Knowles at 17th Annual Southwest IDEAS Conference: Strategic Growth Focus

On Wednesday, November 19, 2025, Knowles Corporation (NYSE:KN) presented its strategic vision at the 17th Annual Southwest IDEAS Conference. The company, having divested its consumer electronics business, is now concentrating on high-margin sectors like MedTech, Defense, and Industrial. CFO John Anderson shared insights on the company's growth objectives and challenges, emphasizing an 8-10% annual revenue growth target. Despite optimistic projections, the company faces hurdles in expanding its market share and improving profitability.

Key Takeaways

• Knowles aims for an 8-10% annual revenue growth, with a focus on MedTech, Defense, and Industrial markets.
• The company is targeting a significant increase in EBITDA margins from 24% to 30% within the next three to five years.
• A $75 million order in the alternative energy sector signals strong demand and necessitates facility expansion.
• Knowles plans strategic acquisitions in the Precision Devices segment, focusing on targets with $5 million-$30 million in EBITDA.
• The company maintains a robust balance sheet with net leverage below one and over $100 million in annual cash flow.

Financial Results

Knowles reported an 8% revenue CAGR from 2017 to 2024, attributing half to organic growth and half to acquisitions. The company is targeting an 8-10% revenue growth over the next five years, with 4-6% from organic growth and 4% from acquisitions. A noteworthy $75 million order in the alternative energy sector is expected to boost revenues significantly.

EBITDA margins currently stand at 24%, with a target to reach 30% within the next three to five years, representing a 400 basis point expansion. The company generates over $100 million in cash flow annually, supporting both organic initiatives and strategic M&A activities.

On the balance sheet front, Knowles maintains net leverage below one, aiming to exit the year at 0.5 times leverage. Capital investments are projected to be higher this year, reaching 5% of revenue, before normalizing to 3-4% post-2026. The company has also repurchased $55 million in stock this year, with a total of over $200 million in buybacks over the past few years.

Operational Updates

Following the divestiture of its consumer electronics business, Knowles has shifted its focus to high-growth sectors. The company has completed four bolt-on acquisitions, including the $265 million acquisition of Cornell Dubilier. Pricing strategies at Cornell Dubilier have added $9 million in revenue over the past two years.

The alternative energy sector represents a significant growth opportunity, highlighted by a $75 million order requiring the expansion of Knowles' South Carolina facility. Initial prototype deliveries are expected this quarter, with full ramp-up by the end of the quarter. Deliveries are projected to reach $3 million in Q1, increasing to a $10 million quarterly run rate by Q2.

Future Outlook

Knowles is targeting a revenue CAGR of 8-10%, with Precision Devices expected to grow by 6-8%. The MedTech and specialty audio sectors are anticipated to grow at a rate aligned with GDP.

The company aims to achieve a 30% EBITDA margin within three to five years, focusing on gross margin expansion and operating leverage. M&A activities remain a focal point, with a pipeline of targets in the Precision Devices segment.

Capital allocation will prioritize M&A and stock buybacks, particularly in the absence of suitable acquisition opportunities.

Q&A Highlights

During the Q&A session, Anderson emphasized the company's capital allocation strategy, prioritizing stock buybacks to offset stock-based compensation of approximately $25 million annually. The company evaluates acquisitions based on pro forma EBITDA multiples, targeting less than 13 times post-synergy.

Knowles' weighted average cost of capital is 10-11%, with an acquisition threshold aiming for a 13-15% return by year three. The alternative energy order is under NDA, but the company is optimistic about follow-on orders.

In the hearing aid market, Knowles is focusing on technological advancements to improve size and battery life. Over-the-counter hearing aids have had a limited impact, primarily serving those with mild hearing loss.

Readers are encouraged to refer to the full transcript for a detailed account of the conference call.

Full transcript - 17th Annual Southwest IDEAS Conference:

Unidentified speaker: Okay. Hey, sorry. Hopefully, we're starting on time. Thank you all for coming out. I just want to tell a little bit of background. This is a good example, Knowles, a good example of how we find companies to invite to present at our conference. We very much have a curated list of presenting companies. And Knowles has been doing it with us for maybe a couple of years now. We went through Solomon and our offices on the recommendation of a shareholder who happens to be a sponsor of our conference and looking for new ideas. We are constantly out there in the market, meeting with companies, trying to find good ideas to invite to our conference so we establish a relationship. John was kind enough to come down and talk to us today. I will turn it over to you.

John Anderson, CFO, Knowles: Okay. Thanks.

It's good to be here today. John Anderson, CFO of Knowles. I've been with the company since we went public back in 2014. We were a spinoff of Dover Corporation, some of you may know. I'll provide a brief overview of our business and markets we participate in, a little bit about our historical financial performance as well as our midterm targets, and then our capital allocation priorities. We'll save some time for Q&A after that. If you look at who we are today at a glance, we operate in two distinct segments. Precision Devices is about 54% of the revenues back in 2024. This year, it'll be closer to 56-57% because of some good growth there. It's comprised of high-performance ceramic, film, or electrolytic capacitors, and also RF filters. The other segment, MSA, you can see below, is microphones and receivers for hearing health.

Think of hearing aids. That's about 80% of that segment. The rest of it is what we call specialty audio applications. Anything from true wireless for the really high-end stuff, like for audiophile or musicians, the in-ear monitors they wear. It's about, again, a little less than 20% of that segment. If you look to the right across our end markets, about half of our business today is med tech, and that includes the hearing health market. About 21% is defense. It says defense aerospace. It's primarily defense. The other third of the business is industrial, including energy/electrification. We do some EV, high-end, high-voltage EV charging, but it's fairly small, but really good growth. Before I dive in further into the financial performance, I want to talk a little bit about this transformation that we've went through. Again, spun out of Dover in 2014.

Dover spun out Knowles, but also put some other businesses that fit better, I guess, with us than it did with Dover. It took a while. Over the years, we basically pruned out the businesses that we did not like. They did not have the right margin profile. They did not have the right growth profile. The kind of final step and culmination of that transformation was last December. We sold the consumer electronics business. We had a business, almost $300 million of revenue. It was heavily concentrated on Apple. We were getting squeezed every quarter on margins. We sold that business off last December. We put it in discontinued operations. What you will see today is the continuing business, the portfolio we have today. There is really nothing left to prune. They are all very attractive margin businesses, good growth businesses. Now it is how do we grow.

We're just a little under $600 million. We've got a great balance sheet. Our leverage is below one on a net leverage standpoint. We generate a lot of cash. It's really I'm going to talk today about our organic growth story, and then we'll supplement that with M&A opportunities. I talked about the transformation that we just kind of completed last December. The pillars of this are first focusing on the right markets. We don't want to focus on consumer anymore. We're really focused on medtech, defense, and industrial. For the reasons of these are businesses that value our tech or end markets that value our technology. It's a tough qualification process, but once you're in, it's very sticky. It's not just a focus on price that we experienced back in the consumer side of the business.

I mentioned repositioning of our portfolio. We've made four bolt-on acquisitions. The last one I would call bigger than bolt-on. We spent about $265 million for a capacitor business, film capacitor business called Cornell Dubilier down in Greenville, South Carolina, the end of 2023. As I said, we've exited. The most recent was exiting the consumer MEMS business. There's nothing else to prune. It's about how do we grow organically and through acquisition. From a financial performance, I'll go into some of the details shortly, but we've had this portfolio we have today. We've had 400 basis points of margin expansion between 2017 and 2024. We think we can replicate that. Our EBITDA margins today are about 24%. We're targeting 30% EBITDA margins over the next three to five years. I talked about balance sheet super strong and good cash flow generation.

Let's go into a little bit of detail. This will outlay, again, for the continuing operations. If you pull the K out for 2024, you'd see these numbers. The revenue CAGR, about 8% from 2017 to 2024, about half of that was organic and half of that was through acquisition. For the same time period, we increased our EBITDA, about 11% CAGR. How are you growing EBITDA faster than revenue? It's really margin expansion and operating leverage. We did a really good job with pricing on some of the acquisitions. I'll use Cornell as an example. We bought it Q4 of 2023, first year. It was a great brand, but maybe wasn't as professionally managed. It was family-owned. We went in and increased price by $5 million the first year, another $4 million this year, so $9 million annualized.

There's no attrition because, for the most part, we're selling through distribution who are passing it on or we're sole source. It's a small portion of the BOM for the end customer. They don't really worry about it. Cornell has 30,000 customers. It's $150 million of business. It's not worth them to go requalify another source. That's just an example of how we created value with an acquisition. Over to the left, that's what I just showed you. That's what we delivered in terms of revenue CAGR, EBITDA CAGR, and then margin expansion. We think we can do the same the next five years. Again, revenue of 8%-10%, about 4% of that would be coming from acquisitions, so 4%-6% coming organically.

We can continue to increase EBITDA and grow EBITDA at a much faster rate than revenue through, again, gross margin expansion, operating leverage. EBITDA margins today are roughly, if you look at consensus, about 24%. We think we can easily add 400 basis points over the next three to five years. I think 30% is a reasonable target for us. How do we get to the 8-10% revenue CAGR? Precision Devices, which, again, I mentioned, it's a little more than half the business. We think there can easily grow 6-8%. I'll talk about some of the trends that drive that. The other, call it 45% of the business, MedTech, specialty audio, that's that hearing aid business. That grows at GDP plus. It's grown at that rate for the last 30 years. We're the market leader there.

We got about 60% share. There's some tailwinds there, an aging population in the U.S., all the baby boomers getting to that 60-year age where you start typically buying a hearing aid. And then 4% from acquisitions. We've got a pretty good funnel. Just talking about some of the macro trends, precision devices. Again, I mentioned energy, electrification. Around the world, there's a growing demand for energy. AI is creating this. Machine learning is creating this. Automation. The capacitors that we build and design are going into applications on future alternative energy sources. Not oil and gas. I'm under NDA. I can't talk specifically about the customer, but we got a $75 million order earlier this year. They gave us a $20 million cash deposit to fund the capacity. We're expanding our facility in South Carolina right outside Greenville for a dedicated line. The line's in.

We're delivering prototypes this quarter. The ramp-up will be kind of end of Q. Everything I'm saying, I've talked about. If you go read the conference call scripts. We're expecting some deliveries, $3 million of deliveries in Q1, and then increasing in Q2 and getting to about a $10 million quarterly run rate. That should add $25 million of growth right there, just that specific customer, that specific order. We're hopeful that there's some follow-on orders, but that will definitely take us through 2027 in terms of just fulfilling that $75 million plus order. That's going to kind of charge up the growth for precision devices. The other is medical. We have a lot of medical applications for capacitors.

Think of MRI machines, the capacitors that go into an MRI machine, pacemakers, defibrillators, anywhere where you need to store energy and then quickly release it in a pulse. That business, kind of its medical products, I mean, there's a lot of data out there. That will grow kind of 3-5% growth rate, the medical products. Again, the demographics are right, right? Aging population. They need hearing aids. They need pacemakers, defibrillators. All these things are increasing with age. We talked about that. The last end market for precision devices is defense. Whether it's the U.S., whether it's Europe, people are increasing defense budgets. There's a move from, I'll call it boots on the ground and tanks to electronic warfare. That plays right into what we do. We design capacitors for radar systems.

There is a program called SPICE 6 right now. It is where the Navy fleet is upgrading their radar systems. We are on that. You do not know how many ships are going to get upgraded each year, but this is a project that is probably going to last another 10 years. We have had it for five. It is going to continue. Those are the kinds of applications that we are on. Jamming systems. We have some drone business, not a whole lot, but anywhere where you can think of electronics in combat. Acquisitions. We put that on there because that is what we delivered from 2017 to 2024. We delivered 4% revenue CAGR through acquisitions. We have got a good pipeline. I mean, I would say it is going to be more in the precision device segment. MSA, we are already at like 60% share. There is only one other competitor there.

It's going to be tough to get that through any kind of antitrust. The PD segment, extremely fragmented. It's a lot of owner-managed companies. We've made five acquisitions. They were all, we're kind of getting known as a good buyer for family businesses. The target there is anywhere from $5 million-$30 million of EBITDA. There, we've got a good funnel. We've got three dedicated people working. We like our organic plan, but we think with our balance sheet, our cash flow generation, we can supplement it with acquisitions. That gets you to total growth of 8%-10% a year. Again, growing EBITDA, just like we did the last seven years, growing EBITDA faster than that revenue growth through, really, it's the drop-through on the volume, it's margin expansion, pricing, really focusing on factory productivity initiatives, and then it's OPEX leverage.

If we grow the top line at 7-8%, our target would be to grow OpEx at half that. You get a good drop-through. Yeah, we really don't, we could grow to $800 million-$900 million without having to add a lot of headcount in SG&A. We're on Oracle on most of our companies. The most recent acquisition, Cornell, we're putting them on. The entire company will be on the same instance of Oracle. We've got a shared service center in the Philippines that we can really lever. We feel pretty good about that. I think why we win, it's really all about technology and IP, trade names, and really having that intimate relationship with the engineering teams that are at our customers. I mean, most of the products we sell are custom designed.

Whether it's a hearing aid, you wouldn't believe how many SKUs there are at each customer for hearing aid. Same thing on the capacitor. It is very niche in the capacitors because that's a huge market. We play in a very small portion of that market, but it's where you need really demanding performance. Halliburton, for example, would be like downhole applications where we've got our capacitor at the end of a drill bit, and it's basically charging to clean off that bit so they can keep it downhole longer. It's those kinds of things. I talked about acquisitions. We've made the four acquisitions above. The divestitures we're done with, that's the consumer business. There was a crystal oscillator business, Vectron. Now it's really how do we grow, supplement our organic growth with acquisitions. There's three types.

It is consolidating, where it is just a synergy play, putting two smaller businesses or putting a smaller business in with us. Maybe it is putting them in our plant and closing their plant, consolidating sales forces. There are extensions. That is Cornell. We were primarily ceramic capacitors. They were film capacitors, different applications. We could go to the same customer with a broader portfolio. Adjacencies are probably lower on the priority list, but if there was something, again, in the same end markets that we are focused on, such as defense, med, industrial, and it met the financial parameters, we could do something in that space. Capital allocation, we typically will spend about 3-5% of revenues on capital investments this year. Because of this energy order, it is going to be higher, but the customer funded a lot of this.

We'll be closer to 5% of revenues this year and next year. They aren't real capital-intensive businesses. I would expect it to go closer to 3-4% after 2026. M&A we talked about. I mean, it's a focal point of our capital allocation priority. In the absence of M&A, we buy back stock. That's kind of, we bought back $55 million so far this year, over $200 million over the last couple of years. We generate a lot of cash. We're in a great situation from a leverage standpoint. I expect to exit this year at like 0.5 times. The cash flow generation capability of these businesses is really good. We should generate more than $100 million annually going forward. I think that's it. From an M&A standpoint, we remain disciplined.

We passed on a bunch of things this year just because it did not make sense for us to get the IRR that we wanted in year three. We wanted to be accretive in the first 12 months. We are going to be disciplined, but we have got a good funnel, and I will be disappointed if we do not get something closed in the next 12 months. Absent that, return capital to shareholders through buybacks. I think that is all I had. I think we have a few minutes for questions. Sure. Can you talk a little bit about your capital allocation thoughts when you are thinking about buying back stock versus acquisitions or investing? Yeah, I mean, it is a good question. I kind of look at it as we are always going to buy some stock back to offset stock-based comp. We have stock-based comp.

It's roughly $25 million a year that I don't want to be diluted. I'll always buy that. After that, I kind of look at we're trading at like 13 times EBITDA. I've got to look at what we're paying for the target after I incorporate the synergies. If it's lower than 13 times on a pro forma basis with, again, high confidence cost synergies, not like future revenue, that's kind of how I look at this. I wouldn't say it's either or. We'll continue to do both. We've got the cash generation, but it's a good question. We go through it. We go through with our board every quarter in terms of what's our plan for the next quarter on buybacks based on our pipeline. Do you use that to be buy one plan, or do you buy both? Both.

In an open trading period, we will buy in the market, but then once that window closes, we'll have a plan in place before so we can continue buying through the quarter. What do you think your weighted average cost of capital is? 10-11. 10-11. 12%. 10-11, yeah. We are trying to get a return of 13-14-15%. Is that a more reasonable acquisition threshold or? I want to keep the bar high. I want enough clearance that that's why we put 200 or 300 basis points above that, but in year three. In year three. Year three, yeah. Year three. Yeah, it's tough to do the first year, but year three. Did you shed any more light on the $75 million as far as it's a new, other than just being energy? One customer. I'll just say alternative energy.

Again, I'm under NDA. I hope they can soon announce their plans on their facility that this product is going into. I just say it's not traditional. Is it a one-off or is there? We have one order in hand where they gave us $20 million to build the capacity out for that. I'm hopeful. I'm promising that. I'm hopeful that when we demonstrate we can deliver this, other customers and other orders will come for it. Big picture, there's a huge demand for energy going forward. It's not just all going to be traditional sources. Driven by AI, driven by machine learning and automation. I mean, anything you read, there is an increased demand around the world for energy. It's not just going to be oil and gas. Sure.

Anecdotally, I know people sometimes are using hearing aids, but I don't know if anyone is happy with them. They're just always frustrated with the battery life, what they can hear. As far as you being in the business, what is the main issue here? It's not natural. I wore it. I went to this, it's called U-Haul. I went to a conference, and I wore them for a day. You hear stuff like you hear your footsteps. You hear stuff that you've never heard before. I think it takes a while for your brain to adjust. You go through an audiologist because the first tuning might not be perfect for you. You got to keep going back and getting it synced right.

Yeah, a lot of people just, they end up, again, the price of these, you're going to continue to go to the audiologist. There's still a decent return rate because it's not a natural kind of feel to it. When it means communicating with your family, your spouse, and grandkids, I mean, you're going to deal with it. There's clearly a transition and adjustment period. The ones that you see advertised in the middle of the night for $99, those go to the drawer somewhere. Somebody wears them for one time, and they aren't a good product. They just literally do not get used. There's clearly an adjustment period. That's why they introduced these over-the-counter hearing aids under Biden a couple of years ago. It never really took off because those are limited in the gain you get.

Because if you did not sign, if you went to, I'll call it Best Buy or Walmart to go get hearing aids, and you did it yourself, you could damage your ears if you were not limited into the gain. The over-the-counter product is really targeted for people with really mild hearing loss. People with mild hearing loss are not going to buy hearing aids. The stigma is still there. They are just like, "I'll deal with this." It is when you get where you are really struggling to communicate with your family and you have moderate or severe hearing loss, that is when you buy. The over-the-counter is not for that market. Over-the-counter, it has been out there two years. It has maybe increased the market 2%. Good question. On the R&D front, is there anything that you see that is going to improve that? It is always getting smaller.

You'll notice that with people who wear hearing aids now, you can barely tell now. I mean, it's really small. It's all about size, battery life. You want a single charge for 24 hours and weight and then durability if you're in the shower and things like that. Those are kind of the things. There's nothing revolutionary beyond that. It's how do we make it smaller? How do we make it last longer? Anything else? Any other questions? All right. Thanks. I mean, like I said, I've been with Knowles since we went public in 2014. I've never felt better about our growth prospects, both organically and the balance sheet. I mean, Dover didn't do us any favors. They put $400 million plus debt down. There were some tough years. You can see that in our trading pre-2024.

It was always kind of an up and down, but we've got a good portfolio now. I think it's a great opportunity. Thanks.

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