Business Overview and History Knowles Corporation was founded in 1937 as a manufacturer of acoustic components for the hearing aid industry. The company started as a small business focused on developing innovative microphone and speaker technologies to improve the quality of life for those with hearing impairments. Over the decades, Knowles continued to expand its product portfolio and technical capabilities, becoming a leading global provider of high-performance electronic components and solutions.
In the 1950s and 1960s, Knowles diversified into microphones and speakers for other applications beyond hearing aids, including the communications, industrial, and consumer electronics markets. The company’s precision manufacturing expertise and continued investments in research and development allowed it to stay at the forefront of evolving audio technology needs.
Knowles faced a major challenge in the 1990s as the hearing aid market consolidated and put pricing pressure on the company. In response, Knowles shifted its focus to high-growth markets like mobile devices, successfully growing its position as a supplier of microphones and speakers for smartphones and other consumer electronics. This strategic pivot helped the company weather the industry changes and emerge as a more diversified enterprise.
In the 2000s and 2010s, Knowles continued to broaden its product portfolio, expanding into areas like high-performance capacitors, radio frequency filters, and advanced micro-acoustic solutions for medtech applications. The company made several strategic acquisitions to enhance its technological capabilities and market reach. Knowles also restructured its operations to improve efficiency and profitability during this period.
Through its 80+ year history, Knowles has navigated industry shifts, competitive pressures, and economic cycles by continuously innovating, diversifying its business, and aligning its capabilities with the evolving needs of its customers across a range of end markets. The company’s commitment to engineering excellence, operational discipline, and serving the needs of its global customer base has been instrumental to its growth and success over the decades.
Financial Performance and Ratios Knowles’ recent financial performance has been marked by a mix of growth and challenges. In the latest reported quarter (Q3 2024), the company’s revenues from continuing operations increased by 32% year-over-year to $143 million, driven by the acquisition of Cornell Dubilier Electronics in late 2023 and 4% organic growth. This result was at the high end of the company’s guided range. The company’s adjusted EBITDA margins for the total company stood at a healthy 24.6% during the quarter.
For the full fiscal year 2023, Knowles reported revenue of $707.60 million and net income of $72.40 million. The company generated operating cash flow of $122.70 million and free cash flow of $105.80 million in 2023.
However, the company’s net income from continuing operations has been more volatile, decreasing from $39 million in the first nine months of 2023 to $13 million in the same period of 2024. This decline was primarily due to higher operating expenses, interest expense, and unfavorable foreign currency exchange rate changes, partially offset by improved gross profit. In Q3 2024, net income was $0.50 million, with earnings per share of $0.26, which was at the midpoint of the company’s guided range.
Liquidity Knowles’ balance sheet remains relatively strong, with a net debt to adjusted EBITDA ratio of 1.0x as of September 30, 2024. The company’s current ratio stands at 2.35, indicating a solid liquidity position. The quick ratio is 1.67, further supporting the company’s short-term financial health. Additionally, Knowles has demonstrated a commitment to shareholder returns, with a free cash flow yield of approximately 7% based on the current stock price.
As of September 30, 2024, Knowles had cash and cash equivalents of $92.60 million. The company’s debt-to-equity ratio was 0.28, reflecting a conservative capital structure. Knowles also has access to a $400 million revolving credit facility, with $108 million outstanding as of September 30, 2024, providing additional financial flexibility.
Diversified End Markets and Product Portfolio Knowles’ product portfolio spans several high-performance electronics categories, catering to a diverse range of end markets. The company operates through two reportable segments: Precision Devices (PD) and MedTech & Specialty Audio (MSA).
The Precision Devices (PD) segment includes high-performance ceramic capacitors and RF products, serving the medtech, defense, electric vehicle, and industrial sectors. In the nine months ended September 30, 2024, PD revenues were $227.20 million, up 49.8% compared to the prior year period, primarily driven by the acquisition of Cornell Dubilier Electronics. However, the segment faced challenges, with EBIT decreasing from $21.60 million to $10.50 million, and EBIT margin declining from 14.2% to 4.6%. This was due to lower factory capacity utilization in the legacy PD business, integration costs related to the CD acquisition, and amortization of fair value adjustments to inventory.
The MedTech & Specialty Audio (MSA) segment encompasses advanced micro-acoustic microphones, balanced armature speakers, and audio solutions, primarily catering to the medtech and consumer electronics markets. MSA revenues for the nine months ended September 30, 2024, were $183.80 million, up 10.8% compared to the prior year period. The segment’s EBIT increased by 25.3% to $71.90 million, with EBIT margin expanding from 34.6% to 39.1%. This improvement was driven by higher gross profit margins, favorable product mix, and foreign currency changes.
In terms of geographic markets, Knowles generated 43.8% of its Q3 2024 revenues from the United States, 35.1% from Asia, 16.5% from Europe, and 4.9% from other Americas regions, highlighting its global presence and diversified customer base.
Outlook and Strategic Initiatives Looking ahead, Knowles’ management has provided guidance for the fourth quarter of 2024, expecting revenues in the range of $141 million to $151 million, representing a 5% year-over-year increase. The company projects adjusted EBIT margins between 21% and 23% for Q4 2024. Earnings per share are expected to be within a range of $0.26 to $0.30, with cash from operating activities projected to be between $30 million and $40 million. Research and development expenses for Q4 2024 are anticipated to be between $8 million and $9 million, while selling and administrative expenses are expected to range from $23 million to $25 million.
The company’s long-term strategy focuses on further strengthening its position in high-growth, high-margin industrial technology markets through organic investments and strategic acquisitions. The recent acquisition of Cornell Dubilier Electronics has expanded Knowles’ position in film, electrolytic, and mica capacitors used in medtech, defense, and industrial electrification applications.
Following the divestiture of the CMM business, Knowles plans to hold an Investor Forum in the first quarter of 2025 to outline its growth strategy and future plans in more detail. The company’s management has expressed confidence in its ability to drive shareholder value by leveraging its expanded margin profile, improved exposure to attractive end markets, and disciplined capital allocation approach.
Risks and Challenges While Knowles has made significant strides in transforming its business, the company is not without its risks and challenges. The company operates in a highly competitive environment, facing competition from both large, diversified players and specialized niche competitors. Fluctuations in customer demand, particularly in the industrial and communication markets, can impact Knowles’ financial performance.
Additionally, the company is exposed to supply chain disruptions, commodity price volatility, and foreign currency exchange rate fluctuations, all of which can affect its profitability. Knowles’ ability to successfully integrate and realize synergies from future acquisitions will also be a key factor in its continued growth and margin expansion.
The PD segment, in particular, has faced challenges due to continued weakness in the industrial and communication markets, associated with excess customer and channel inventory. The integration of the Cornell Dubilier Electronics acquisition and optimization of the combined business will be crucial for improving the segment’s performance.
Conclusion Knowles Corporation has undergone a strategic transformation, positioning itself as a premier industrial technology leader serving high-growth, high-margin markets. The divestiture of the CMM business and the acquisition of Cornell Dubilier Electronics have been pivotal steps in this evolution, allowing the company to focus on its core strengths and capitalize on emerging trends in the medtech, defense, electrification, and industrial sectors.
While the company has faced some financial challenges in recent quarters, Knowles’ diversified product portfolio, strong balance sheet, and disciplined capital allocation approach position it well for future growth and value creation. The company’s focus on innovation, operational excellence, and serving demanding applications across multiple industries provides a solid foundation for long-term success.
Investors will be eagerly anticipating the company’s upcoming Investor Forum, where management is expected to provide more detailed insights into its strategic roadmap and long-term prospects. As Knowles continues to navigate the evolving landscape of high-performance electronics, its ability to leverage its technological expertise, global operational capabilities, and customer-centric approach will be key to driving sustainable growth and shareholder value in the years to come.
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