10-Q: Knowles Q3 Earnings Surge, Driven by Strong PD Segment

Knowles Corporation reports significant increases in Q3 and year-to-date earnings and revenue from continuing operations, fueled by strong demand in its Precision Devices segment.

Summary

• Revenues from continuing operations increased by 7.3% to $152.9 million for the third quarter of 2025, and by 4.9% to $431.0 million for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Net earnings from continuing operations surged by 95.7% to $18.0 million in Q3 2025 and by 95.4% to $25.4 million for the nine months ended September 30, 2025.
• Diluted earnings per share from continuing operations improved to $0.21 in Q3 2025 from $0.10 in Q3 2024, and to $0.29 for the nine months ended September 30, 2025, from $0.14 in the prior year.
• Gross profit margin from continuing operations expanded to 45.7% in Q3 2025 from 44.1% in Q3 2024, and to 42.6% for the nine months ended September 30, 2025, from 42.3% in the prior year.
• The Precision Devices (PD) segment saw revenues increase by 11.9% to $88.2 million in Q3 2025 and by 5.3% to $239.2 million for the nine months ended September 30, 2025.
• The MedTech & Specialty Audio (MSA) segment revenues increased by 1.6% to $64.7 million in Q3 2025 and by 4.4% to $191.8 million for the nine months ended September 30, 2025.
• Adjusted free cash flow increased to $81.2 million for the nine months ended September 30, 2025, up from $63.5 million in the prior year.
• The company repurchased $55.0 million of common stock during the nine months ended September 30, 2025, with $139.0 million remaining under the current authorization.
• Long-term debt decreased to $104.0 million as of September 30, 2025, from $134.0 million at December 31, 2024.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance from continuing operations, with significant growth in revenue, earnings, and EPS. Strategic transformation post-CMM divestiture appears to be yielding positive results, particularly in the Precision Devices segment. While cash and cash equivalents decreased, adjusted free cash flow improved, and debt was reduced. The ongoing share repurchase program further indicates management's confidence. Minor negatives like impairment charges and yield issues are noted but do not overshadow the overall positive trajectory.

Positives

• Strong revenue growth in continuing operations, with Q3 2025 up 7.3% and 9M 2025 up 4.9%.
• Significant improvement in net earnings from continuing operations, nearly doubling year-over-year for both the quarter and nine-month period.
• Diluted EPS from continuing operations more than doubled for both the quarter and nine-month period.
• Gross profit margins improved, reflecting higher shipping volumes, product cost reductions, and increased factory capacity utilization.
• Precision Devices segment demonstrated robust growth, driven by higher demand in defense, electrification, medtech, and industrial markets, along with higher average pricing.
• Increased bookings and backlog in the Precision Devices segment for capacitor products over the past four quarters.
• Adjusted free cash flow increased by $17.7 million for the nine-month period, indicating improved cash generation from continuing operations.
• Reduced interest expense due to a lower outstanding revolving credit facility balance and lower imputed interest on the Seller Note.
• Ongoing share repurchase program with $139.0 million remaining, signaling confidence in company valuation and returning capital to shareholders.
• Successful divestiture of the Consumer MEMS Microphones (CMM) segment, supporting the company's transformation into an industrial technology focus.

Negatives

• Cash and cash equivalents decreased to $92.5 million at September 30, 2025, from $130.1 million at December 31, 2024.
• Net cash provided by operating activities decreased to $66.8 million for the nine months ended September 30, 2025, from $95.0 million in the prior year, primarily due to CMM-related payments and the absence of CMM cash generation.
• Lower than expected yields in the Cornell Dubilier (CD) business as the specialty film product line ramps up, impacting gross profit.
• Unfavorable product mix and lower average pricing on mature products in the MedTech & Specialty Audio segment, partially offsetting growth.
• An impairment charge of $3.6 million was recorded for certain machinery and equipment in the MedTech & Specialty Audio segment during the nine months ended September 30, 2025.
• Restructuring charges of $3.2 million for the nine months ended September 30, 2025, primarily related to headcount reductions post-CMM sale, indicating ongoing cost adjustments.

Risks

• Ability to achieve expected strategic and financial benefits from the CMM divestiture.
• Difficulties or delays in realizing expected synergies from acquisitions.
• Fluctuations in the company's stock market price, operating results, and cash flows.
• Ability to prevent or promptly remedy product quality issues.
• Risks associated with increasing inventories in anticipation of customer orders.
• Global economic instability, including inflation, rising interest rates, pandemics, and geopolitical uncertainties.
• Impact of changes to laws and regulations affecting product or service offerings.
• Ability to achieve reductions in operating expenses.
• Ability to qualify products and facilities with customers.
• Ability to obtain, enforce, defend, or monetize intellectual property rights, including potential litigation costs.
• Disruption caused by cybersecurity incidents.
• Increases in costs or availability issues for critical raw materials and components.
• Challenges in managing new product ramps and introductions for customers.
• Dependence on a limited number of large customers.
• Ability to maintain and expand existing relationships with leading OEMs.
• Increasing competition and new market entrants.
• Ability to develop new or enhanced products or technologies in a timely manner that achieve market acceptance.
• Escalating international trade tensions, new or increased tariffs, and trade wars.
• Financial risks, including currency fluctuations, credit risks, and market value fluctuations.
• Potential impairment of intangible or long-lived assets due to a sustained decline in stock price and market capitalization.
• Market risk associated with fluctuations in commodity prices, particularly for precious metals.
• Changes in tax laws, tax rates, and exposure to additional tax liabilities.

Future Outlook

The company expects to continue generating positive cash flow from operations and believes its future cash flow and access to capital markets will adequately fund working capital needs, capital expenditures, strategic investments, and share repurchases. Capital expenditures for 2025 are projected to be in the range of 4% to 6% of revenues. The company does not anticipate a new universal baseline tariff of 10% to have a material impact on operations, but continues to monitor trade policies and implement cost control and pricing actions to mitigate risks.

Management Comments

• The divestiture supports our continued transformation into an industrial technology company, consisting of our Precision Devices and MedTech & Specialty Audio segments, primarily serving the defense, medtech, industrial, and electrification markets.
• We have undertaken actions to help ensure that our cost structure is appropriate to support our remaining businesses, following some dis-synergies from the CMM sale.
• As inventory levels in the industrial markets have recently begun to normalize, our Precision Devices segment has experienced increased bookings for the past four quarters, leading to increased backlog across our capacitor products.
• We are optimizing operations and leveraging existing programs and strategies to reduce the impact from tariffs, and implementing pricing actions designed to mitigate the risk these policies may have on our revenues and operations.

Industry Context

Knowles is actively transforming into an industrial technology company, focusing on high-growth, high-margin markets such as medtech, defense, industrial, and electrification. This strategic shift, marked by the divestiture of the Consumer MEMS Microphones (CMM) segment, positions the company to capitalize on specialized electronic component demand in these sectors. The reported increase in bookings and backlog in the Precision Devices segment, particularly as industrial market inventory levels normalize, suggests a positive alignment with broader industrial recovery trends. The company's efforts to mitigate tariff impacts and optimize cost structure are consistent with industry-wide responses to global economic uncertainties and supply chain pressures.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various legal proceedings and claims arising in the ordinary course of business, primarily related to commercial, warranty, employment, and intellectual property matters.
• Management believes the disposition of these legal proceedings or claims will not have a material adverse effect on cash flow, results of operations, or financial condition, after considering recorded accruals and insurance coverage.
• The company may incur substantial costs for investigations and legal proceedings related to enforcing and defending its intellectual property rights, and may face retaliatory legal proceedings.

Related Party Transactions

• Received Series D-2 preferred stock of Syntiant Corp. with a fair value of $77.2 million as partial consideration for the sale of the CMM segment.
• Provided financing of $6.4 million to Syntiant, with a balance of $5.9 million at September 30, 2025, bearing interest at 13.0% after six months post-closing.
• Shares certain separation costs with Syntiant, with a remaining credit balance of $6.2 million at September 30, 2025; future costs will be shared equally as the balance is below the $6.5 million contractual threshold.
• Leases portions of its facilities to Syntiant, with $2.6 million in lease payments applied to the separation credit.
• Subleases portions of its manufacturing facilities to Syntiant at cost, totaling $5.2 million in operating lease right-of-use assets subleased at September 30, 2025.
• Recognized revenue totaling $4.4 million (Q3 2025) and $12.7 million (9M 2025) from transactions with Syntiant, reflected in the MedTech & Specialty Audio segment.
• Receivables, net include $4.0 million due from Syntiant at September 30, 2025.
• Recorded an impairment charge of $3.6 million for machinery and equipment associated with the MedTech & Specialty Audio segment, sold to Syntiant for a nominal price.

Stakeholder Impact

• Shareholders: Benefited from increased earnings per share and an ongoing share repurchase program, indicating return of capital. Director and officer trading plans may be perceived negatively by some, but are common for liquidity and diversification.
• Employees: Impacted by restructuring charges and headcount reductions primarily to rightsize operating expenses subsequent to the CMM sale.
• Customers: Benefiting from increased demand in defense, electrification, medtech, and industrial markets, leading to higher shipping volumes and increased backlog in the Precision Devices segment.
• Creditors: Debt levels decreased, and the company remains in compliance with all debt covenants, indicating strong financial health and ability to meet obligations.
• Suppliers: Increased demand and production could lead to higher orders for raw materials and components, though the company also notes risks related to costs and availability.

Next Steps

• Continue to monitor changes in international trade relations and trade policy, including tariffs, and implement cost control and pricing actions.
• Focus on ramping up the specialty film product line in the Cornell Dubilier business to improve yields.
• Manage capital expenditures within the expected range of 4% to 6% of revenues for 2025, prioritizing capacity expansion and cost savings.
• Repay the remaining $72.7 million balance of the Seller Note due on November 1, 2025.
• Continue to execute the share repurchase program, with $139.0 million remaining under authorization.
• Evaluate the impact of ASU 2024-03 on financial statements, effective for annual reporting in 2027 and interim reporting in Q1 2028.

Key Dates

Recommendation

The company's strong financial performance from continuing operations, marked by significant revenue and earnings growth, demonstrates successful execution of its strategic transformation post-CMM divestiture. The Precision Devices segment is a key driver, showing robust demand and increasing backlog. Improved gross margins and adjusted free cash flow indicate operational efficiency. The reduction in long-term debt and ongoing share repurchase program reflect sound capital management and a commitment to shareholder value. While some operational challenges exist (e.g., CD yields, MSA product mix), the overall trajectory is positive, suggesting the stock is undervalued given the strong underlying business fundamentals and strategic focus on high-growth industrial markets.

Keywords

Specialty Electronic Components, MedTech, Defense, Industrial, Electrification, Precision Devices, MedTech & Specialty Audio, Capacitors, RF Filters, Microphones, Speakers, SEC Filing, Earnings Report, 10-Q, Financial Results, Share Repurchase, CMM Divestiture