tariff situation we are all hearing so much about.
First, the sale of CMM significantly reduced any -- our manufacturing footprint in China as well as our exposure to the China markets. On a continuing operation basis, in 2024, approximately 5% of revenue could be subject to tariffs on importing goods from either China or Mexico. Well, the exposure, as we understand today is limited, we will continue to explore alternatives to mitigate the impact of these tariffs.
Now let me turn the call over to John to detail our quarterly results to provide Q1 guidance. After hearing from John, I will share my thoughts on 2025.

John Anderson

Thanks, Jeff. We reported fourth quarter revenues of $143 million, up 2% from the year ago period and within our guidance range. EPS was $0.27 in the quarter, up $0.05 or 23% and from Q4 of 2023, also within our guidance range.
In the Medtech and Specialty Audio segment, Q4 revenue was $70 million, flat compared with the year ago period. On a full year basis, revenue in the Medtech and Specialty Audio segment increased by 8% over prior year levels, driven by increased shipments into the hearing health market.
Q4 gross margins were 51.4% and down 130 basis points versus the year ago period driven by lower average pricing on mature products and higher factory cost. The Precision Devices segment delivered fourth-quarter revenues of $73 million, up 4% from the year ago period. Shipments of high-performance capacitors were lower than expected due to a slower-than-expected ramp-up of our specialty film product line.
As Jeff noted, we have a strong backlog for this product line, and we expect production output to increase throughout the first half of the year driving a return to total company revenue and earnings growth beginning in the second quarter.
Segment gross margins were 38%, up 240 basis points from the fourth quarter of 2023 as factory productivity improvements in our legacy Precision Device business were partially offset by higher scrap costs and production inefficiencies as we ramp up the specialty film product lines.
On a total company basis, R&D expense in the quarter was $9 million, up $1 million from Q4 of 2023 driven by increased investments in both the Medtech, Specialty Audio and Precision Device segments. SG&A expenses were $26 million, up $1 million from prior year levels, driven by higher incentive compensation costs. Interest expense was $3 million in the quarter and flat with the prior year.
Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $35 million in cash from operating activities at the midpoint of our guidance. For full-year 2024, we generated cash from operating activities of $130 million. Note that cash from operations for the 3 and 12 months ended December 31, includes $2 million and $24 million, respectively, generated by the Consumer MEMS microphone business.
Capital spending was $3 million in the quarter. During the fourth quarter, we repurchased 1.3 million shares at a total cost of $24 million and reduced our debt balance by $23 million. We exited the quarter with cash of $130 million and $203 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 0.6 times. For the full year, we repurchased 3 million shares at a total cost of $54 million. In addition, the Board of Directors recently authorized a $150 million increase to our stock purchase plan.
Moving to our guidance. For the first quarter of 2025 revenues are expected to be between $124 million and $134 million. R&D expenses are expected to be between $8 million and $9 million, selling and administrative expenses are expected to be within the range of $23 million to $25 million, down $2 million year over year on actions taken to reduce our fixed cost base in order to support the needs of our continuing operations.
We're projecting adjusted EBIT margin for the quarter to be within a range of 16% to 18%. Interest expense in Q1 is estimated at $2 million to $3 million and includes noncash imputed interest, and we expect an effective tax rate of 13% to 17%.
We're projecting EPS to be within the range of $0.16 to $0.20 per share, this assumes weighted average shares outstanding during the quarter of $91 million on a fully diluted basis. We're projecting cash utilized in operating activities to be within the range of $15 million to $5 million and capital spending is expected to be $4 million.
Cash used in operating activities includes $12 million to settle supplier obligations related to the Consumer MEMS microphone business. We expect an additional payment of $12 million in Q2. These payments represent substantially all remaining supplier obligations related to the CMM business.
In conclusion, based on recent order trends and existing backlog, we expect to resume year-over-year revenue and earnings growth beginning in the second quarter of this year and expect to deliver operating cash flow of more than 15% of revenues from continuing operations for full year 2025.
I'll now turn the call back over to Jeff to share his thoughts on '25 and beyond. Jeff?

Jeffrey Niew

Thanks, John. Now let me close with some thoughts on the strategic positioning of the company. As I look forward, design activity has never been higher for the company. We have a healthy pipeline of new opportunities ramping into production in 2025 across our end markets. Starting with medtech, the end market for here in helps remains strong, and our MSA business is expanding the product offering to our customers positioning them for continued growth.
In the defense market, our high-performance capacitor business is seeing orders for new and expanding programs. Demand for our specialty film capacitors is high with shipments and orders for these products expecting significant growth through 2025. With this new $75 million-plus order in the energy sector, we expect even further acceleration of growth in 2026.
As our operations teams increase the output and customer deliveries in specialty film, we expect to see growth in both industrial and energy markets in 2025. Further, we believe the industrial end markets have stabilized as inventory levels within our distribution partners has started to decline.
Based on all the activities we are experiencing, I'm confident our ability to grow revenue and profitability again in 2025. We ended 2024 with the sale of the Consumer MEMS microphone business closing in late December. The sale culminates a strategic transformation we have been embarking on for a number of years.
We strengthened our balance sheet, invested in our core businesses where we have higher terms completed an acquisition that expanded our portfolio and our serviceable market and provide new growth vectors. Lastly, we returned capital to shareholders through stock buybacks. It has been built on several pillars that guided us through this transformation and will guide us as we move forward.
First, through deep engineering and customer application expertise our high-performance technologies drive us as we create new products that solve difficult problems in the real world.
Second, after we customize these technologies to create solutions, we leverage our world-class manufacturing operations to be a trusted, high-quality supplier through a blue-chip set of customers.
Finally, we use our expertise to serve niche applications within large growing markets, such as medtech, defense, industrial, electrification and energy. These fundamental pillars create value for our organization, our customers and our shareholders. For continued operations, we achieved a revenue CAGR of 12% over the past five years through a combination of organic growth and acquisitions as presented on slide 9 in the supplemental materials today.
Our ability to differentiate our products coupled with our ability to leverage overhead allow us to achieve adjusted EBITDA CAGR of 36% over the same period. I'm excited about the progress we've made to date in our future. I look forward to our investor forum, which we expect to host in Q2 of this year. There, I will go into further detail on our strategy and plans for future growth.
Now let me turn the call over to the operator for the Q&A session. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Anthony Stoss, Craig-Hallum.

Anthony Stoss

Jeff, a couple of questions. I just wanted to focusing on -- you commented about pricing pressure. Is it in a particular segment? Or is it across kind of all the product lines and then maybe for John, in terms of the inventory, I know you said it's starting to come down, but maybe you can give us a sense of how many months it still is. And then I have one or two others.

Jeffrey Niew

Yes. So first on pricing pressure. I'd sit there and say, generally speaking, the Precision Device segment, I'd say pricing net-net is a positive. I think we talked about the Cornell acquisition, how we've got about $5 million to $6 million of pricing increase in 2024. I would expect that we would probably have maybe in the neighborhood of $2 million to $3 million in Cornell in 2025.
And the rest of Precision Devices, I would say, net-net price per positive. I would sit there and say there's been a little bit more pressure in the MSA business on pricing. Nothing that gets me overly worried. It's mainly in mature products. It's not about new products.
It's really about product mix. And so I think we still are very confident that the MSA business will be north of 50% gross margin going forward, just as it's been in the past. . On the inventory, I think here's what I'd say. When we look back last quarter, I kind of talked about there being about six months' worth of inventory at the end of Q3 in the inventory -- the distribution channel.
We think that number has come now down at the end of Q4, down to about 4% to 4.5%. And what I would say is we had a pretty strong bookings quarter in Q4. Our bookings accelerated quite a bit in Q4 in the Precision Device segment.
And looking at our flash reports already for Q1, January was also very strong in bookings as well. And that goes across not just distribution, but also with our direct OEM customers as well. So that's what's honestly giving us quite a bit of confidence in full-year 2025 being another year of growth.

John Anderson

Yes. Tony, in terms of inventory, just to clarify, Jeff referenced inventory at our customers, either distributors or OEMs versus our in -- our inventories are pretty normalized level.

Jeffrey Niew

Yes. And I guess what I'd say is, again, six months at the end of Q3 four to five months at the end of Q4, we need to see it be below three months is where it needs to be. And so we'll see that where it ends at the end of this quarter. But I guess what gives me optimism we're seeing a lot more orders from distribution that we weren't seeing in Q3 came in Q4 and actually already into January, we're seeing some pretty strong orders.

Anthony Stoss

Okay. And then just two follow-ups. Jeff, you made a comment that on the specialty film that you have confidence that we will get this fixed. Is it still ongoing? Is it another month or two?
Or how long do you think before that's fixed? And then maybe, John, can you just remind us what the consumer business did on an annual revenue basis.

Jeffrey Niew

So on specialty film business, we're definitely going to see sequential improvement in output, but it's not yet in Q1 where we want it to be. I think it's probably going to take us into the fully into the second quarter, near the end of the first half in order to really start catching up. I mean, that's I think where we're at.
But I think what the real positive here is Tony, we have a big backlog of orders per shipment already in 2025. This is a really exciting area for us in terms of application, specialty film area.
And I think what also gives us really excited about is, and we called it out in the press release is we got a $75-plus million order already in Q1.
I know it does start shipments until 2026. But this is a real order. We got a pretty significant millions of dollars prepayment to start ramping this up. But this is going to be a very big product line for us going forward. And we'll talk more about out of as we get closer to the shipment date.

John Anderson

Yes. Tony, in response to your question on the CMM revenues for the period January 24 through December 27 when we closed roughly $260 million.

Operator

(Operator Instructions)
Bob Labick, CJS Securities.

Bob Labick

So looking at, we'll call it, Knowles 2.0, we estimate maybe 40% of revenues are going to come from medtech, 40% industrial and 20 defense. But industrial is the harder one to break down. Can you give us a sense of the biggest end markets there and the trends kind of across those?

Jeffrey Niew

Yes. Bob, I think you kind of see this. This is kind of like the story of -- it's a lot of the distribution business, right? And where we estimate that we shipping it on an annual basis to north of 30,000 customers. I think one of the beauties of this market is, is we don't really have reliance.
And that's probably areas where we think because we have so many smaller customers, we have a pretty unique opportunity here to continue to look at strategic pricing in this area.
What I would say, again, kind of what I said earlier is we are starting to see stabilization. And if I look at our industrial/distribution business, I think we believe right now, what we see is we've kind of hit the bottom on that and we're starting to rise sequentially in Q1. And not to the extent yet where we want to be yet, but the bookings trend is in the right direction. And I think that's what we're kind of looking at, Bob.
And so it's really hard. I think we can kind of lay out a lot of these different markets, but there's no one market that really like is very, very large for us in the industrial sector.

John Anderson

Yes, I'd say a couple of areas that we play in are automation areas, HVAC areas, downhole pumps in the energy, but your equipment or semiconductor equipment. I mean there's a lot of markets in here. I mean like not just like two or three, there's quite a few markets we're in.

Bob Labick

Okay. Great. And then obviously, you mentioned the new specialty film products and the impact on the quarter and whatnot. Maybe give us a little more color on that product, what areas that's going to be sold in. And then R&D investments in general.
Obviously, if you're rolling out new products, we should see some acceleration in growth going forward, as you've talked about. So give us a sense of what the R&D and innovation is being spent on.

Jeffrey Niew

Yes. So I mean I think what -- we have a core -- in a specialty film area, we have a core capability. And the applications that we're selling into is what we call pulse power applications. It's applications that require a significant amount of energy in a very, very short period of time. And what they're doing is this allocation is buying a lot of capacitors, fully charging them and then releasing the energy all at once.
It's a very unique capability that we have, and we're ramping this up. I feel very confident about the shipments from this order. Starting in 2026, we'll be ramping this out. But you can kind of see that -- right now, we're ramping up for a whole bunch of smaller customers. And then we have this one big customer who is going to drive a lot of growth in 2026.

Operator

And that concludes the question-and-answer session. Thank you for your participation in today's conference. You may now disconnect.