Executive Summary / Key Takeaways

• Knowles Corporation has successfully transformed into a focused industrial technology company, divesting its consumer business to concentrate on higher-growth, higher-margin opportunities in MedTech, Defense, Industrial, and Electrification markets.
• The company delivered Q1 2025 revenues at the high end of guidance ($132.2 million) and EPS at the midpoint ($0.18), demonstrating solid execution amidst mixed market conditions and operational ramp-up challenges.
• Growth is expected to resume year-over-year starting in Q2 2025, driven by the ramp-up of the specialty film product line, normalizing inventory levels in industrial markets leading to increased distribution orders, and strong backlog in MedTech and Defense.
• Knowles possesses differentiated technology in high-performance components, custom engineering expertise, and a strategic proximity manufacturing footprint, providing competitive advantages, particularly in high-reliability and tariff-sensitive applications.
• Robust cash flow generation is a key strength, supporting strategic capital allocation priorities including exploring synergistic M&A opportunities (seeking the "next Cornell"), executing share repurchases ($189 million remaining authorization as of Q1 2025), and maintaining a healthy balance sheet with a low net leverage ratio (0.7x at March 31, 2025).

Knowles Corporation is undergoing a significant strategic evolution, shedding its legacy as a broad-based component supplier to emerge as a more focused industrial technology player. This transformation, highlighted by the recent divestiture of the Consumer MEMS Microphones (CMM) business and the strategic acquisition of Cornell Dubilier (CD), centers the company on high-performance, high-reliability solutions for demanding applications across MedTech, Defense, Industrial, Electrification, and Energy markets. This strategic pivot aims to leverage Knowles' core strengths – deep engineering expertise, unique technology, proprietary manufacturing techniques, and a customer-centric approach – to capture growth and expand margins in less cyclical, higher-value segments.

Central to Knowles' value proposition is its differentiated technology portfolio. The company designs and manufactures specialty electronic components including high-performance capacitors, radio frequency (RF) and microwave filters, advanced medtech microphones, and balanced armature speakers. These products are engineered to perform unique and critical functions requiring extreme reliability, often through custom design and scalable manufacturing processes. For instance, its balanced armature speakers are designed to enhance the performance of customer products, particularly in the MedTech hearing health market, while advanced medtech microphones serve critical medical device applications. In the Precision Devices segment, high-performance capacitors and RF filters are vital for demanding defense and industrial uses. The company is actively investing in R&D, increasing spend in both PD and MSA segments to drive future growth. A notable area of focus is the specialty film capacitor line, targeting pulse power applications that require significant energy release in a short time – a capability enabled by Knowles' unique technology. While specific quantifiable performance advantages over all alternatives are not detailed, the company emphasizes the nature of these benefits: superior reliability, customizability, and performance enhancement in critical applications, which collectively contribute to its competitive moat and ability to secure sole-source positions for a significant portion of its PD business. New R&D initiatives are also exploring opportunities to leverage core competencies for growth acceleration in medical markets beyond 2025.

The competitive landscape for Knowles is varied, with rivals often specializing in different component areas. In capacitors and RF solutions, key competitors include larger players like Murata Manufacturing (MRAAY), TDK Corporation (TTDKY), and Vishay Intertechnology (VSH), as well as analog semiconductor firms like Analog Devices (ADI) in areas like audio processing. Knowles holds an estimated 5-10% aggregate market share in its primary segments. Compared to Murata and TDK, Knowles generally operates at a smaller scale, which can impact cost efficiency (e.g., Murata's components potentially having 20% lower operating costs per unit). However, Knowles differentiates itself through its focus on high-performance, niche applications requiring custom engineering and extreme reliability, particularly in MedTech and Defense, where performance and reliability often outweigh upfront cost considerations. For example, its RF products are noted for durability in harsh environments, and balanced armature speakers for sound fidelity in hearing health. While ADI may offer faster processing in some areas, Knowles leverages its specific expertise in micro-acoustic components. Vishay competes on cost-effectiveness, but Knowles' technological edge in high-performance niches allows it to target premium segments. Knowles' strategic shift towards higher-margin industrial and medtech markets, coupled with its proximity manufacturing strategy (producing in the US for US customers, Asia for Asia), positions it favorably regarding potential tariff impacts, potentially allowing it to pass on costs and even gain share from competitors with different manufacturing footprints.

The strategic transformation culminated in the sale of the CMM business, which closed in late December 2024. This move significantly reduced Knowles' exposure to the volatile consumer and mobile markets, which historically carried lower margins. The transaction generated approximately $141.9 million in total consideration, including cash and Syntiant preferred stock, and is now reported as discontinued operations. Concurrently, the acquisition of Cornell Dubilier in November 2023 bolstered the Precision Devices segment, adding film, mica, and electrolytic capacitors and expanding presence in electrification and industrial markets. The integration of CD has progressed well, with management highlighting accelerated cost synergies, operational improvements, and pricing actions contributing to a significant 700 basis point improvement in CD's adjusted EBITDA margins throughout 2024 and making the acquisition accretive in its first year of ownership. Restructuring efforts, including headcount reductions, are ongoing to rightsize the cost structure following the CMM divestiture and further optimize operations.

Knowles commenced 2025 on solid footing, delivering Q1 revenues of $132.2 million, at the high end of the guided range, despite a slight 0.8% decrease year-over-year. Non-GAAP diluted EPS was $0.18, hitting the midpoint of guidance. Gross profit margin improved slightly year-over-year to 40.3% (GAAP), benefiting from reduced CD-related costs and company-wide product cost reductions, though non-GAAP gross margin saw a decrease to 41.6% due to unfavorable mix and production inefficiencies in the specialty film ramp. Operating expenses saw slight changes, with increased R&D investment offset by lower SG&A (benefiting from prior restructuring and lower intangible amortization, partially offset by accelerated stock-based compensation). Interest expense decreased significantly due to lower debt levels. The MedTech Specialty Audio segment saw a modest 1.2% revenue increase year-over-year in Q1 2025, primarily driven by a supply agreement with Syntiant post-CMM sale (metal cans), though this lower-margin business and unfavorable mix pressured gross margins. The Precision Devices segment experienced a 2.4% revenue decrease, impacted by lower demand in industrial and defense markets, partially offset by strength in MedTech. PD gross margins were flat year-over-year, with legacy PD improvements offset by challenges in ramping the specialty film line. Adjusted EBIT for continuing operations decreased year-over-year in Q1 2025, primarily due to lower non-GAAP gross profit margin, partially offset by lower non-GAAP operating expenses.

Looking ahead, management is guiding for Q2 2025 revenues between $135 million and $145 million and non-GAAP diluted EPS between $0.21 and $0.25. This outlook anticipates a resumption of year-over-year revenue and earnings growth starting in the second quarter. Key drivers for this expected growth include the continued ramp-up of the specialty film product line, which is seeing improving yields and production flow with a larger ramp expected in the second half of 2025. Furthermore, inventory levels in the industrial markets, particularly within the distribution channel, are showing signs of normalization, moving from an estimated ~6 months supply in Q3 2024 to 3-3.5 months by the end of Q1 2025 (normal is below 3 months). This normalization is translating into increased distribution orders, contributing to strong booking trends and backlog, particularly in the PD segment. The MedTech Specialty Audio segment also boasts a strong backlog for Q2, with expected sequential and year-over-year growth driven by improved customer mix and performance in specialty audio. For the full year 2025, Knowles is confident in delivering revenue and profitability growth, supported by increasing order activity, growing backlog, and normalizing industrial demand. Capital expenditures are expected to be around 5% of revenues in 2025, primarily focused on specialty film capacity expansion. Beyond 2025, a significant $75 million plus order in the energy sector for specialty film capacitors, with shipments starting in 2026 ($25 million+ expected in 2026), provides visibility into future growth acceleration.

Knowles maintains a robust financial position, ending Q1 2025 with $101.9 million in cash and cash equivalents and total debt of $188.8 million, resulting in a low net leverage ratio of 0.7 times. Liquidity exceeds $350 million, providing ample financial flexibility. The company generated $1.3 million in cash from operating activities in Q1 2025, impacted by $21 million in payments related to CMM supplier obligations and working capital changes, but benefiting from customer prepayments. Adjusted free cash flow was $18.3 million in Q1 2025. Management expects strong cash generation to continue throughout 2025, targeting operating cash flow of more than 15% of revenues from continuing operations. This strong cash flow supports strategic capital allocation priorities, including active exploration of synergistic M&A opportunities, aiming to replicate the success of the Cornell acquisition, and returning capital to shareholders through share repurchases. The board recently authorized an additional $150 million for buybacks, with $189 million remaining under the program as of March 31, 2025.

While the outlook is positive, investors should be mindful of key risks. The successful ramp-up of the specialty film product line is critical for achieving expected growth in the second half of 2025; delays could impact financial performance. The recovery in the industrial market and the consistency of orders from distribution partners remain areas to monitor, as booking trends have been inconsistent. Although management believes direct and indirect tariff exposure is minimal and costs can be passed on, the potential impact on customer end-market demand, particularly in the industrial sector, remains the most difficult to predict and could be affected by broader macroeconomic changes. Finally, while the CMM divestiture is complete, the company is still incurring some dis-synergies and costs related to settling remaining obligations ($12 million expected in Q2 2025), which will impact near-term cash flow.

Conclusion

Knowles Corporation has strategically repositioned itself as a focused industrial technology company, leveraging its differentiated high-performance component expertise to target attractive, higher-margin markets. The successful divestiture of the consumer business and the accretive acquisition of Cornell Dubilier have reshaped its portfolio and margin profile. While Q1 2025 results reflected mixed market conditions and operational ramp-up challenges, the outlook for Q2 and the full year 2025 points towards a resumption of growth, driven by key product ramps, normalizing industrial demand, and strong backlogs in core segments.

Supported by robust cash generation and a healthy balance sheet, Knowles is well-equipped to pursue both organic growth initiatives and selective, synergistic acquisitions. The company's technological advantages in niche, high-reliability applications provide a competitive edge against larger, more generalized players. Investors should watch the execution of the specialty film ramp, the pace of industrial market recovery, and the progress on strategic M&A as key indicators of Knowles' ability to realize its full potential as a focused industrial technology leader.