Knowles Corp Q2 FY2025 earnings call

• Tariff situation: Knowles is a proximity manufacturer, with total exposure to tariffs less than 5% of revenue and 3% of COGS. Successfully passing on additional costs to customers, and key end markets like medtech, defense, and industrial are relatively insulated from tariff impacts.
• Q2 results: Revenue was $146 million, up 8% year-over-year; cash from operations was $36 million, exceeding guided range; EPS was $0.24, above midpoint of guided range.
• Segment details: MedTech & Specialty Audio revenue was $67 million, up 10% year-over-year; Precision Devices revenue was $79 million, up 6% year-over-year. Precision Devices had third consecutive quarter of positive bookings trends, and MedTech & Specialty Audio returned to growth after Q1 slowdown.
• Future outlook: Positioned for organic growth in 2025, with new initiatives like specialty film production line and inductor line expansion. Repurchased $30 million in shares in Q2.

In Q2 2025, Knowles Corporation had two main segments. The MedTech & Specialty Audio segment generated revenue of $67 million, which was a 10% year-over-year increase, contributing approximately 45.9% of the total revenue of $146 million. The Precision Devices segment had revenue of $79 million, a 6% year-over-year increase, accounting for about 54.1% of total revenue. The MedTech & Specialty Audio segment saw strength in Specialty Audio and Hearing Health, with a return to growth after a Q1 slowdown. The Precision Devices segment had positive bookings trends for the third consecutive quarter, with broad-based end market strength.

• Q3 2025 revenues expected between $144 million and $154 million.
• R&D expenses expected between $8 million and $10 million.
• Selling and administrative expenses expected within $25 million to $27 million.
• Adjusted EBIT margin for Q3 expected within 22% to 24%.
• EPS expected within $0.29 to $0.33 per share.
• Cash generated by operating activities expected within $20 million to $30 million.
• Capital spending expected to be $11 million. Full year 2025 operating cash flow expected 16% to 20% of revenues, capital spending ~5% of revenues.

• Tariff uncertainties: Fluid tariff situation with potential impacts on costs and business.
• Market sensitivity: Industrial market more sensitive to recessions, though currently no impact seen.
• M&A challenges: Market volatility affecting M&A activity, need for disciplined approach in M&A.

Q: Congrats on these results. So the guide was nicely ahead of what we were thinking and perhaps what you guys were thinking earlier in the year. If you could speak to maybe the delta, what is providing that upside? And then also any update on demand for the thin film opportunity as well?

A: Yes. So first, I would sit there and say, I think, Chris, as I mentioned on the call, this is the third -- with Q2, the third successive quarter within the PD segment where we've had a book-to-bill over 1. I would note our book-to-bill in Q2 for PD was above 1.15. So we have the very strong bookings quarter again. And it was pretty broad-based. I'd say in the PD segment, it was medical, defense, industrial, it's with our distribution partners as well as with our direct customers. So we're seeing quite a bit of demand on the PD side. I would sit there and say, on the MSA side, on the Hearing Health side, obviously, we saw Q1 be a little bit weaker in the end market, but it bounced right back in Q2. Kind of like we've said in the past, with these essential devices, maybe somebody stays home for a month and delays getting a hearing aid by a month, but it bounced back very nicely. And we're expecting both segments to have year-over-year growth for full year 2025. So it's really pretty broad-based, Chris, across most markets. And I think kind of -- it's, I would say, a little bit of a testament to kind of what we laid out at Investor Day, which is around these three markets, medtech, industrial and defense. And I would add -- one last piece I would add, I was just looking at our bookings for July. July to date, we are already having another strong month of bookings in July already.

Q: Excellent. And then I know you're not guiding 2 quarters ahead. But without the MEMS business, I think that was maybe -- could create some volatility for Q4. Did you have any early thoughts on how we should be thinking about Q4? And then secondly, just gross margin expansion. Like with these higher volumes, what should we expect from higher utilizations moving forward here?

A: Yes. I'll let John cover the gross margin in a second. Just from a revenue base, obviously, you're correct, we're not guiding Q4. But I would say this, we are expecting year-over-year growth again in Q4, and we expect sequential growth again in Q4. That's what I would sit there and say at this point. I mean, I think we're pretty fully booked already for Q3 with our lead times and our strong intimacy with our customers, we have a pretty good view of Q3. We're starting to get a pretty good view into Q4, but we're still expecting based on the order activity that we'll see year-over-year growth in Q4 as well as sequential growth in Q4.

Q: Congratulations on continued strong performance. Well, congrats on the strong performance. Let's see. You touched on organic growth accelerating [indiscernible] '25. You mentioned the film expansion and inductor lines. I was hoping you could just expand on that a little bit. And the film is for the energy order you talked about on previous calls? Or how should we think about that?

A: Well, the film will be, yes, the energy order, but that won't really start hitting revenue line until probably midyear next year when we'll start delivering that order. So the growth in the specialty film line is actually going to be other customers, mainly medtech, defense and industrial shorter term. But I think here's how I kind of would frame it. If you looked historically, we gave quite a bit of information at the Investor Day. And historically, these businesses that we have owned today, continuing ops have grown over a cycle. They grew at -- we showed 4% organically. We kind of committed that on an organic basis, we think that over a cycle, 4% to 6% now is kind of the growth rate for these businesses. And I would say we're trending toward the higher end of that range right now. And so it's going to be driven by, first, a lot of new design wins in our core. So I think we got good design wins in our core products. But then there's these other expansionary opportunities. I would sit there and say specialty film is going to really start delivering significant growth in the back half of this year as well as into 2026. The inductor line is going to take a little longer. We just introduced that product category last week. It builds off of our ceramic capacitor capabilities or ceramic inductors. And we would hope starting in about 24 months from now, we'd start to see some more significant revenue. So I think I would sit there and say, we've got a lot of design wins in the core, plus we've got some other opportunities that are expanding our TAM and allowing us to grow. So over the next, I would say, year to 2 years, I would sit there and say our growth rate is going to be probably towards the higher end of that organic range that we laid out at the Investor Day.

Q: Okay. That sounds great. And then you touched on this, too. Obviously, you had strong cash flow in the quarter. You bought back stock, but you still mentioned M&A as a potential part of the growth over time. Can you talk just a little bit about the M&A market? It has closed up for a couple of companies or industries with all the macro noise. How does it look now? How is your pipeline? What are your opportunities? How do you feel about it?

A: Pipeline is good. I'd say, it's obviously hard to predict exactly when this is all going to come to fruition. We want to be disciplined around this, of course, as we've kind of done in the past. We want to make sure that we're thinking about thoughtful what we do. We said at the Investor Day, there's kind of three types of acquisitions: there's consolidation, there's extensions and there's adjacencies. I'd say, again, Q1 into Q2, the market kind of froze up a little bit on doing M&A. It seems like it's starting to reopen again. So while I don't have anything to announce here today, obviously, and it's hard to predict when things will happen, I think we're being aggressive here in areas where we think we can drive value for the corporation. And so we'll be looking at this. Obviously, we have our metrics. I don't know, John, you want to cover how we look at this, but we're going to be very disciplined about what we do.