Knowles Corporation (ticker: NYSE:KN), a market leader in advanced sound and communication solutions, reported a robust second quarter in 2024, with revenues hitting $205 million, marking an 18% increase year-over-year (YoY).
The company's Medtech & Specialty Audio segment demonstrated a 4% sequential growth, while its Precision Devices segment saw a significant 55% YoY revenue surge. The Consumer MEMS Microphone (CMM) business also contributed with a 9% YoY growth.
Knowles' financial strategy included repurchasing $25 million of shares and reducing its debt by $34 million. Looking ahead, the company expects sustained cash generation and projects Q3 revenues to be in the range of $210 million to $220 million, a 23% YoY rise.
Key Takeaways
- Knowles Corporation's Q2 2024 revenue rose to $205 million, an 18% increase YoY.
- The company saw a 55% YoY revenue increase in its Precision Devices segment.
- Medtech & Specialty Audio segment reported a 4% sequential growth.
- Consumer MEMS Microphone business grew 9% YoY.
- Knowles repurchased $25 million of shares and reduced debt by $34 million.
- Q3 revenue is projected to be between $210 million and $220 million, a 23% YoY increase.
- The company is considering the potential sale or restructuring of its CMM business and recorded a goodwill impairment charge of $249 million.
- Knowles is pursuing acquisitions while aiming to maintain modest debt levels.
Company Outlook
- Expectations for sustained cash generation throughout 2024.
- Anticipation of sequential improvement in OEM customers and modest growth in distribution for the second half of the year.
- Focus on maintaining a strong balance sheet and modest debt levels.
Bearish Highlights
- Inventory issues in some Medtech markets.
- The industrial sector continues to decline, though modest improvements are expected.
- The CMM business did not show much sequential growth in Q3 after a strong Q2.
Bullish Highlights
- Strong growth in defense and Medtech sectors anticipated.
- Precision Devices and Medtech & Specialty Audio segments are expected to show sequential growth.
- Synergies from the CD acquisition are larger than anticipated, with margins improving faster than expected.
Misses
- Growth in defense was not as high as expected.
- A significant goodwill impairment charge of $249 million in the CMM business.
Q&A Highlights
- Knowles is closer to concluding the potential sale of the CMM business but did not provide further details.
- The company is actively looking at acquisitions and continuing share buybacks due to strong cash flow.
- Stable pricing observed in Medtech & Specialty Audio and Precision Devices, excluding the mobile market.
- The OTC market has not become a significant part of their business yet.
Knowles Corporation's Q2 performance and strategic maneuvers reflect a company in transition, focusing on growth and operational efficiency.
While the CMM business faces challenges, the overall strong financial results and proactive management strategies, such as potential acquisitions and share buybacks, demonstrate Knowles' commitment to driving shareholder value and positioning itself for future success.
As the company navigates market fluctuations and strategic reviews, investors and market watchers alike will be keenly observing Knowles' next moves in the evolving landscape of sound and communication technology.
InvestingPro Insights
Knowles Corporation (KN) has shown a compelling financial performance in the recent quarter, and when looking at the InvestingPro data and tips, the company's stock presents several interesting facets for potential investors. With a Market Cap of approximately $1.64 billion and a Revenue Growth of 7.36% over the last twelve months as of Q1 2024, Knowles demonstrates a solid financial footing.
InvestingPro Tips highlight that analysts have revised their earnings upwards for the upcoming period, signaling confidence in the company's future performance. Moreover, the stock is currently trading at a low P/E ratio relative to near-term earnings growth, indicating that it may be undervalued given its growth prospects. This could be particularly appealing to value investors seeking growth potential at a reasonable price.
The company's stock also generally trades with low price volatility, which might be attractive to investors looking for stable investment options in the tech sector. Additionally, Knowles has been profitable over the last twelve months, and analysts predict the company will continue to be profitable this year.
For those interested in a deeper analysis, InvestingPro offers additional tips on Knowles Corporation, which can be found at https://www.investing.com/pro/KN. These tips could provide further insights into the company's financial health and stock performance, helping investors make more informed decisions.
InvestingPro Data metrics further illustrate the company's financial status with a P/E Ratio (Adjusted) of 20.74 and a PEG Ratio of 0.17 over the last twelve months as of Q1 2024, suggesting that the company's earnings growth is expected to outpace its P/E ratio. The Price to Book ratio also stands at 1.59, reinforcing the notion that the stock might be trading at a reasonable valuation.
In conclusion, Knowles Corporation's robust financial results, coupled with positive analyst revisions and favorable valuation metrics, present a compelling case for investors. The InvestingPro platform offers a wealth of additional tips and metrics that can help investors further assess the potential of Knowles Corporation's stock.
Full transcript - Knowles Cor (KN) Q2 2024:
Operator: Thank you for standing by. My name is Kaylin. I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2024 Knowles Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Sarah Cook. You may begin.
Sarah Cook: Thank you and welcome to our second quarter 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 form 10-K for the fiscal year ended December 31, 2023. 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 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 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 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?
Jeffrey Niew: Thanks, Sarah and thank you all for joining us today. Let me start by saying, I'm pleased with the performance of our business in the second quarter. We continued to execute on our plan of focusing on high growth end markets, where we have differentiated solutions and in the Q2, the business performed as we expected. We delivered $205 million in revenue, which is at the midpoint of our guided range and represents 18% growth on a year-over-year basis. EPS of $0.24 and cash from operations of $25 million were both in line with our expectation and at the midpoint of our guided range. From a segment perspective, Medtech & Specialty Audio revenue grew 4% sequentially at the end market for our Hearing Health products remains strong. The market dynamic of the aging population, expansion of the middle class globally and improved hearing aid penetration all remain favorable. We reported adjusted EBITDA margins of over 45%, driven by continued operational execution and our sustained success of new product adoption. We expect the strength to remain throughout the year within 2024 and for 2024 to be a year of growth for the Medtech & Specialty audio segment. Despite the continued headwinds from normalization of inventory levels in our industrial and distribution end markets, precision devices delivered solid results in the second quarter. Driven by the acquisition of Cornell, revenue was up 55% on a year-over-year basis. Adjusted EBITDA margins increased nearly 260 basis points sequentially on flat revenue driven by strong operational execution and improvements in gross margin within Cornell. We have begun to see signs of inventory reduction in our distribution channel and industrial end markets, and we are ready to capitalize on growth as demand improves. I would also add our design activity remains robust and we are well positioned to grow as the market recovers. On our Consumer MEMS Microphone business, we continue to progress to a conclusion on strategic alternatives process taking into consideration all stakeholders from customers to suppliers and shareholders to employees. From an operational standpoint, CMM financial results in the quarter were solid. Revenue was up 9% from the prior quarter and adjusted EBITDA margins grew by 330 basis points. Before I conclude, I would like to touch on our capital allocation activities. In the second quarter, based on our continued robust cash generation, we've repurchased $25 million of shares while also reducing our debt by $34 million. We expect sustained cash generation for the remainder of 2024. The first half of 2024 produced solid financial results. I continue to be pleased with the performance of the business and I'm excited about the opportunities we have ahead of us. My confidence in our ability to deliver shareholder value remains strong as our teams continue to demonstrate operational excellence, execution in innovative products and expanding our market share across our core businesses. Now, let me turn the call over to John to go into the details of our quarterly results and provide the Q3 guidance.
John Anderson: Thanks, Jeff. We reported second quarter revenues of $205 million at the midpoint of guidance and up 18% from the year-ago period, driven by organic growth of 2% and the acquisition of Cornell in the fourth quarter of 2023. EPS was $0.24 in the quarter at the midpoint of our guidance range and up $0.01 or 4% from the second quarter of 2023. In the Medtech & Specialty audio segment, revenue was $60 million, down 2% versus the prior year. Our Hearing Health business was up 5%, offset by lower demand in the Specialty Audio market. Gross margins were 54.6%, up more than 100 basis points versus the year-ago period, driven by favorable product mix and benefits from foreign currency. The Precision Devices segment delivered revenues of $74 million, up 55% from the year-ago period, driven by the acquisition of Cornell, partially offset by lower shipments of high performance capacitors into distribution and OEMs in the industrial end market as customer and channel inventories were remain elevated. Gross margins were 37.2%, down 250 basis points from the second quarter of 2023 due to the acquisition of Cornell. While the gross margins at Cornell remain lower than that of the legacy Precision Devices business, we saw a sequential margin improvement at Cornell of 340 basis points. And we expect margins to continue to improve throughout 2024. Excluding Cornell, year-over-year gross margins within the PD segment were flat. Consumer MEMS microphone revenues of $71 million were up 9% versus the year-ago period due to share gains and increased consumer demand primarily in Ear and IoT end markets. Gross margins were 28.1%, a 550-basis point decrease from the prior year due to the absence of a $4 million benefit related to the sale of fixed assets, which was recorded in the second quarter of 2023. On a total company basis, R&D expense in the quarter were $17 million, up 6% from Q2 2023 due to the acquisition of Cornell. SG&A expenses were $32 million, $2 million higher than prior-year levels driven by the acquisition of Cornell, partially offset by restructuring actions taken in the second half of 2023 in the Precision Devices segment. Interest expense was up $4 million versus the prior year due to higher bank borrowings associated with the acquisition of Cornell in the fourth quarter of 2023. Now, I'll turn to our balance sheet and cash flow. In the second quarter, we generated $25 million in cash from operating activities at the midpoint of our guidance. For the first six months of 2024, we generated $42 million in operating cash flow, representing a $20 million increase over the first six months of 2023. Capital spending was $3 million in Q2 and we ended the quarter with cash and cash equivalents of $84 million. During the second quarter, we repurchased 1.4 million shares at a total cost of $25 million and we reduced outstanding borrowings under our revolving credit facility by $34 million. We exited the second quarter with $261 million of total debt that includes $146 million of borrowings under our revolving credit facility and an interest-free seller note issued in connection with the Cornell acquisition. Lastly, our net debt leverage ratio based on trailing 12 months adjusted EBITDA was 1.1 times. Moving to our guidance. for the third quarter of 2024 revenues are expected to be between $210 million and $220 million, up 23% versus the year-ago period, driven by organic growth of 3% and the acquisition of Cornell. R&D expenses are expected to be between $16 million and $18 million, and selling and administrative expenses are expected to be within a range of $29 million to $31 million, up $5 million from the prior year due to increases associated with the Cornell acquisition. We're projecting adjusted EBIT margin for the quarter to be within a range of 16% to 18%. We're forecasting interest expense in Q3 to be approximately $4 million, which includes $2 million of non-cash imputed interest. We expect an effective tax rate of 9% to 13% for the quarter, which is lower than normal due to the utilization of foreign tax credits. And we're projecting EPS to be within the range of $0.29 to $0.33 per share. This assumes weighted average shares outstanding during the quarter of $92.2 million on a fully-diluted basis. We're projecting cash from operations to be within a range of $35 million to $45 million and capital spending is expected to be $5 million. I'll now turn the call back over to the operator for the questions and answers portion of our call. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Christopher Rolland with Susquehanna. Your line is open.
Christopher Rolland: Hey, guys. Thanks for the question. I know you guided for sequential on year-over-year growth in Medtech & Specialty audio and Precision Devices. I assume that's also going to include consumer, and if you could just kind a force rank, or give us some idea of what that sequential strength might be for those different segments, that would be great.
Jeffrey Niew: Yes. So, Chris thanks for the question. So first, I think for being very deliberate about this, the sequential growth is coming from the non-CMM portion of the business. So, I think we're starting to see particularly in the Precision Devices business. we think we're starting to see sequential improvement, on our way at some point and hopefully in the near future, our return to year-over-year growth on a pro forma basis when you include Cornell. And we're seeing that, being relatively broad based. So, I think we're pretty pleased. We are seeing some sequential growth in the Medtech & Specialty audio. I think it's going to be quite honestly a little bit more pronounced the sequential growth in Q4 versus Q3. But we do expect in Precision Devices again have sequential growth in Q4 from Q3. As far as the CMM business, we are not in Q3, seeing a lot of sequential growth, I'd say, it's flattish. but it is coming off, I'd say a pretty strong Q2 on a year-over-year basis. We had a pretty strong Q2, I think, the CMM business was up about 8% or 9% year-over-year in Q2. So, it's coming off a pretty strong Q2.
Christopher Rolland: Great. And then I guess, maybe, following up there, because September for CMM typically is pretty strong for you guys. Are you seeing something different in content, or is it just purely timing? And then lastly, any update on potentially selling that business and yes, we'll just stop there.
Jeffrey Niew: Okay. So, let me take the second question first. I would say not a huge update from the last quarter. but I would say, we're entering closer towards a conclusion. And so, I think that's about what we can say at this point, where it's inching closer towards a conclusion. I would say overall, for the full-year, the CMM business is actually, going to be up, pretty significantly year-over-year. And so, I think it appears, I would say, we're not going to comment by quarter. but I think it's up about 8% or so that's we're seeing for the full-year.
Christopher Rolland: Okay, great. Well, great results in the parts of the matter. Thanks, guys.
Operator: And your next question comes from the line of Anthony Stoss with Craig-Hallum. Your line is open.
Anthony Stoss: Afternoon, guys. I have a couple of questions. On the CD acquisition, I think, the past quarter, you were kind of ballparking it to equate to about $135 million to $140 million for the full-year 2024. Is that changed or is that still kind of the right number to think about?
John Anderson: I'd say, it's a little lower than that, although here's what I would say, I think when we announced the deal. We talked about $26 million in EBITDA for this year. We're still sticking, we're going to hit the $26 million of EBITDA even on the lower number. And the way we're doing that quite frankly is the synergies are larger than we had expected. I think we've talked about that probably in the past. I think a couple of quarters ago, we were talking of maybe, a couple million dollars of kind of price opportunity. Last quarter, we talked maybe $3 million to $4 million, I would say, it's probably closer to $5 million now, in terms of price in that business. So, we're feeling pretty good about, where we are. And I think what I'd say, talking about CD acquisition is, the margins are coming up like probably a little faster than we would have expected, even on lower revenue, which is I think a really good sign, because as the market starts to recover, we can see that the margins are going to expand and we're going to get to the target margins that we've kind of talked about early on faster than we probably would have said.
Jeffrey Niew: Anthony, just to give a little color to that, when we acquired CD, Q4 of last year, margins were right around 30%. Same thing in Q1 of this year and we're seeing sequential -- pretty significant sequential improvement. We expect to be kind of in the high-30s as we exit 2024.
John Anderson: Yes. and so and that's a combination, obviously of some of this capacity utilization, but it's also getting the synergies.
Anthony Stoss: Got it, perfect. Second question, just wanted to confirm something, so the September guide, are you assuming anything from your prior biggest handset customer in terms of content in a handset?
Jeffrey Niew: So again, what I'm trying to say is actually, we're not going to make comments on specific customers. I think overall, I would just make the comment again. The growth sequentially is coming from the non-CMM portion of the business. And I think we keep continuing to focus on overall, reducing our exposure to mobile, which is our -- one of our lowest gross margin markets. but overall, if you look at for the full-year, the CMM business will be up 8% based on what we're seeing for this year for the full-year.
Anthony Stoss: Got it. Okay. And then lastly, Jeff, I think in the past quarters, you were sitting with about five months' worth of inventory in PD and you wanted to bring it down to two months. Are we still in that kind of same five months or is it starting to come in?
Jeffrey Niew: So, you're referring to inventory in the channel. Correct? That's what you're referring to?
Anthony Stoss: Yes.
Jeffrey Niew: Yes. So, we're definitely seeing -- so here's like again, I kind of brought this up. We expect PD both, in the classic PD, as well as Cornell to be sequentially improving in Q3, and we expect it to improving in Q4. We are seeing the inventory in the channel starting to come down. but it's probably coming down a little bit slower than we expected. So, the steepness of the sequential improvement is probably a little less than we would have expected, but we're definitely seeing it. When I look at the numbers, we had some nice even sequential growth we're going to have from -- in Cornell, but again, in classic PD from Q2 to Q3. So, the inventory is definitely coming down in the channel and there are still pockets, where there's still probably too much inventory. But overall, we're starting to kind of see the light at the end of the tunnel in the PD markets. So, one thing I just would kind of make a comment on, Anthony is, passives versus semiconductors, because I think we sometimes get these things mixed. What we're seeing is the semiconductor channel, which we're not obviously involved with as much. There is a lot of inventory still in semiconductors, but the passive inventory in the channel -- the passive inventory has been reducing at a faster rate than semiconductor in the channel.
Anthony Stoss: Very good. Thanks, Jeff for all the color.
Jeffrey Niew: Yes.
Operator: And your next question comes from the line of Tristan Gerra with Baird. Your line is open.
Tyler Bomba: Hi. This is Tyler on for Tristan. Thanks for taking my questions. I know you talked about some of the pricing opportunities you have on the Cornell side, but can you speak to pricing across the rest of your businesses?
Jeffrey Niew: Yes. Sure, I can talk about it. I would sit there and say first in the Medtech & Specialty audio pricing is stable. I wouldn't say we've gotten big price increases or reductions. It's very, very stable. Again, a lot of things we have with these customers are longer-term contracts, very stable. I think we're a very valuable -- valued supplier. In the Precision Devices segment, outside of Cornell, we're seeing some modest price increases. I think again, I think I've talked about this before, Tyler where -- when we first started doing pricing in the classic PD section, we had some larger increases. Now, it's kind a smaller, but continual. And then, I think lastly, is CMM business. I'd say, outside of mobile, pricing's been pretty stable in our CMM business. Mobile is still challenged. I would sit there and say mobile is still challenged. And so, that's probably our biggest challenge is the mobile area. And again, as we try to over time reduce our exposure to mobile, we would probably see less and less price decreases in that business.
Tyler Bomba: Great. And then just looking at the Hearing Health business, have you seen anything notable to call out on the OTC market? Any sense that there's upside relative to your expectations for that business?
Jeffrey Niew: Yes. we've been on the call, like many times talking about OTC, and I've always kind a like tried to hold back expectations in terms of how big this could be. It still is not really like becoming a significant piece of business for us. And what I could sit there and say pretty confidently, there's no socket I can point to that we've really lost that have any significant volume. And so it's just not developing the way people would had hoped. but more it's kind of in-line what we'd hoped. Now, what I would say, I still think the OTC market is helping with the traditional hearing aid market, where people hearing more about hearing aids. And maybe, they go look in over the counter hearing aid and then they opt into at the traditional hearing aid channel. And these are complicated devices. And I think there's probably a little bit of a, I would say, an underappreciation for the value of the audiologist in the way this works in terms of a person getting a hearing aid. And I think people are starting to realize that. And again, having been in the market for many years, we didn't factor in too much in for OTC and it's probably meeting expectation, but at a very low level. But the traditional hearing aid channel continue to do very well.
Tyler Bomba: Great. Thanks, again for taking the questions.
Operator: Our next question comes from the line of Bob Labick with CJS Securities. Your line is open.
Bob Labick: Thanks. Good afternoon.
Jeffrey Niew: Hey, Bob.
John Anderson: Hey, Bob.
Bob Labick: Hi. I would say, you talked obviously about, in Precision Devices in particular. You have the destock going on in the inventory in the channel and stuff. But can you maybe talk a little bit about the overall end-market demand, where the biggest drivers are, where you see that and how long it takes to kind of get back up to that growth rate?
Jeffrey Niew: Yes. So, let me kind of just try to divide it up into a few different markets. We got defense, medtech, industrial, other. We'll make some comments a little bit about, electric as well. And again, Cornell, as well as the traditional PD participate in all these areas. And so, what I would sit there and say let me start with defense, we're definitely seeing growth in defense. We are seeing some growth in defense. It's not probably as high as we would have expected. but for the full-year, we will see growth in defense. Medtech, there has been a number of areas, where we have seen inventory issues, not the hearing aid, but in some of our other Precision Devices markets. But we are expecting that some pretty strong year-over-year growth in Medtech in the back half of the year as the inventory has kind of weighing it down, right. So, we are starting to see that in the marketplace. My guess what I would sit there and say is that the one market that's probably a little bit probably the more murky of all is the industrial/others. And that market has been, I'd say, not it's still in decline and there's some modest improvement that we're seeing going forward, but it's not like and that's probably the area when I kind of set up front that we're -- the steepness of the recovery is probably not as large as we thought, probably really more in the industrial area. We're seeing some sequential improvement. Now, let me just cut it a different way. I could also cut it a different way, which is OEM versus distribution. We're expecting some pretty strong back half of the year, sequential improvement at our OEM customers. A lot of that driven by Med and our distribution we're expecting modest sequential growth in the back half of the year.
Bob Labick: Okay. Got it. thanks. And then, I haven't really had a chance to fully go through this. So, at the risk of sounding a little silly, could you talk about the goodwill impairment in CMM and what I guess, the process was and what that kind of says to us about that segment?
John Anderson: Sure, Bob. I can take that. So, as you recall in the third quarter of last year, we announced that we were reviewing strategic alternatives for the CMM business. That review included a range of possibilities including a potential sale or restructuring in the business. During the second quarter of 2024, we evaluated the potential outcomes of our review. And we concluded as a management team that it's more likely than not the fair value of the CMM reporting unit was below its carrying value. And as a result, we recorded a goodwill impairment charge of $249 million.
Bob Labick: Okay. got it. And basically, you said, you're inching towards a resolution there. Can you talk about M&A? I mean, you've talked about most likely in the PD segment, but can you still -- is M&A still doable with the kind of ongoing CMM strategic alternatives? Or are they going to be separate events you'll finish CMM and then get back to potential M&A? Or how's that process playing?
Jeffrey Niew: Well, let me start with the first statement, which is our cash flow continues to be very robust. We're very pleased with the cash flow in the first half. Normally, seasonally, cash flow is usually weaker in the first half. We had a very strong first half cash flow. We're expecting that to continue in the back half. And I would sit there and say, we are definitely looking at acquisitions. but I guess what I would just say is, we want to make sure we don't do anything that our shareholders would look at and say, why are they doing that? There's a lot of opportunities out there. and I point to the Cornell acquisition, which we think is from a synergy standpoint from -- and how it fits with what we do. I mean this has been a really great acquisition for us. We're looking for that next Cornell. And so, I don't think it's going to take for a conclusion of the CMM process to move forward with the M&A. If we find the right thing, our balance sheet's in good shape, we are going to move forward with M&A.
John Anderson: And Bob, we've always said, we're going to maintain modest debt levels, not going above, call it 275 on a net leverage ratio.
Jeffrey Niew: yes. And that kind of leads to just a little bit on the capital allocation. We are continuing to buy back shares as well, because of the cash flow.
Bob Labick: Okay. Super. Thank you very much.
Operator: And there are no further questions at this time. I will turn the call back over to Sarah Cook.
Sarah Cook: Thank you for joining us today. As always, we appreciate your interest in Knowles and look forward to speaking with you in the next earnings call. This concludes our call today.
Operator: And this concludes today's conference call. You may now disconnect.
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