• Revenue: $196 million, above the midpoint of guidance, up 36% year-over-year.

• Earnings Per Share (EPS): $0.20, at the high end of guidance, up $0.15 from the previous year.

• Cash from Operations: $17 million, exceeding the high end of guidance.

• MedTech and Specialty Audio Revenue: Up 26% year-over-year to $57 million.

• Precision Device Revenue: Up 38% year-over-year to $74 million, driven by Cornell acquisition.

• Consumer MEMS Microphone Revenue: Up 44% year-over-year to $65 million.

• Gross Margin: MedTech and Specialty Audio at 54.8%, Precision Devices at 36.1%, Consumer MEMS Microphones at 26.2%.

• Debt: $293 million, including $180 million under revolving credit and interest-free seller note from Cornell acquisition.

• Net Leverage Ratio: 1.1 times based on trailing 12-months EBITDA.

• Capital Spending: $3 million in the quarter.

• Cash and Cash Equivalents: Ended the quarter with $122 million.

• Warning! GuruFocus has detected 6 Warning Signs with KN.

Release Date: May 01, 2024

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

Positive Points

• Knowles Corp (NYSE:KN) reported Q1 revenue of $196 million, surpassing the midpoint of their guidance, indicating strong market demand and effective business strategies.

• Earnings per share (EPS) reached $0.20, at the high end of the guided range, reflecting improved operational efficiency and profitability.

• Significant revenue growth in the MedTech and specialty audio segment, up 26% year-over-year, driven by robust market conditions and successful product adoption.

• Precision Device segment saw a 38% revenue increase from the previous year, largely due to the strategic acquisition of Cornell CornellCookson, which is expected to continue contributing to growth.

• Consumer MEMS microphone business experienced a 44% increase in revenue, indicating recovery and growth in this segment.

Negative Points

• Despite overall growth, the Precision Devices segment faced challenges with high inventory levels in distribution and industrial end markets, which could impact short-term growth.

• Gross margins in the Precision Devices segment declined by 1,100 basis points due to lower factory capacity utilization and costs associated with the Cornell acquisition.

• Increased interest expenses by $4 million compared to the previous year, largely due to the Cornell acquisition, which could affect net profitability.

• The strategic alternatives process for the Consumer MEMS Microphone business is taking longer than expected, creating uncertainty for stakeholders.

• While revenue is increasing, the company noted excess share inventory in the Precision Devices segment, which could negatively impact demand and financial performance in upcoming quarters.

Q & A Highlights

Q: Can you discuss the expected recovery profile for the second half of the year, particularly in terms of sequential growth and by segment? A: Jeffrey Niew, President and CEO of Knowles Corp, explained that the Precision Devices (PD) segment is expected to see sequential growth in Q3 and Q4, with a cautious outlook on the industrial and distribution sectors. The MedTech and Specialty Audio (MSA) segment is performing strongly, with significant growth expected in Q4 due to new product launches. The Consumer MEMS Microphone (CMM) segment is also expected to perform better in the second half of the year, with a more optimistic outlook than three months prior.

Q: What updates can you provide on the strategic alternatives process for the CMM business and any broader updates on M&A activities? A: Jeffrey Niew mentioned that the company is progressing towards a conclusion regarding the CMM business, considering various stakeholders. He highlighted that Knowles is actively looking for acquisition opportunities, particularly ones that align with their strategic positioning. John Anderson, CFO, added that the company plans to continue share repurchases and manage debt levels effectively.

Q: Could you provide an update on the integration and synergies from the Cornell acquisition, particularly regarding pricing power and margin improvements? A: Jeffrey Niew confirmed that Knowles is on track to deliver the cost synergies projected during the Cornell acquisition announcement. He also noted better-than-expected pricing opportunities emerging, particularly in the second half of the year, which should help improve gross margins significantly.

Q: How is the competitive environment affecting each of your segments, and what changes have you observed in go-to-market or pricing strategies among your competitors? A: Jeffrey Niew described the competitive environment as stable across segments, with no significant changes. He emphasized Knowles' strong position in markets like MedTech and defense, where they have unique offerings and some pricing power. In the Consumer MEMS Microphone segment, the company is reducing exposure to the mobile market, which is more challenging.

Q: What is driving the positive pricing you are able to implement in the Precision Devices segment, and how do you reconcile this with the broader market environment? A: Jeffrey Niew highlighted that Knowles' strategy of focusing on differentiated products in markets like MedTech and defense allows for some pricing power. He also mentioned the unique opportunity with Cornell, where small price increases can be effectively passed through distribution channels, benefiting overall pricing dynamics.

Q: Can you provide insights into the expected revenue and EBITDA from Cornell for the year, considering the current macroeconomic headwinds? A: Jeffrey Niew projected that Cornell's revenue for the year would be slightly below the initial $140 million target, likely between $135 million and $140 million. However, he assured that the EBITDA targets would be met due to recognized synergies, and John Anderson added that Cornell is expected to generate more cash flow than initially planned.

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

This article first appeared on GuruFocus.