Core Insights - Harvey Partners has established a new position in Knowles Corporation, acquiring 622,500 shares valued at approximately $14.5 million, representing 1.3% of the fund's reportable U.S. equity assets as of September 30 [2][10] - Knowles Corporation's stock has increased by 20% over the past year, outperforming the S&P 500, which rose by 13% during the same period [3][10] Company Overview - Knowles Corporation is a leading provider of advanced micro-acoustic, audio, and precision device solutions, serving high-growth markets such as mobile communications, hearing health, and industrial electronics [6] - The company's market capitalization is approximately $2 billion, with a revenue of $573.5 million and a net income of $35.8 million for the trailing twelve months [4] Recent Performance - In the third quarter, Knowles reported a revenue growth of 7% year-over-year, reaching $152.9 million, with a gross margin of 45.7% and non-GAAP EPS of $0.33, exceeding guidance expectations [11] - The company anticipates 6% organic revenue growth for the year, with fourth-quarter revenue projected to increase by another 9% year-over-year [11] Investment Rationale - The new position by Harvey Partners indicates confidence in Knowles' diversified exposure to various end-markets, which may support steadier earnings despite potential softness in consumer hardware cycles [7] - Knowles generates revenue by designing, manufacturing, and selling audio and precision device components to original equipment manufacturers and distributors across multiple sectors, including consumer electronics, medtech, and industrial markets [9]

Core Insights - Ariel Investments reported a strong performance for its Mid Cap Value Strategy in Q3 2025, with a return of +9.62% gross of fees, outperforming both the Russell Midcap Value Index (+6.18%) and the Russell Midcap Index (+5.33%) [1] Company Performance - Knowles Corporation (NYSE:KN) experienced a one-month return of -4.95% but saw a 52-week gain of 16.68%, closing at $22.45 per share with a market capitalization of $1.928 billion as of November 27, 2025 [2] - In Q3 2025, Knowles Corporation reported revenue of $153 million, reflecting a 7% year-over-year increase [4] Market Position and Strategy - Knowles Corporation is recognized for its strong quarterly results, with healthy demand across key markets and a return to growth in its Precision Devices segment due to normalized channel inventories and improved operational efficiency [3] - The company has been returning capital to shareholders through share repurchases and is positioned to benefit from its focus on niche markets in hearing health and precision devices [3] Hedge Fund Interest - Knowles Corporation was held by 21 hedge fund portfolios at the end of Q3 2025, an increase from 17 in the previous quarter, indicating growing interest among institutional investors [4]

Summary of Knowles (NYSE:KN) FY Conference Call Company Overview - Knowles operates in two distinct segments: - **Precision Devices**: Approximately 54% of revenues in 2024, expected to rise to 56-57% in 2025. This segment includes high-performance capacitors and RF filters [3][4]. - **Microphones and Receivers (MSA)**: Primarily focused on hearing health, with about 80% of this segment related to hearing aids [4]. Financial Performance - Historical revenue CAGR from 2017 to 2024 is about 8%, with half from organic growth and half from acquisitions [9]. - EBITDA CAGR during the same period is approximately 11%, driven by margin expansion and operating leverage [9]. - Current EBITDA margins are around 24%, with a target of 30% over the next three to five years [8][11]. Market Segmentation - **Med Tech**: Accounts for about 50% of the business, including hearing health [4]. - **Defense**: Represents about 21% of revenues, with increasing defense budgets globally [4][14]. - **Industrial**: Comprises the remaining third, including energy and electrification applications [4]. Growth Strategy - Focus on organic growth supplemented by M&A opportunities, particularly in the Precision Devices segment, which is highly fragmented [6][17]. - Recent acquisition of Cornell Dubilier for $265 million, enhancing the capacitor business [7]. - Anticipated revenue growth of 8-10% annually, with 4-6% from organic growth and 4% from acquisitions [10][17]. Key Trends and Opportunities - Aging population driving demand for hearing aids, with Knowles holding a 60% market share in this segment [12]. - Increased demand for energy solutions, particularly in alternative energy, supported by AI and automation trends [12][26]. - Significant order of $75 million from a customer in the alternative energy sector, expected to contribute $25 million in growth [12][13][26]. Capital Allocation - Capital investments typically range from 3-5% of revenues, expected to be higher this year due to the energy order [20][21]. - Share buybacks are a priority, with $55 million repurchased this year and over $200 million in the last couple of years [21][22]. - M&A remains a focal point, with a disciplined approach to ensure high returns on investments [22][23]. Challenges and Considerations - The company has exited lower-margin businesses, including a consumer electronics segment heavily reliant on Apple, to focus on higher-margin opportunities [5][6]. - The hearing aid market faces challenges with customer satisfaction and product effectiveness, impacting potential growth [27][28][29]. Conclusion - Knowles is positioned for growth with a strong balance sheet, a focus on high-margin markets, and a disciplined approach to capital allocation and acquisitions. The company is optimistic about its growth prospects, both organically and through strategic acquisitions [30][31].

Financial Performance - Revenues for Q3 2025 were $152.9 million, an increase of $10.4 million or 7.3% compared to Q3 2024's $142.5 million[108] - Gross profit for Q3 2025 was $69.9 million, up $7.0 million or 11.1% from $62.9 million in Q3 2024, with a gross profit margin of 45.7%[111] - Earnings from continuing operations for Q3 2025 were $18.0 million, an increase of $8.8 million compared to $9.2 million in Q3 2024[120] - Adjusted earnings before interest and income taxes (Adjusted EBIT) for Q3 2025 were $34.5 million, an increase of $4.5 million from $30.0 million in Q3 2024[122] - Non-GAAP diluted earnings per share from continuing operations were $0.33 for Q3 2025, compared to $0.27 for Q3 2024, an improvement of $0.06[125] - Revenues for the nine months ended September 30, 2025 were $431.0 million, an increase of $20.0 million or 4.9% compared to $411.0 million in 2024[127] - Gross profit for the nine months ended September 30, 2025 was $183.8 million, reflecting an increase of $9.9 million or 5.7% from $173.9 million in 2024[132] - Non-GAAP gross profit for the same period was $190.2 million, up $7.7 million or 4.2% from $182.5 million in 2024[133] - Earnings from continuing operations improved to $25.4 million for the nine months ended September 30, 2025, compared to $13.0 million in 2024, an increase of $12.4 million[140] - Diluted earnings per share from continuing operations increased to $0.29 for the nine months ended September 30, 2025, up from $0.14 in 2024[144] - Adjusted EBIT for the nine months ended September 30, 2025 was $83.9 million, an increase of $5.4 million from $78.5 million in 2024[142] Expenses - Research and development expenses for Q3 2025 were $10.0 million, a decrease of $0.2 million or 2.0% from $10.2 million in Q3 2024[113] - Selling and administrative expenses for Q3 2025 were $34.0 million, a slight increase of $0.1 million or 0.3% from $33.9 million in Q3 2024[114] - Research and development expenses rose to $29.7 million, a $0.5 million increase or 1.7% from $29.2 million in 2024[134] - Selling and administrative expenses were $107.1 million, a slight increase of $0.3 million or 0.3% compared to $106.8 million in 2024[135] - Interest expense decreased significantly to $7.5 million, down $5.4 million from $12.9 million in 2024[136] Taxation - The effective tax rate for Q3 2025 was 19.3%, down from 24.6% in Q3 2024, primarily due to the mix of earnings and losses by taxing jurisdictions[117] - The effective tax rate (ETR) for the nine months ended September 30, 2025 was 26.2%, a decrease from 38.1% in 2024[138] Segment Performance - Revenues for the Precision Devices segment were $88.2 million in Q3 2025, an increase of $9.4 million or 11.9% from $78.8 million in Q3 2024[152] - Adjusted earnings from continuing operations before interest and income taxes for the Precision Devices segment were $20.2 million in Q3 2025, up from $16.1 million in Q3 2024, an increase of 25.5%[154] - Revenues for the MedTech & Specialty Audio segment were $64.7 million in Q3 2025, an increase of $1.0 million or 1.6% from $63.7 million in Q3 2024[156] - Adjusted earnings from continuing operations before interest and income taxes for the MedTech & Specialty Audio segment were $26.2 million in Q3 2025, slightly up from $26.1 million in Q3 2024[158] - Precision Devices (PD) revenues increased by $12.0 million or 5.3% to $239.2 million for the nine months ended September 30, 2025, compared to $227.2 million in 2024[160] - PD's earnings before interest and income taxes (EBIT) rose to $25.7 million with a margin of 10.7%, up from $10.5 million and 4.6% in the prior year[161] - Adjusted EBIT for PD was $44.8 million, reflecting a $7.1 million increase and an adjusted EBIT margin of 18.7%, compared to 16.6% in 2024[162] - MedTech & Specialty Audio (MSA) revenues grew by $8.0 million or 4.4% to $191.8 million for the nine months ended September 30, 2025[164] - MSA's EBIT decreased by $6.6 million to $65.3 million, with a margin of 34.0%, down from 39.1% in the previous year[165] Cash Flow and Shareholder Returns - Adjusted free cash flow increased to $81.2 million in 2025, representing 18.8% of revenues, compared to $63.5 million or 15.5% in 2024[177] - Cash and cash equivalents totaled $92.5 million as of September 30, 2025, down from $130.1 million at the end of 2024[168] - The company repurchased 3,120,574 shares for $55.0 million during the nine months ended September 30, 2025, compared to 1,686,253 shares for $29.5 million in 2024[170] - Cash flows from operating activities were $66.8 million in 2025, a decrease from $95.0 million in 2024, primarily due to supplier obligations and separation costs[171] Corporate Actions and Legal Matters - The divestiture of the Consumer MEMS Microphones segment supports the company's transformation into an industrial technology company focused on defense, medtech, and industrial markets[102] - The company completed the sale of the CMM segment to Syntiant for approximately $141.9 million on December 27, 2024[169] - The company is involved in various legal proceedings, claims, and investigations as part of its ordinary business operations[178] Accounting and Risk - The financial statements are prepared in accordance with U.S. GAAP, requiring estimates and assumptions related to assets, liabilities, revenues, and expenses[179] - There are no material changes in the company's previously reported critical accounting estimates[180] - Recent accounting standards are not expected to significantly impact the company's revenue, earnings, or liquidity[181] - There were no material changes to the market risk exposure information disclosed in the Annual Report for the year ended December 31, 2024[182]

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Financial Data and Key Metrics Changes - Revenue for Q3 2025 was $153 million, representing a 7% increase year over year, and EPS was $0.33, up 22% year over year [4][11] - Cash from operations was $29 million, exceeding the midpoint of the guidance range [4][11] - Gross margins for the MedTech and specialty audio segment were 53%, flat compared to the previous year, while Precision Devices segment gross margins improved to 41.5%, up 150 basis points year over year [11][12] Business Line Data and Key Metrics Changes - MedTech and specialty audio revenue was $65 million, up 2% year over year, driven by increased demand in the specialty audio market [5][11] - Precision Devices segment revenue was $88 million, up 12% year over year, with growth across all end markets including MedTech, defense, industrial, and EV and energy [5][12] Market Data and Key Metrics Changes - The defense market showed particularly strong growth, with design wins outpacing other end markets [6][12] - Channel inventories are now at normalized levels, matching orders to end market demand [7] Company Strategy and Development Direction - The company is focused on leveraging unique technologies to design custom engineered solutions and deliver them at scale [4][10] - Future growth opportunities are anticipated in the specialty film production expansion and strong secular growth trends in end markets [8][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in organic growth rates at the high end of the stated range of 4% to 6% for the total company in 2026, supported by a healthy backlog of orders [8][9] - The company expects to finish 2025 strong with revenue and EPS growth accelerating in the second half of the year [8][9] Other Important Information - The company purchased $20 million in shares and reduced outstanding bank borrowings by $15 million during the quarter [9][13] - The net leverage ratio based on trailing 12 months adjusted EBITDA was 0.6 times, with liquidity exceeding $350 million [14] Q&A Session Summary Question: Update on specialty film capacity and demand outlook - Management indicated that the specialty film line is expected to generate $25 to $30 million this year, with additional orders anticipated, leading to a projected $55 to $60 million next year [20][21] Question: Design activity and growth expectations for segments - Management expects MedTech and specialty audio growth in 2026 to be in the 2% to 4% range, while Precision Devices may exceed the high end of the 6% to 8% growth range [23][24] Question: Update on M&A environment - The M&A environment has improved, with more assets available and lower interest rate expectations, but the company remains disciplined in its approach [33][34] Question: Impact of palladium prices on gross margins - The company has pre-buys in place for palladium, mitigating immediate impacts on gross margins, and is monitoring the situation closely [38][39] Question: Specialty film gross margin improvements - Management expects sequential improvement in specialty film gross margins from Q3 to Q4, with significant improvements anticipated by mid to late Q2 of next year [45][46]

Financial Data and Key Metrics Changes - Revenue for Q3 2025 was $153 million, representing a 7% year-over-year increase, while EPS was $0.33, up 22% year-over-year [4][11] - Cash from operations was $29 million, exceeding the midpoint of the guidance range [4][11] - Year-to-date revenue growth was 5% and EPS growth was 15% year-over-year [8] Business Line Data and Key Metrics Changes - MedTech and specialty audio revenue was $65 million, up 2% year-over-year, with gross margins at 53% [5][11] - Precision Devices segment revenue was $88 million, up 12% year-over-year, with gross margins at 41.5% [5][12] - The company expects MedTech and specialty audio revenue growth to be in the range of 2%-4% for 2025, while Precision Devices is expected to grow at the high end of 6%-8% [5][7] Market Data and Key Metrics Changes - The defense market showed particularly strong growth, with design wins outpacing other end markets [6][12] - Channel inventories are now at normalized levels, matching orders to end market demand [7] Company Strategy and Development Direction - The company is focused on leveraging unique technologies to design custom-engineered solutions and deliver them at scale [4][10] - There is a strong emphasis on organic growth, with expectations for growth rates at the high end of 4%-6% for the total company in 2026 [8][9] - The company is pursuing synergistic acquisitions while maintaining a disciplined approach to M&A [33][34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to continue growing revenue in the fourth quarter and beyond, supported by a healthy backlog of orders [8][9] - The company anticipates strong revenue and EPS growth in the second half of 2025, driven by new design wins and robust demand across all markets [8][9] Other Important Information - The company purchased $20 million in shares and reduced outstanding bank borrowings by $15 million during the quarter [9][13] - The net leverage ratio based on trailing 12 months adjusted EBITDA was 0.6 times, with liquidity exceeding $350 million [14] Q&A Session Summary Question: Update on specialty film capacity and demand outlook - Management indicated that specialty film revenue is expected to be in the $25 million-$30 million range this year, with potential growth to $55 million-$60 million next year due to increased capacity [20][21] Question: Design activity and growth expectations - Management expects MedTech and specialty audio growth in 2026 to be in the 2%-4% range, while Precision Devices may exceed the high end of the 6%-8% growth range [23][24] Question: M&A environment and opportunities - The M&A environment has improved, with more assets available and lower interest rate expectations, but the company remains disciplined in its approach [33][34] Question: Impact of palladium prices on gross margins - Management has pre-buys in place to mitigate the impact of rising palladium prices, and does not foresee a negative impact on gross margins at this time [38][39] Question: Specialty film gross margin improvements - Management expects sequential improvement in specialty film gross margins, with significant benefits anticipated by late Q2 2026 as production ramps up [45][46]

Financial Data and Key Metrics Changes - Revenue for Q3 2025 was $153 million, representing a 7% increase year over year, with EPS of $0.33, up 22% year over year, and cash from operations at $29 million, all exceeding the midpoint of the guidance range [4][12][10] - Gross margins for the MedTech and specialty audio segment were 53%, flat compared to the previous year, while Precision Devices segment gross margins improved to 41.5%, up 150 basis points year over year [12][13] Business Line Data and Key Metrics Changes - MedTech and specialty audio revenue was $65 million, up 2% year over year, driven by increased demand in the specialty audio market [12][5] - Precision Devices segment revenue was $88 million, up 12% year over year, with growth across all end markets including MedTech, defense, industrial, and EV and energy [5][13] Market Data and Key Metrics Changes - The defense market showed particularly strong growth, with design wins outpacing other end markets, driven by increased defense spending and demand for electronic warfare solutions [6][7] - Channel inventories are now at normalized levels, matching orders to end market demand, indicating a healthy market environment [8] Company Strategy and Development Direction - The company is focused on leveraging unique technologies to design custom-engineered solutions and deliver them at scale, positioning itself well for growth in 2025 and beyond [10][11] - The strategy includes expanding specialty film production and pursuing synergistic acquisitions while maintaining a strong balance sheet [10][16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in organic growth rates at the high end of the stated range of 4% to 6% for the total company, supported by strong secular growth trends and a healthy backlog of orders [9][10] - The company anticipates strong revenue and EPS growth in the second half of 2025, driven by new design wins and increased order activity [9][18] Other Important Information - The company purchased $20 million in shares and reduced outstanding bank borrowings by $15 million, maintaining a strong balance sheet with cash of $93 million and $176 million in debt [10][15] - The company expects to generate operating cash flow of 16% to 20% of revenues for the full year 2025 [15] Q&A Session Summary Question: Update on specialty film capacity and demand outlook - Management indicated that the specialty film line is expected to generate $55 to $60 million in revenue next year, with a backlog of $25 to $30 million [20][22] Question: Design activity and growth expectations for segments - Management expects MedTech and specialty audio growth in the range of 2% to 4%, while Precision Devices may exceed the high end of the 6% to 8% growth range due to strong design win activity [24][25] Question: M&A environment and focus - The company remains focused on acquisitions but is being selective, ensuring any acquisition makes strategic sense [35][36] Question: Impact of palladium prices on gross margins - Management noted that current palladium prices are not expected to negatively impact gross margins due to pre-buys and monitoring of market conditions [40][41] Question: Specialty film gross margin improvements - Management anticipates sequential improvement in specialty film gross margins, with significant improvements expected by mid to late Q2 2026 as production ramps up [46][47]

Financial Data and Key Metrics Changes - Revenue for Q3 2025 was $153 million, up 7% year over year, with EPS of $0.33, an increase of 22% year over year, and cash from operations at $29 million, all exceeding the midpoint of guidance [5][13][19] - Gross margins for Q3 were 53%, flat compared to the previous year, with expectations to remain above 50% for the full year 2025 [14][19] Business Line Data and Key Metrics Changes - MedTech and Specialty Audio segment revenue was $65 million, up 2% year over year, driven by increased demand in the specialty audio market [5][13] - Precision Devices segment revenue was $88 million, up 12% year over year, with strong growth across all end markets including medtech, defense, industrial, and EV [6][14] Market Data and Key Metrics Changes - The defense market showed particularly strong performance, with design wins and bookings outpacing other end markets [8][9] - Bookings in the Precision Devices segment remained strong, particularly in defense and with distribution partners, indicating normalized channel inventories [9][44] Company Strategy and Development Direction - The company is focused on leveraging unique technologies to design custom engineered solutions and deliver them at scale, positioning itself well for future growth [4][10] - The strategy includes expanding specialty film production and pursuing synergistic acquisitions while maintaining manageable debt levels [11][19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in entering a period of accelerated organic growth, supported by strong design wins and a healthy backlog of orders [10][12] - The company expects organic growth rates at the high end of the stated range of 4% to 6% for the total company in 2025, driven by robust secular growth trends [10][19] Other Important Information - Cash generation from operations was robust, allowing for share repurchases of $20 million and a reduction in bank borrowings by $15 million [11][16] - The company has a strong balance sheet with liquidity exceeding $350 million, and exposure to tariffs is less than 5% of revenue [17][18] Q&A Session Summary Question: Specialty film capacity and demand outlook - Management indicated that specialty film revenue is expected to be in the range of $55 million to $60 million next year, with a backlog of $25 million to $30 million [21][23] Question: Design activity and growth expectations - Management expects MedTech and Specialty Audio growth in the range of 2% to 4%, while Precision Devices may exceed the high end of the 6% to 8% growth range [25][26] Question: Specialty film applications and follow-up orders - Specialty film is focused on pulse power applications, with emerging applications in defibrillators and radiotherapy, indicating strong future demand [32][33] Question: M&A environment and strategy - The company remains focused on acquisitions but is being disciplined, ensuring any acquisition makes strategic sense [37][38] Question: Book to bill ratio and palladium prices - The book to bill ratio for the Precision Devices segment was one for the quarter, with strong bookings and a high backlog [44] - Palladium prices have increased, but the company has pre-buys in place to mitigate impact on gross margins [41][42]