Knowles Corp. Aktie

Thank you for standing by. My name is Preilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knowles Corporation Q1 2026 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Sarah Cook. You may begin.

Thank you, and welcome to our first quarter 2026 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO.

Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review the risks and uncertainties in the company's SEC filings, including, but not limited to, the annual report on Form 10-K for the fiscal year-ended December 31, 2025, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law.

In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis with the exception of cash from operations or unless otherwise indicated. We've made select financial information available in webcast slides, which can be found in the Investor Relations section of our website.

With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

Thanks, Sarah, and thanks to all of you for joining us today. We started 2026 with solid financial results in Q1 and great momentum entering the rest of the year. Our strategy of leveraging our unique technologies to design custom-engineered solutions and then delivering them at scale for blue-chip customers in high-growth markets that value our solutions is proving to be a powerful combination. We had strong organic growth in the first quarter as we delivered revenue of $153 million, up 16% year-over-year and at the high end of our guided range. EPS of $0.27, up 50% year-over-year, exceeded the high end of our guided range and cash utilized in operations of $1 million was within our guided range.

Now on to our segment results. In Q1, Medtech & Specialty Audio revenue was $68 million, up 14% year-over-year. Our customers' new product introductions, coupled with our position on these platforms have led to stronger-than-expected growth in the first quarter. Knowles continues to demonstrate our ability to deliver unique solutions with superior technology and reliability our customers have come to depend on.

MSA's first quarter revenue grew well above our annual organic growth target of 2% to 4%. However, the hearing health end market is expected to continue to grow at normal historical rates in 2026. Therefore, we are projecting Medtech & Specialty Audio will grow within the 2% to 4% range for the full year 2026. Beyond 2026, we are positioned well to win next-generation designs for MEMS microphones and balanced armature speakers.

As I said during our year-end call, we are also -- we also see the prospect to increase our content per device in next-generation hearing health products and expand our reach with our Microsolutions group, which provides the opportunity in the future to increase growth rates above the historical rates. In the Precision Devices segment, Q1 revenues was $85 million, up 17% year-over-year with all our end markets we serve, Medtech, Defense, Industrial and Electrification growing on a year-over-year basis.

Let me share a couple of highlights driving growth in our end markets this quarter. We saw strength in the defense market across our product families. Our capacitors were in demand supporting ongoing OEM investments in defense programs, new products starting production and share gains. We also saw broad-based orders for our RF microwave products as we continue to be a sole supplier on a number of key defense programs. Additionally, we do expect increasing demand in 2027 and beyond, driven by the replenishment of stocks in connection with the Iran conflict.

In the industrial market, demand continued to grow with strong order activity across a wide range of our capacitor products, supporting a multitude of applications and industries at both our distribution partners and OEMs. As an example, our ceramic capacitors were in high demand in the semiconductor equipment market and also for use in downhole applications. Additionally, with inventory challenges we saw last year behind us, we believe our distributor partners' orders are aligned with end market demand. In addition to the strong shipments we saw in the first quarter, our book-to-bill in Precision Devices was very strong at 1.19. This ordering pattern was broad-based, and this marked the sixth consecutive quarter where the book-to-bill was greater than 1.

We see order strength across all our end markets, both at OEMs and with our distribution partners. A robust pipeline of new design wins, coupled with favorable secular trends gives me confidence in our ability to continue to grow revenue above the high end of the organic growth target of 6% to 8% for Precision Devices in 2026. I continue to be excited by the strength of our business and the momentum we exited the first quarter with. We are well positioned for continued strong organic revenue growth and margin expansion through 2026.

We believe this momentum is sustainable for 2 key reasons. First, our portfolio of businesses are well positioned in markets with strong secular growth trends. Whether it be defense, medical, industrial or electrification, the secular drivers of growth in these markets is forecasted to be positive for the foreseeable future. Second, we design high-performance customized solutions for our customers that have demanding applications, and we have the manufacturing capabilities that allow us to ramp up these solutions quickly and efficiently. This combination differentiates us, allowing us to garner premium margins for the products we produce. This is proving to be a winning combination.

Before I turn the call over to John to cover our financial results and provide our Q2 guidance, I would like to reiterate what I said on previous calls. I believe Knowles has entered a period of accelerated organic growth. With a very healthy backlog of existing orders, we now expect our revenue growth in 2026 to be above the high end of our target organic revenue target of 4% to 6% that we provided at our Investor Day in May of last year. Our strategy of leveraging our unique technologies to design custom-engineered solutions and then deliver them at scale for blue-chip customers in high-growth markets that value our solution is proving to be a powerful combination, driving revenue growth, expanding margins and strong cash flow to drive shareholder value.

Now let me turn the call over to John for our financial results and our Q2 guidance.

Thanks, Jeff. We reported first quarter revenues of $153 million, up 16% from the year ago period and at the high end of our guidance range. EPS was $0.27 in the quarter, up $0.09 or 50% from the year ago period and above the midpoint of our guidance range. Cash utilized by operating activities was $1 million within our guidance range. In the Medtech & Specialty Audio segment, Q1 revenue was $68 million, up 14% compared with the year ago period, driven by increased hearing health shipments associated with our customers' successful new product introductions.

Q1 margin -- gross margins were 53.5%, up 480 basis points from the year ago period, driven by both increased factory capacity utilization and favorable mix. For full year 2026, we expect MSA gross margins to be in line with 2025 margins of 51%. The Precision Devices segment delivered first quarter revenues of $85 million, up 17% from the year ago period, driven by broad-based strength across Medtech, Defense and Industrial end markets. Segment gross margins were 39.2%, up 350 basis points from the first quarter of 2025, as improved pricing and higher end market demand is driving increased factory capacity utilization.

These improvements were partially offset by higher factory costs in our specialty film product line as we ramp up production capacity to support our $75 million-plus energy order. While we delivered significant year-over-year margin improvement in the first quarter, I'm confident in our ability to further improve Precision Devices gross margins in the second half of 2026 as we increase production volume in our specialty film line. On a total company basis, R&D expense in the quarter was $10 million, up $1.4 million compared to Q1 2025, on higher project spending in both MSA and PD segments.

SG&A expenses were $28 million, up $3 million from prior year levels, driven primarily by higher sales commission, timing of expenses and additional head count within the Precision Devices segment to support future revenue growth, including new product initiatives. Interest expense for the quarter was $2 million, $1 million lower than last year due to lower average debt balances.

Now I'll turn to our balance sheet and cash flow. In the first quarter, we utilized $1 million in cash from operating activities and capital spending was $11 million. Cash from operations includes $8 million in outflows related to the CMM business, which was divested at the end of 2024. Payments related to the CMM business are now substantially complete. During the first quarter, we repurchased 276,000 shares at a total cost of $7.5 million. We exited the quarter with cash of $41 million and $131 million of borrowings under our revolving credit facility. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was 0.6x, and we have liquidity of more than $310 million as measured by cash plus unused capacity under our revolving credit facility.

Moving to our Q2 guidance. For the second quarter of 2026, revenues are expected to be between $152 million and $162 million, up 8% year-over-year at the midpoint. R&D expenses are expected to be between $9 million and $11 million. Selling and administrative expenses are expected to be within the range of $26 million to $28 million. We're projecting adjusted EBIT margin for the quarter to be within the range of 20% to 22%. Interest expense in Q2 is estimated at $2 million, and we expect an effective tax rate of 15% to 19%. We're projecting EPS to be within a range of $0.28 to $0.32 per share, up $0.06 or 25% year-over-year at the midpoint. This assumes weighted average shares outstanding during the quarter of 87 million on a fully diluted basis.

We're projecting cash from operating activities to be within the range of $20 million to $30 million. Capital spending is expected to be $8 million. We expect full year capital spending to be approximately 4% to 5% of revenues as we continue to make investments in the first half of this year associated with capacity expansion related to the large energy order we received in 2025. We started 2026 with significant year-over-year revenue and earnings growth, and we have positive momentum entering the remainder of the year. Our first quarter performance, combined with a robust backlog and increased order activity throughout the first 4 months of the year, give me confidence in our ability to deliver an increase in 2026 adjusted EBITDA above our cumulative annual growth target of 10% to 14%.

I'll now turn the call back over to the operator for the Q&A portion of our call. Operator?

[Operator Instructions]

Your first question comes from the line of Christopher Rolland with Susquehanna.

Congrats on the results. So in your press release, I think you mentioned numerous design wins across multiple end markets. And Jeff, you might have addressed this fully in your prepared remarks, I'm not sure. But if you didn't, if you could highlight perhaps those products, the applications, kind of how you view the lifetime value just broadly of these sockets, all of that would be appreciated.

Yes. I mean -- Chris, I wish I could sit there and point to one specific one. I mean the one obviously that we continue to ramp on or work on is the energy order, which will be fully ramped up at the end of Q2. So that's not a significant contributor in Q1. But it's very broad-based, whether it be in medical, we have a lot of applications relative to wearable-type devices. You can go into industrial, and we have a lot of things going on in downhole applications, a lot of good stuff going on there. Defense, I would characterize just briefly, orders are up. There's no doubt, orders are up. But the level of activity relative to everything that is going on in the globe, it's like really high.

And so you're going to see, we think, in defense, some strength in '27 -- '26 rather, that's probably stronger than we expected. But '27 looks shaping up to be even better for defense. And so overall, I think we're executing on this concept of that we built out an engineering team that can customize to solve really hard problems across these applications. And then we can scale the production very quickly on these customized solutions. And it's just very broad-based what we're seeing.

Excellent. And then maybe, John, a question for you. Gross margin expansion, you talked about that. I think you talked about pricing -- favorable pricing. Maybe if you can talk about pricing increases, whether you put them on or whether you have an ability to increase price from here? And then just more broadly, the drivers of gross margin beyond pricing. I think you talked about ramping the specialty film line, which is great. Any other things to think about on gross margin and drivers there would be great...

Let me -- Chris, let me take the pricing question, and then I'll let John cover the other drivers of gross margin expansion. I mean I think more and more, Chris, what we're starting to realize as we go through this journey is that we have a lot of very strong positions. And we're looking at this on a regular basis. And I would say more specific to the PD business, where we have a lot of different applications, a lot of different customers. And pricing strategy is becoming a big part of our opportunity every single year.

And I would sit there and say the things that we've done should lead us in that 2% to 4% in the PD business on price a year, somewhere in that range, and we should be able to garner. It's a little different in the MSA business. I think we have a very limited customer base. We have very strong margins in that business. So we aren't really seeing like price increases in that business. And that's why we're sitting there saying that the gross margins are not expected to expand. But I think John talk a little more about it. Pricing is one piece, but there's other things involved.

Chris. So I talked in my prepared remarks about the MSA gross margins. We kind of expect that to be flat around the 51% level for full year. They were above that in Q1. It's really we are operating near full maximum capacity. We also had some favorable mix. But MSA, kind of think of it year-over-year, flattish at a very attractive 51%. From PD, that's where we think there's margin expansion opportunity. We delivered 39.1% this quarter. And as we look, Q2 will be kind of in that range. But as we enter in the back half of '26, we see increasing capacity utilization in both the specialty film line as we ramp up production, we'll be kind of ramped up, as Jeff mentioned, as we exit Q2 there. And so we should see some really good improvement in capacity utilization in the back half but also in our specialty -- in our ceramic capacitor line and our RF filters as demand is increasing, we think there -- there's opportunity...

I would sit there and say our variable margins are very strong in all of our businesses. And right now, obviously, we will probably need to hire more direct labor as this continues to ramp in these businesses. But there isn't a tremendous amount of overhead that's needed in order to support increased volume.

And your next question comes from the line of Robert Labick with CJS Securities.

This is Will on for Bob. Looking at specialty film pilot programs, you discussed downhole fracking and energy transmission pilots. Can you give us an update on how they're progressing? When do you know if they may convert to larger programs? And did you win any new pilots in the quarter?

They're on the list. We review on a very regular basis of the pilots. And I would say we're due to deliver pilots on 20 different customers over the next, say, quarter. So just figure every quarter, we're delivering pilots...

Broad-based applications and downhole.

Yes, I would sit there and say just a little bit more specific on the energy order. We are on track from a ramp standpoint. We are on track from a yield standpoint. And so we feel very strongly about that $25 million-plus at pretty good gross margins for the rest of the year, right, especially in the back half as it's fully ramped. Bottom line is, I think everything is heading kind of the right direction here for the specialty film line. And we see the opportunity, as John kind of laid out, that within the Precision Devices, this is going to be especially on a year-over-year basis and a sequential basis, going to help drive improved gross margin within the specialty -- within the PD...

Yes. I will be surprised at full year, we don't improve gross margins within the PD segment by 100 basis points, and it's really driven in the back half of 2026.

That is super helpful. And you talked about the tailwinds from the war in defense. Are there any headwinds from the war that you're evaluating?

Just a little bit on input costs. I mean our transportation costs are fairly low. You think of the size of our components are very, very small. And we manufacture in a lot of the regions that we're selling. So they're fairly minimal. But that's really the only thing we've seen, maybe some resin-based products, some modest increases, but not significant.

Yes. I mean the cost that we're looking at here, if it were to become more substantial, we would -- like on the transportation costs, a lot of our customers take possession at our dock, and we're not paying for the shipping anyway. So I mean, I think -- and then there are some input costs like resins and things like that, but it doesn't seem to be a big portion of our bill of materials.

[Operator Instructions]

Your next question comes from the line of Anthony Stoss with Craig-Hallum.

Jeff, just getting back to pricing power because maybe I wasn't following it correctly. It seems like there's a ton of activity, especially on the military defense side. And maybe there's puts and takes in each of the different divisions. Do you -- given the nature of activity, do you think it's fair to say that gross margins and pricing in 2027 on average is going to be higher than 2026?

No, I would sit there and say, we have a pretty strong cadence of how we do pricing at this point. I wouldn't sit there and say that we're going to sit there and see pricing. If I say it's in PD 2% to 4% per year, maybe it gets towards the higher end of that range. I'm not seeing that. I mean, you're right, the demand -- I mean, just more than defense, the demand across the board is pretty high. I looked -- we talked about the book-to-bill being 1.19. That's on top of 16% growth, right? So that book-to-bill represents a fair amount of orders.

And I just got off the phone with our sales team. The order rate in April is already strong again. We're looking at another strong month of bookings in April. I think we're starting to spend a little bit more time, obviously, analyzing pricing and things like that. But just remember, we don't have huge amounts of cost in order to get these units out. They're very profitable already in the PD segment. And so I think we're going to continue to follow our kind of, what I would say, playbook of increasing price on a somewhat regular basis by market, by product, by customer to cover any cost -- input cost increase and some more where we can.

I would add, Tony, I do think from a gross margin standpoint, there is some opportunity in '27 to be above '26 just because think of the trajectory through '26, we're increasing gross margins as we -- '27 margins should be similar to what the margins we exit '26 at, which will be, again, higher than we're delivering right now.

Got it. That makes sense. And then 2 last questions on the energy ramp. Is there any technical hurdles or either production setup hurdles that you still need to overcome before the end of Q2? Or is it pretty much blocking and tackling?

I mean it's a lot of blocking and tackling. And I would sit there and say, we're in the process. All the equipment is on site. It's a matter of bringing it up, fully qualifying it and then running high volume through it. I mean there isn't -- I would sit there and say, like we're waiting for a piece of equipment that may not arrive on time. I mean everything is in place. And so it's a matter of just bringing everything up. I would sit there and say, in Q1, they were slightly ahead of what they had projected in terms of output and getting things qualified. I'm not committing that we're going to be ahead for the first half. But I think everything seems to be -- I was just down there 1.5 weeks ago at the facility. I mean everything was great. And so I think we're in pretty good shape.

Okay. Last question. Your group that you don't talk about that often, the RF side, quite a few of the RF power amp folks are all talking about just huge orders in satellite. Do you have any products that are exposed to satellite? Or can you tweak anything that you could gain exposure to huge satellite orders...

Yes. I mean if you think about our -- I mean, here's the thing. If you think about our line, we do have some satellite business. I wouldn't say it's a huge driver. I think what we have, what we provide is the super, super high-performance RF filters. And that's why we can garner great gross margins. We can -- we make good money in the space. I would say there's more of a mix in the satellite business of using, like, more commercially available RF filters versus specialized stuff. To the extent, and I would almost say this, the satellite business is like where we are with EV, where we can be differentiated, we'll sell into that market.

But when they come to us and say, we want something really low cost, and we want it to be at a very low price, we tend to say, there's other guys who are willing to do that kind of stuff. So we do have some, but it's usually where they need something very unique and special where we can garner very good gross margins.

And Tony, I'd just add, we talked about 17% year-over-year revenue growth in Q1 in the Precision Devices segment. RF was a big contributor to that. They grew. It's -- you're right. It's smaller as far as a percent of the total, but their growth rate was in the double digits.

Yes. I mean I guess my point being is we're just not going to deviate from the idea here. We don't really want to be in the commoditized portions of the market. And there are some commoditized portions of the market. And I would say my take is satellite is a little bit more mixed in terms of what they're looking for.

And the next question comes from the line of Tristan Gerra with Baird.

In Precision Devices, could you give us a sense of where your front-end utilization rates are? And as ultimately utilization rates go to full utilization above 90%, what type of gross margin would that imply? And then are you also able to quantify the impact on gross margin currently from the energy order production ramp? And when does that headwind go away?

So first, let me just cover on capacity utilization. It is different from product to product. We have RF filters. We have ceramic caps. We have film caps, which is the old Cornell acquisition. It's a little different from product to product. But generally speaking, we have done a lot of capacity planning for the mid- to longer-term in the last quarter. And what we're seeing with the growth rate that we're having, at least within 2026 and into probably the first half of '27, we're going to need more direct labor. We're not going to need a lot more, I would say, equipment. There may be some selective places we need equipment. We're probably running on average in the 80% range right now across the PD business. That's probably where we're running. And we have some room to still bring up output without adding a lot of expensive capacity.

So I think, again, the stuff that's been -- our variable margins are very strong. We expect we're going to drop a lot of this growth, the revenue to the bottom line. As far as the energy order, I think how I kind of see the energy order is this, it is definitely weighing on the PD segment. We really haven't quantified to the extent that it is at this point. But I think it is going to be a driver of margin expansion in the back half.

So just directionally, Tristan, think of maybe 200 to 250 basis points better than we're doing today as it relates to the PD segment, and that's driven heavily by this energy order.

Okay. Great. That's very useful. And then given lead time expanding and all type of shortages happening in the industry, are you seeing appetite from customers to try to secure capacity into '27? And have you done LTAs in the past? Is that the type of discussion that customers are coming to you with? Or is it mostly short lead time type of orders?

I would sit there and say, in our distribution business, for the most part, it's been short-lead-time orders. In our OEM business, I would sit there and say, there is a lot more discussion, specifically in the defense area about larger orders. We're starting to see more people come to us saying, we would want to place an order with you for instead of a year, which would be very more typical for defense, we want to place a 3- or a 5-year order in defense. So there's a lot of negotiations and discussion going on about that right now.

I would say in industrial and medical, we have long -- very long-term customers. We get regular forecasts from them, and we are prepared to make sure we meet their requirements. But I think defense is the area where we're starting to see at least more discussions about bigger orders. But I will add that book-to-bill of that 1.19, we did not have any real, like, big orders that were scheduled out more than a year. So there's nothing in that book-to-bill that would be an anomaly that drove that book-to-bill up to 1.19. I would say 97% of that book-to-bill will be shipped within 12 months.

Thank you. And there are no further questions at this time. Ladies and gentlemen, this now concludes today's conference call. You may now disconnect.

Good day, everyone, and welcome to Knowles Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, I would like to hand the conference over to Ms. Sarah Cook. Please go ahead, Sarah.

Thank you, and welcome to our fourth quarter and full year 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations. Presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO.

Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company's sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review the risks and uncertainties in the company's SEC filings, including, but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2024, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law.

In addition [indiscernible], any non-GAAP financial measures referenced during today's conference call to be found in our press release posted on our website at knowles.com, and in our current report on Form 8-K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure.

All financial references on this call will be on a non-GAAP continuing operations basis with the exception of cash from operations or unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

Thanks, Sarah and thanks to all of you for joining us today. 2025 was a breakthrough year for Knowles marked by the completion of our portfolio transformation at the end of 2024 and the beginning of our journey as an industrial technology company.

Our organic growth in 2025 exceeded our Investor Day expectations and demonstrates our strategy of leveraging our unique technologies to design custom engineered solutions and deliver them at scale for blue chip customers in high-growth markets that value our solutions. Before I discuss this a little more, in detail, let me cover our Q4 2025 results.

Q4 was another quarter of strong financial performance. revenue was $162 million, up 14% year-over-year, exceeding the high end of our guided range. EPS was $0.36, up 33% year-over-year and above the midpoint of our guided range. Cash from operations was $47 million, also exceeding the high end of our guided range. On a full year basis, revenue of $593 million, up 7% year-over-year and EPS was $1.11, up 21% compared to 2024.

As I said last quarter, I believe our results continue to demonstrate that our focus on markets and products will be a significant competitive advantages that result in increased organic growth and positions us well for future growth.

Now turning to our segment results. In Q4, MedTech and Specialty Audio revenue was $73 million, up 4% year-over-year. Full year revenue was $264 million, up 4% from 2024 and at the high end of the organic growth target of 2% to 4% we presented at our Investor Day in May last year.

In Hearing Health, Knowles is known for superior technology and reliability. Our customers depend on our ability to deliver unique solutions to improve comfort of fit and performance with extremely low power. Our unique technologies, coupled with strong intimacy with our customers' applications is allowing us to win next-generation designs for MEMS microphones as well as balance overt speakers.

We also see the opportunity to increase our content per device in next-generation hearing health products. Beyond the Hearing Health market, we remain optimistic about the future growth opportunities within our [ Micro ] solutions group that we detailed at our Investor Day.

In the Precision Device segment, Q4 revenue was $90 million, up 23% year-over-year. As channel inventory levels are now normalized, and orders are matching end market demand, we saw strength across all our key end markets, leading to an acceleration of revenue in the second half of the year.

Full year revenue grew 10% year-over-year, exceeding the high end of the organic growth target of 6% to 8% we presented at our Investor Day in May last year. Within Precision Devices, as I stated earlier, we saw growth in all our end markets, MedTech, defense, industrial, EV and energy with revenue growing year-over-year.

Let me provide a little color by end market. In the MedTech market, we have new design wins ramping and repeat orders and production spending across multiple product lines such as high-performance [indiscernible] capacitors and pulse power film capacitors. The number of medical devices being used to extend life expectancy and to ensure sustained quality of life design the rise.

Our custom high-reliability capacitors can be found in a multitude of implantable devices, medical imaging and life-extending treatments. Our defense business continues to be strong. As a sole-source supplier on a number of key programs or volumes continue to grow. As I mentioned on our last earnings call, our capacitors and [ RF ] microwave solutions serve a wide variety of military applications spending from radar to communications to munitions. Defense spending is increasing and shifting toward electronic warfare, where our products are in high demand.

In the industrial markets, we have seen inventory levels normalize at our distribution partners. Our hyper-performance ceramic film electrolytic passed a diverse set of applications from robotics to welding and induction heating in the industrial sector. The energy market continues to be an exciting opportunity for growth in 2026 and beyond with our new specialty film line expected to start producing and delivering high-volume pulse power capacitors late in the second quarter of this year.

On a more quantitative basis, to summarize, even with extremely strong shipments in Q4, we saw another quarter of healthy bookings with a book-to-bill greater than 1 in our Precision Devices segment. Our continued collaboration with our customers have led to robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions. This, coupled with strong secular growth trends in the markets we serve gives me confidence in our ability to continue to grow revenue throughout 2026 and beyond.

Across the company, we are leveraging our unique technologies, creating custom products through our customer application intimacy and then scaling in production with our world-class operational capabilities for end markets with strong secular growth trends. Our 2025 results demonstrate this is a winning combination, leading to revenue and EPS growth on a year-over-year basis.

I would like to reiterate what I previously said, I'm excited about the momentum and strength of our business. We have entered 2026 positioned well for continued strong organic revenue growth above historic levels. While the first quarter of the year is typically seasonally low, I expect to see strong year-over-year growth in the third quarter.

New design wins are ramping. We have a very healthy backlog of existing orders and we are seeing increased demand for our products. Our organic growth and increasing EBITDA continues to produce robust cash generation, resulting in a very strong balance sheet, which will allow us to pursue synergistic acquisitions and continue to buy back shares while keeping our debt level or debt at very manageable levels.

To close, we are laser focused on what we do best, designing custom engineered products and delivering them at scale for customers in markets that value our solutions positioning us well for growth in 2026 and beyond. Now let me call -- turn the call over to John to detail our financial results and provide our Q1 guidance.

Thanks, Jeff. We reported fourth quarter revenues of $162 million, up 14% from the year ago period and above the high end of our guidance range. EPS was $0.36 in the quarter, up $0.09 or 33% from the year ago period and above the midpoint of our guidance range.

Cash generated by operating activities was $47 million, also above the high end of our guidance range driven by both increased EBITDA and lower-than-expected net working capital. In the Medtech and Specialty Audio segment, Q4 revenue was $73 million, up 4% compared with the year ago period, driven by increased shipment volume. On a full year basis, revenue increased by 4% over prior year levels due primarily to growth in Specialty Audio and an increase in shipment volume of stamp metal cans.

Q4 gross margins were 51.9%, up slightly from the year ago period. As expected, segment gross margins for full year of 2025 were above 50%. The Precision Devices segment delivered fourth quarter revenues of $90 million, up 23% from the year ago period. On a full year basis, revenue increased by 10% over prior year levels driven by strength across all our end markets and product lines.

Revenue accelerated throughout the back half of the year as inventory levels normalized at our distribution partners. Segment gross margins were 40.1%, up 230 basis points from the fourth quarter of 2024 as higher end market demand and production volumes in ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. This was partially offset by higher scrap costs and production inefficiencies in connection with our specialty film line.

For the full year, segment gross margins improved 140 basis points from 2024 levels despite headwinds from our specialty film line. We experienced production volume increases in RF microwave products and ceramic capacitors driving the gross margin improvement. I'm confident in our ability to continue to improve segment margins further in '26 as capacity utilization increases and efficiencies in connection with our specialty film line are realized.

On a total company basis, R&D expense in the quarter was $9 million, flat with Q4 2024 levels. SG&A expenses were $27 million, up $2 million from prior year levels, driven primarily by higher incentive compensation cost. Interest expense was $2 million in the quarter and down $2 million from the year ago period as we continue to use cash generated by operations to reduce our debt levels.

Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $47 million in cash from operating activities and capital spending was $15 million. During the fourth quarter, we repurchased 451,000 shares at a total cost of $10 million. We exited the quarter with cash of $54 million and $114 million of borrowings under our revolving credit facility. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was 0.4x, and we have liquidity of more than $340 million as measured by cash plus unused capacity under our revolving credit facility.

Before turning to Q1 guidance, I want to briefly highlight our performance relative to our full year 2025 outlook and 5-year targets that we provided at our May 2025 Analyst Day. Full year revenue was $593 million and up 7% versus 2024, which was above the high end of our outlook of $560 million to $590 million. Revenues exceeded the high end of our organic growth target of 4% to 6%.

From a segment perspective, med tech and specialty audio revenue grew by 4% and Precision Device revenue grew by 10% and with full segments meeting or exceeding the organic revenue growth targets of 2% to 4% and 6% to 8%, respectively. Adjusted EBITDA from continuing operations was $140 million, up 9% from 2024, driven by higher gross profit margins and increasing operating leverage and within the outlook range we provided. Cash from operations was $114 million or 19.2% of revenues, above the midpoint of our full year outlook.

Moving to our Q1 guidance. For the first quarter of 2026, revenues are expected to be between $143 million and $153 million, up 12% year-over-year at the midpoint. R&D expenses are expected to be between $9 million and $11 million. Selling and administrative expenses are expected to be within the range of $25 million to $27 million.

We're projecting adjusted EBIT margin for the quarter to be within the range of 18% to 20%. Interest expense in Q1 is estimated at $2 million, and we expect an effective tax rate of 15% to 19%. We're projecting EPS to be within a range of $0.22 to $0.26 per share, up $0.06 or 33% year-over-year at the midpoint. This assumes weighted average shares outstanding during the quarter of $88 million on a fully diluted basis.

We are projecting cash from operating activities to be within the range of negative $5 million to $5 million. Capital spending is expected to be $10 million. We expect full year capital spending to be approximately 4% to 5% of revenues as we continue investments associated with capacity expansion related to the large energy order we received in 2025.

In conclusion, we delivered strong year-over-year revenue, earnings and cash flow growth in the fourth quarter and for full year 2025. As we exited the year, we have a robust backlog and increased order activity, which gives me confidence in our ability to continue to achieve revenue, earnings and cash flow growth, which is expected to drive shareholder value throughout '26 and beyond. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator?

[Operator Instructions]. We'll take the first question from Christopher Rolland from Susquehanna.

And yes, I guess the large energy order and the thin film capacity products. I guess just first, an update there. Have you guys seen a broadening in new customers for that product? And if you could remind us on your capacity addition plans and timing of revenue and any TAM detail or something around that would be great as well.

Yes. So first, on the [ energy ] no different than we've kind of talked about earlier last year, which we expect this to be in the neighborhood of -- north of $25 million of revenue this year and really getting going in the back half, we should have it fully ramped in Q2. And so that's a lot by the end of -- by the end of Q2. So I think you'll see more of that, a big portion of that $25 million in the back half of the year.

Overall, for the specialty film line, I think we are seeing a definitely broadening of the customer base beyond some of the medical applications defib radiotherapy, downhole fracking, military applications like rail guns. There's a definite broadening of the [indiscernible]. And I think we talked about this a few quarters ago that overall, including the energy order, our expectations were in that, I would say, $5 million to $65 million range for revenue of this product category in 2026.

I think that still holds that we're still in that range for this year. So I think what I kind of see here is that the specialty film line, including energy, it really has a bright future as we look toward the future, Chris.

Excellent. Great. And then as we start thinking about the future, kind of what your next big hit might be. I guess, first of all, do you have some prospects that you've identified organically or internally some next kind of big hits and/or are you really looking outside? You did mention acquisitions. If you could give us an update there? Are you finding some high-value targets here and speaking evaluation are they reasonable?

Yes. I mean obviously, it's very hard to comment like specifically, but our pipeline continues to be good on the acquisition front. But to be honest with you, our organic opportunities over the next 24 to 36 months look pretty promising. And I'll just kind of go back to beyond the energy situation and the [ Pulse Power ] specialty film line. A couple of other things that we talked about on the Investor Day to give a brief update.

First, on our micro solutions within [ MSA]. That's where we are taking our existing technologies, our existing capacity, our existing R&D capability that we use for our hearing health and putting that into other medical applications. I would say incrementally more positive about this than it was, say, 2 quarters ago. We got a lot of new medical applications where we're collecting NREs at this moment that we should start ramping into higher volume production in 2027.

I mean it's not going to generate a ton of revenue this year. But remember, these MedTech designs are typically 3- to 5-year design windows and we're getting to the beginning of that, that 3 years in the 2027 year time frame when we started this. So that's pretty positive.

Defense spending, I just sit there and I see -- you read it every day. We're well positioned with event spending. With our [ RF ] and our capacitive products, I think that's more of a secular growth trend where we have some very differentiated products. And then lastly, I think we're doing some work in terms of ceramic caps. In terms of doing what I would say, in defense and [ undermunitions], we're doing some assembly work. There's a lot of good stuff going on here.

And so generally speaking, I think I've been pretty positive. We said our organic growth of 4% to 6% in our first year out of the gate, we're I think we're pretty excited about how we think about our organic growth opportunities over the next 24 to 36 months.

Next question today comes from Anthony Stoss, Craig-Hallum.

First off, John, maybe I missed it. Gross margin guide for March. I think in the past, you were thinking about 2 you maybe just confirm that. And then I'm just curious what you think for the June quarter gross margin might look like if the ramp is going to occur until late Q2, does that spill into the June quarter gross margins?

Yes. Tony, we really -- we kind of moved away as we transition to industrial tech company. We kind of moved away from gross margin. So the guide -- the focus on our guide is obvious revenue, EPS and cash flow. I would say from -- if you give a little detail on gross margin, we're at, call it, full year 2025, we're at 45.5%.

And MSA was, as I mentioned, above 50%. I think the MSA margins are going to kind of hold in that area in '26. But there is potential for margin expansion, especially in the back half of 2026 as we get to higher production volumes or ramped up production volumes on that specialty film line. So I think there -- again, there's an opportunity to increase above that 44.5% in '26 by, call it, 50 to 75 basis points, but weighted toward the back half of the year.

Got it. And Jeff, I'm curious if you could kind of highlight the fastest-growing markets or what you expect for 2026. I got to believe it's military. And I'm curious if you have exposure on the satellite side as well.

We do have some exposure in satellite, but just a comment, I think I mentioned on the prepared remarks that we had a very strong [ PD ] and a very strong bookings quarter. And even with that, the book-to-bill was 1.06 even with that very strong shipment quarter.

And I think we're already through January. We had a very strong January bookings month as well. And so -- and it's pretty broad-based. We tried to cut this up in a number of different ways. In terms of our key markets of being defense, med, industrial and then we put EV and energy together, all of them are looking pretty strong right now. The bookings have been strong and supporting that. And so I think from our perspective, it's very broad based. And if I look OEM versus distribution, same thing. Both our OEM business and distribution business is doing very well.

And so I think to pick one out and sit there and go, this one is doing the best I mean, defense is doing well, but so is a MedTech. Our MedTech business is doing well. You know the energy story. And I think the one that we're seeing more and more momentum is energy -- sorry, sorry, industrial we're seeing more momentum in industrial than we did 6 months ago. So I think that seems to be a pretty big positive change since the last 6 months.

Perfect. Congrats, nice execution.

The next question comes from Robert Labick from CJS Securities.

This is [ Will ] on for Bob. I know you talked about the time line of the energy orders, but can you talk more specifically about the production build out? Has the new capacity being completed, tested? Where does it stand?

Yes. So I mean we have weekly calls with the team. This is obviously happening outside of Greenville, South Carolina. And so we have weekly calls. It's like every week, there's something new. A couple of weeks ago, we got the permits to start producing product in the facility. Equipment is being moved in. We've got a team actually in Greenville from all over the world, how support this ramp-up of bringing manufacturing engineering teams from across the globe to help with the ramp-up.

So there's a lot going on plus at the same time, we're still delivering low volume units on this order. But the goal here is we're going to ramp to something like 10x in the next months from where we are today. So I think we're on track a lot to be done here, but we're on track in order to get to by the end of Q2, the full volume production that we committed to.

And again, I think it depends a lot about on auto orders in the rest of the specialty film business. Exactly what we deliver on this energy order. But I think we're thinking in that $50 million to $65 million range from -- in the 20s this year for 2025.

And Will, I will say very modest amount in -- so it will help drive sequential growth in Q1 to Q2 as we ramp up.

Yes. So I think that's a good point. I think obviously, we're guiding to a pretty decent organic growth year-over-year, but that's not really being driven by the energy order, obviously.

That's very helpful. And can you remind us, can that capacity be used for other pulse power applications beyond the energy order if the demand arises?

Yes. I mean, like how we're setting this up, quite frankly, is we're setting it up probably in the same facility, but a little separated because the normal specialty line is much higher mix this is essentially below mix production, and we're working on a lot of things that will make the standard specialty line fill line more productive over time, too. like automation. We're doing a lot of things that will help longer term with the standard specialty film line. But we're setting them up right next to each other as opposed to trying to build one high-volume customer against more like, I call higher mix customers.

[Operator Instructions] We'll go next to Tristan Gerra from Baird.

This is Tyler Bomba for Tristan. You've touched on it briefly already, but could you give us a more detailed update on the supply/demand dynamics in industrial? Do you expect the second half to see industrial revenue rebounding the first half is kind of back to supply and demand balance?

Yes. So when I look at like our numbers in our forecast here, I think we expect in the first half right now, we expect pretty strong industrial shipments in the first half off of what was pretty strong in the back half of 2025. And then I would sit there and say, right now, the back half of the year looks more -- quite now looks more flattish to the back half of 2025. Industrial -- for industrial specifically.

But overall, we expect growth for Industrial for the full year. So obviously, if we go back to, Tyler, to when we were talking earlier last year, the first half in industrial of 2025 was still relatively medially weak. We're seeing a fair amount of growth in the first half and then I think it's a little early. Industrial is a lot more turns business. The lead times are shorter. But right now, I think what I see here is we're going to -- it's going to be flattish year-over-year in the back half.

That's very helpful. A quick follow-up. We're starting to hear about shortages of components across the industry. Is this impacting your demand? And are the supply constraints expected to positively impact price in the second half?

Well, I mean, we're always looking at price, Tyler. So I think you're absolutely right. I mean, there's a number of things here, dynamics that I think are going on. And we continue to see -- I mean, like I said on the previous question, with book-to-bill, when we were having the strong book-to-bills in the front half of '25, it was off of weak shipments. So you got to take that book-to-bill with a grain of salt.

But when you look at the Q4 numbers in terms of the revenue being $90 million, and we still have a book-to-bill of 1.06. And I said, January is already in the books and the bookings in January were already strong again. And so it's definitely a topic here about capacity, capacity utilization, pricing, it's all tier mix. And to be honest with you, I would sit there and say we are starting to see some concerns as we enter towards the back half of the year that we got to make sure we're prepared for all the orders we're receiving. So I think if this demand continues at this rate.

And everyone, at this time, there are no further questions. That does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2025 Knowles Corporation Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Sarah Cook. Please go ahead.

Thank you, and welcome to our third quarter 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations. And presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO.

Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws.

Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings included, but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2024, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.

All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis with the exception of cash from operations or unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the Investor Relations section of our website.

With that, let me turn the call over to Jeff, who will provide details on our results. Jeff?

Thanks, Sarah, and thanks to all of you for joining us today. As we continue to execute our strategy of leveraging our unique technologies to design custom engineered solutions and then deliver them at scale for customers and markets that value our solutions, we achieved strong results in the third quarter of 2025.

Revenue was $153 million, up 7% year-over-year. EPS of $0.33, up 22% year-over-year, and cash from operations was $29 million, all of which were above the midpoint of our guided range. I believe our results continue to demonstrate that our focus on the markets and products where we have significant competitive advantage is paying dividends and positions us well for future growth.

Now turning to the segment results. In Q3, Medtech & Specialty Audio revenue was $65 million, up 2% year-over-year. Our continued operational excellence, sustained success of new product adoption and cutting-edge technology is evidenced with our strong gross margins. I expect that Medtech & Specialty Audio will have revenue growth within the range of 2% to 4% over the year in 2025, and we are optimistic about our future growth opportunities we detailed at our Investor Day.

In the Precision Devices segment, Q3 revenue was $88 million, up 12% year-over-year. We saw revenue growth across all our end markets: medtech, defense, industrial, and EV and energy. Our strong intimacy with our customers' applications has led to accelerating design wins. Coupled with robust secular trends in our end markets, I am confident in our ability to continue to grow revenue in the fourth quarter and beyond.

While we are seeing growth across all our end markets, I would like to highlight the defense market as it was particularly strong with design wins and bookings outpacing other end markets. Our capacitors and RF microwave solutions serve a wide variety of military applications. We have a compelling product offering of RF filters being used in next generation of defense systems serving a broad base of applications from radar, detection and jamming to ground communications, ensuring reliable and secure military communications.

Our capacitors provide the electrical energy source needed for extremely harsh applications like munitions and detonation devices. Defense spending is increasing and shifting towards spending on electronic warfare where our products are in high demand.

In Q3, bookings in the PD segment remained strong, particularly in defense and with our distribution partners. We continue to believe that channel inventories are now at normalized levels as they are now matching orders to end market demand. We continue to collaborate with our customers leading to a robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions across all the markets we serve. We are positioned well for organic growth, and I expect the Precision Devices segment will grow at the high end of our stated growth range of 6% to 8% in 2025.

I would like to reiterate the strategy we are executing across both of our business units. We are leveraging our unique technologies, creating custom products through our customer application intimacy and then scaling into production with our world-class operational capabilities for end markets with strong secular growth trends. It is proving to be a winning combination, leading to year-to-date revenue growth of 5% and EPS growth of 15% on a year-over-year basis.

John will go through our Q4 guidance shortly, but as we stated on previous calls, we are expecting to finish the year strong with revenue and EPS growth accelerating in the second half of 2025.

As we look to next year, with new design wins ramping and a very healthy backlog of existing orders, we expect to see organic growth rates at the high end of our stated range of 4% to 6% for the total company. This is an increase from historical levels, supported by strong secular growth trends in our end markets and new initiatives such as the expansion of our specialty film production coming online.

Cash generation from operations continued to be robust in the third quarter, allowing Knowles to purchase $20 million in shares and reduce outstanding bank borrowings by $15 million. We have a very strong balance sheet that will continue to support our growth as we pursue synergistic acquisitions and buy back shares while continuing to keep our debt at very manageable levels.

In summary, as I said last quarter, I'm excited by the momentum and strength the business demonstrated and the growth opportunities that we have in front of us, both in the near and longer term. Our design wins continue to be strong across our product portfolio. This is driving increased demand for our products, which gives me confidence that we have entered a period of accelerated organic growth from historical levels. We are laser-focused on what we do best, designing custom engineered products and delivering them at scale for customers and markets that value our solution, positioning us well for growth in 2025 and beyond.

Now let me turn the call over to John to detail our quarterly results and provide guidance for Q4.

Thanks, Jeff. We reported third quarter revenues of $153 million, up 7% from the year ago period and at the high end of our guidance range. EPS was $0.33 in the quarter, up $0.06 or 22% from the year ago period and also at the high end of our guidance range. Cash generated by operating activities was $29 million at the high end of our guidance range, driven by lower-than-expected net working capital.

In the Medtech & Specialty Audio segment, Q3 revenue was $65 million, up 2% compared with the year ago period, driven by increased demand in the specialty audio market. Q3 gross margins were 53%, flat versus the year ago period. As expected, segment gross margins in the third quarter improved more than 200 basis points sequentially, and we expect gross margins to be above 50% for the full year 2025.

The Precision Devices segment delivered third quarter revenues of $88 million, up 12% from the year ago period. Segment gross margins were 41.5%, up 150 basis points from the third quarter of 2024 as higher end market demand and production volumes in our ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. These improvements were partially offset by higher production costs and lower-than-expected yields associated with the ramp-up of the specialty film product line.

It's worth noting that specialty film output trends within the quarter were positive. And as we exited Q3, we are well positioned for both sequential growth and gross margin improvement in the fourth quarter.

On a total company basis, R&D expense in the quarter was $9 million, flat with Q3 2024 levels. SG&A expenses were $26 million, up $2 million from prior year levels, driven primarily by annual merit increases and higher incentive compensation costs. Interest expense was $2 million in the quarter and down $2 million from the year ago period as we continue to reduce our debt levels.

Now I'll turn to our cash flow and balance sheet. In the third quarter, we generated $29 million in cash from operating activities. Capital spending was $8 million in the quarter. We continue to expect to generate operating cash flow of 16% to 20% of revenues for full year 2025.

During the third quarter, we purchased 940,000 shares at a total cost of $20 million. We exited the quarter with cash of $93 million and $176 million of debt, which includes borrowings under our revolving credit facility and an interest-free seller note issued in connection with the Cornell acquisition. The remaining balance of the seller note matures next month, and we expect to fund this payment with a combination of cash on hand and revolver borrowings.

Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was 0.6x, and we have liquidity of more than $350 million as measured by cash plus unused capacity under our revolver.

Before turning to the fourth quarter guidance, I want to give a brief update on the tariff situation as it relates to Knowles. While the situation remains fluid, we continue to believe our exposure to tariffs is less than 5% of revenue and 3% of cost of goods sold. We've had success in passing these additional costs on to our customers, and our expectation is to continue to do so without loss of business.

Moving to our guidance. For the fourth quarter of 2025, revenues are expected to be between $151 million and $161 million, up 9% at the midpoint year-over-year. R&D expenses are expected to be between $8 million and $10 million. Selling and administrative expenses are expected to be within the range of $26 million to $28 million. We're projecting adjusted EBIT (sic) [ EBITDA ] margin for the quarter to be within the range of 22% to 24%. Interest expense in Q4 is estimated at $2 million and includes noncash imputed interest.

We expect an effective tax rate of 7% to 11%. As we move forward, I expect the tax rate to increase in 2026 to the range of 15% to 19%. We're projecting EPS to be within a range of $0.33 to $0.37 per share. This assumes weighted average shares outstanding during the quarter of 87.2 million on a fully diluted basis. We're projecting cash generated by operating activities to be within the range of $30 million to $40 million. Capital spending is expected to be $12 million, and we expect full year capital spending to be approximately 5% of revenues as we've increased investments associated with capacity expansion related to our specialty film line.

In conclusion, our year-over-year revenue and earnings growth were strong in the third quarter. And with the backlog and increased order activity, we expect to continue to deliver both sequential and year-over-year revenue and earnings growth in the fourth quarter of 2025. I'll now turn the call back over to the operator for the questions-and-answers portion of our call. Operator?

[Operator Instructions] Your first question comes from the line of Christopher Rolland with Susquehanna.

Congrats. So I guess my first is going to be on specialty film. If you guys could just remind us on current capacity, your plans or even update us on your plans for capacity additions and how from a demand standpoint, you guys see revenue now into next year and whether you have high confidence on high-volume additional customer opportunities for this product in particular?

Yes. Chris, let me separate that into 2 pieces of specialty film. Let me answer the first, which is a little bit easier, which is back to that energy order we received in Q1. So first, I think we're on track that starting really in the second quarter, but really fully ramping up at the end of the second quarter, that energy order will start to be delivered in the back half in full -- but starting in Q2, around $25 million or so. That's what we expect in that business.

I think in the other portion of the specialty film business, right now, we have a backlog that's not counting again the energy order that's in excess of $25 million, close to $30 million backlog that to deliver on. And we see more orders coming. So we feel pretty comfortable as we look into next year that the specialty film line, probably is going to be in the $25 million to $30 million range this year. If you add the $25 million, it should be at least $55 million or $60 million next year. And we're expanding the capacity to fulfill those orders.

Excellent. And then perhaps we can talk about -- I think in the press release, you talked about design activity. I was wondering what you were alluding to and what underpins your high end of your target growth range? And just as we kind of think about Medtech or Precision Devices or any subsegment, what you would expect to be above and?

Yes. So if you divide it that way, I think if I were to sit there right now, I would probably look at the Medtech & Specialty Audio business in '26 being in that 2% to 4% range for growth next year. I would sit there and say the Precision Device, which is now a business which is now obviously larger than the med tech is at the high end to maybe even slightly above the high end of the 6% to 8% that we provide for organic growth at the Investor Day.

The underpinning of this, I wish I could point to and say beyond that energy order, which we highlight that it's like one customer or one application, we are just having a tremendous amount of success. And I would sit there and say, I really commend the teams within Knowles, Chris, in terms of execution. It's taking our unique technologies and then customizing them for specific applications across med, industrial, defense, and then delivering them at scale with a world-class operation. And we're just having a tremendous amount of design win activity across the board. And that's why I think we feel comfortable right now when you look at the growth rates, coupled with that energy order we'll start to deliver that all our markets are up.

I was even looking -- I think like even this year, we're kind of having quite a bit of success this year in EV. That's in '25, which obviously a lot of people aren't. And that's all about very specialized design wins in EV where we're having obviously very unique and differentiated products.

Your next question comes from the line of Bob Labick with CJS Securities.

Congratulations. Also my congratulations as well on the strong performance.

Thanks, Bob.

Yes. So I just want to follow up on the kind of the specialty film. There's obviously lots of excitement going on in the capacitors. You talked about the energy order coming on next year and then the other specialty, I guess, I think you said medical and defense. And any way you can elaborate on some of the products that these are going into or the ability for follow-on orders in the non-big energy one and how that could progress over time?

Yes. I think I talked about a couple of them that we've talked about before, but they're growing pretty rapidly and doing well for us. But it all -- the specialty film really focuses around pulse power applications. It's applications where the capacitor is not being used in a traditional sense as a building block of an electronic circuit. It's actually being used to store a significant amount of energy that needs to be released in a very rapid pace in order to power something.

And we've talked about before about defibs. We talked about in the railgun application. We talked about more recently, radiotherapy is a great application for us. So there's a lot of applications that are emerging that are coming. I wouldn't -- beyond the energy ore, which is very unique in terms of the size, we have a lot of unique applications that are coming to market, and we continue to be called up on a weekly and daily basis. We seem to be in a very unique position, Bob, relative to the technology and the capability to deliver the solutions. And of course, it doesn't help to be U.S.-based in manufacturing in the U.S. as well.

Got it. Yes. It sounds like these are new applications solving problems may be better than before in kind of existing markets, but taking share from older technologies. Is that post...

I wouldn't say taking share. I would say this is like new applications that didn't exist before that are requiring like a significant amount of power to be delivered in a very rapid period of time in order to power the device. I think one of the ones that we alluded to, which is coming is downhole. And that's another application that, quite frankly, we're taking prototype orders for right now, but we could see down the road with all the work that we've been doing that these downhole applications where our capacitors would be in high heat environments, have to be taken downhole in order to be involved in fracking and cleaning of drill bits. There's a whole bunch of different applications here that we've been working on for like a year or 2. And we're in the prototype phase right now, but everything indicates like that one is another application that would require pulse power.

Got it. Very exciting. And shifting gears, obviously, the balance sheet is in good shape. You're buying back stock. You've had M&A in the past. Can you just give us an update on the M&A environment? I don't know if it's like with tariffs, it slowed down. Has it like reopened up a little bit? Or what's the opportunity...

Yes, we're definitely focused on this. I just think where we are today as a company is we have a great organic plan. And I think we want to make sure that if we do an acquisition, it becomes -- it's very obvious to our analysts, our shareholders why we did it. And so we're laser-focused on -- still on acquisitions. But I think we're in a position now where we're trying to be picky and making sure we're going to do something that makes sense, and that's really 1 plus 1 equals 3.

I'm still hopeful we'll get something done over the next year or 2, but we want to make sure it's the right thing. I don't know, John, if you have any comments.

I think that the environment has improved from a quarter ago. There's more assets out there. Interest rates expectations are coming down. So again, we've got a good pipeline, but it's difficult to say when we're going to be able to complete. And as Jeff said, we're being disciplined.

Your next question comes from the line of Anthony Stoss with Craig-Hallum.

John, probably the first question for you. I'm curious if you can share the book-to-bill now and where it was maybe a quarter ago. And then palladium prices are up about 30% in the last 30 days. I know this impacted you guys early in 2022. I'm curious at what price of palladium do you think would have a negative effect on your gross margins?

So I'm going to let John take the palladium question first, and then I want to just cover the book-to-bill.

Yes, Tony, you're right. The palladium costs have increased. I will say we're pretty good in terms of -- we've got prebuys. We have a pretty good position at least through the first half of next year, where we're kind of locked in at prices below today's market price. If they continue to elevate, I know looking back 12, 18 months ago, they got over $2,000 a troy ounce -- as you mentioned, they're $1,500. Again, we're monitoring this closely. If there are opportunities to prebuy even beyond the second half of next quarter -- sorry, of 2026, we'll do that. But I don't see this impacting our gross margins in a negative way at this point.

I mean we've had a kind of a -- when we went through this once before, obviously, we were able to raise prices. But I think one of the things that we've done is we've kind of fixed the price, as John said, through the middle of next year. So we're not subject to like big swings in volatility over a short period of time. And I would also add that if we get to the back half of next year and prices remain the same, I think we'll probably be having discussions with our customers about it. I mean, I don't think it's a big deal at this point.

On the book-to-bill, our book-to-bill within PD was 1 for the quarter. And I just -- it's worth a little color here. It was the second largest order quarter in the last 4 quarters. I think what you're starting to see is, quite frankly, that one is the revenue is up significantly. And so it's getting a little bit more difficult to produce those crazy book-to-bills that we had in the first half, but we're starting to deliver on those. But I will say this, it was -- we had a very strong, again, bookings quarter. When I said it's the second largest bookings quarter we've had in the last 12 months.

I would also just say that the backlog is quite high as well. And that's why we put so many orders in the last 3 quarters, again, not even counting the energy order. And so I think we feel very comfortable about how bookings are. I did look just yesterday at where the bookings were month-to-date, and it appears we're having another strong bookings month in October. So I think that the trends continue.

It was -- as I said in the prepared remarks, it was particularly strong, the bookings in defense and then in -- with our distribution partners. We had well above 100 distribution partners in the defense market.

If I could sneak in one more for John. You said it's good to hear that the thin film you're making improvements in Q4 on the gross margin side. How much or how many more quarters do you think that will last? And what kind of impact is it at now?

Tony, I mean, in terms of -- you're talking about the specialty film line specifically?

Yes.

I mean margins, all I'll say in Q3 were -- we had a great quarter overall, but that was an area for opportunity improvement. Margins were well below the total company and the PD average. As I said, it's really a question of we're adding costs, both fixed overhead. We're incurring higher than normal scrap costs. We're seeing within the quarter -- within Q3, we saw some positive trends. So August was better than July. September was much better than August. So coming out of that, we're kind of trajectory is right.

I think the question -- just -- I think you're not going to really see the full benefit of what we think the gross margin we can get to until probably late Q2 when the energy order starts to fully ramp. Because just remember, what's going on is we're hiring people, equipment is starting to run. We're putting overhead in place to deliver this energy order, but we're not actually delivering a lot of units yet or producing a lot of units. So it is impacting gross margin, and that's really not going to go away fully until mid- to late Q2.

But I do, again, see sequential improvement from Q3 to Q4 in gross margins due to improved output and capacity utilization.

Your next question comes from the line of Tristan Gerra with Baird.

Could you give us a sense of the gross margin leverage on incremental utilization rates and where utilization rates are currently? And also as a follow-up to the prior question, what is the gross margin impact from the ramp in specialty film in Q3? And assuming that impact, as you said, disappears by mid next year, is it kind of a linear decline? Or is it more of a decline that happens mostly when you start ramping in Q2 of next year?

Yes. A lot of questions to unpack there, Tristan. I would say the first thing with respect to the gross margin utilization and capacity, you really have to look at it on a product line-by-product line basis. We have some product lines that are running close to full capacity within the ceramic capacitor business and others that we've got some capacity. So it's really difficult to kind of go and give you a blanket on what our capacity utilization is.

But generally speaking, like our drop-through on incremental revenue.

I would say that question is easier to answer on average, again, it depends on product line. But overall, you can think of 35% to 40% dropping to the bottom line on every dollar of sales. Our variable -- you can see our gross margin is, call it, 45%. Our variable contribution margin is higher than that, obviously. And we don't have a lot of incremental operating expenses. So if I was modeling this yes, every dollar of sales, kind of think of it as that 35% to 40%. Obviously, if it's MSA, it's going to be a little higher than that and certain areas within PD can be a little lower. But overall, kind of use that 35% to 40%.

Maybe, John, if you agree, but I think what you're going to see is some linear improvement in Q4, Q1 and into Q2. And when you're going to see probably a bigger jump up in Q3 once we're fully running the production. So it's going to kind of be linear and then a jump up.

Yes. The only thing I would say is sometimes Q1 has a little seasonality where in some...

I'm talking about specialty film specifically. You will see linear sequential improvement Q3, Q4, Q4 to Q1, Q1 to Q2 and then a big jump up as we get into Q3.

But in some of our other business, like MSA, typically, Q4 is a really good -- Q3, Q4 are good quarters, and then we see a little dip down in Q1.

I think the overall theme, Tristan, is this. I still think that a number of our businesses, specifically the specialty film product category still has upside gross margin that should be -- help the overall company continue to start -- continue to raise EBITDA margins over time.

Yes. I would -- just last point on this. If we're going to finish somewhere 44% to 45% in 2025, there is opportunity to go higher in 2026, really driven by the -- in the back half of '26, driven by that ramp-up in the specialty film line.

Okay. That's very useful. And then for my second one, your exposure to distribution and industrial within PD, is that still around 40%? And you've mentioned that inventory levels are back to normal. Is that the case for industrial and distribution as well? And you've mentioned a very nice ramp in industrial. So should we assume that even in that segment, inventory levels have normalized? And if not, when do you think that happens?

I would say, generally speaking, a big portion of what we categorize in our distribution business is industrial, and that business is up. Now here's what I'd just say is it's a little opaque yet to answer the question on industrial growth year-over-year, because you're taking into account inventory burn down. But I can definitely say that if you look at the growth in distribution, we're going to have some pretty nice growth in our distribution business.

And when we see their POS reports, they're seeing nice growth as well. And a big portion of that's industrial. Now again, it's hard to actually say how much industrial is growing. But I can tell you is the inventory is for sure out. We're definitely seeing ordering trends that are saying that orders are lining up with demand as opposed to if we're burning out inventory, we don't really need that much to order that much from you.

There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.

Good afternoon, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2025 Knowles Corporation Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Sarah Cook. Please go ahead.

Thank you, and welcome to our second quarter 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations. And presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under the applicable federal securities laws.

Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, included but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2024, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release.

All forward-looking statements are made as of the date in this call, and Knowles disclaims any duty to update such statements, except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com, and in our current Form 8-K filed today with the SEC.

This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis, with the exception of cash from operations or unless otherwise noted. We've made selected financial information available on webcast slides, which can be found in the Investor Relations section of our website.

With that, let me turn the call over to Jeff who will provide details on our results. Jeff?

Thanks, Sarah, and thanks to all of you for joining us today. As the tariff situation continues to evolve, I will provide a brief update before my commentary on our second quarter results and the market outlook.

Although the tariff situation continues to be fluid, we are further along in our analysis and still believe Knowles is well positioned as it relates to the direct and indirect impacts of tariffs. As I previously said, we are generally a proximity manufacturer, meaning the vast majority of our products built in the U.S. are shipped within the U.S., and products built in Asia shipped to customers in Asia and Europe. Couple this with our philosophy of sourcing materials geographically close to our production facilities and our total exposure to tariffs is less than 5% of revenue and 3% of cost of goods sold.

In Q2, we have had success in passing these additional costs on to our customers, and our expectation is to continue to do so without loss of business. Additionally, I believe the primary end markets we serve in medtech, defense and the industrial sectors will be relatively insulated from the impacts of tariffs.

Let me reiterate what I previously said. The applications that our products serve in medtech markets such as hearing aids and devices that our capacitors are in, such as implantables, imaging and ventilators to name a few, have traditionally been considered essential. As these products are essential, our historical experience shows economic shocks and subsequent recessions can have modest short-term impacts to these markets, but tend to have very little impact over the course of a full year.

I also believe the defense programs we participate in are secure, and based on our recent order activity, demand appears to be gaining strength. Finally, the industrial market has been more sensitive than medtech and defense to recessions, but we are currently not seeing any impact on demand. We are obviously continuing to monitor this closely.

Now I'll turn to our results. In Q2, we had a strong quarter, delivering revenue of $146 million, up 8% year-over-year, and cash from operations of $36 million, both exceeding the high end of our guided range. EPS of $0.24 was above the midpoint of the guided range, up 20% year-over-year. Our business units continue to execute to the plan based on the strategy we laid out at our Investor Day.

Now turning to our segments. In Q2, MedTech & Specialty Audio revenue was $67 million, up 13% sequentially and 10% year-over-year. We saw strength in both our Specialty Audio business and in the Hearing Health market in Q2. Very similar to what we have seen historically, there was a brief slowdown in demand for Hearing Health products due to macroeconomic uncertainty in Q1, with sequential and year-over-year growth returning in Q2.

The Hearing Health business continues to be resilient as these products are considered essential devices. With customers depending on our ability to develop -- deliver unique solutions, I would note the demand for MSA products continues to be strong as we head into Q3, giving me confidence in the expected year-over-year growth within our MSA business.

In the Precision Devices segment, Q2 revenue was $79 million, up 8% sequentially and 6% year-over-year. Revenue increased across all our end markets for both OEM and distribution partners. In Q2, bookings trends building on Q1 continue to be strong for the Precision Device segment. I would note this is the third consecutive quarter with positive bookings trends. The bookings trends was broad-based across most of our end markets and the distribution demand has returned as we believe inventory levels have normalized.

We continue to collaborate with our customers, leading to a robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions across all the markets we serve. Overall for Knowles, as we noted at the Investor Day, with the acceleration of design wins and order activity, we are positioned well for organic growth in 2025.

Beyond 2025, we expect an increase of organic growth rates from the historical levels as new initiatives such as the expansion of our specialty film production line comes online. Additionally, new products such as our inductor line, which we just announced last week, has the potential to expand our TAM and drive future growth.

We are executing on the strategy of leveraging our unique technologies, creating custom products through our customer application intimacy and then scaling into production with a world-class operational capability for end markets with strong secular growth trends. It is proving to be a winning combination, leading to the beat in revenue and EPS this quarter, and I believe it will allow us to continue to expand our margin profile.

In the second quarter, we repurchased $30 million in shares, which was funded by robust cash generation from operations. We believe our strong cash generation will allow us to pursue synergistic acquisitions and buy back shares while continuing to keep our debt at very manageable levels. In summary, as we enter the third quarter of 2025, I am excited by the momentum and strength the business demonstrated and the growth opportunities that we have in front of us, both in the near and longer term.

As I think about our growth potential in 2025, distribution inventory appears to have normalized and as orders are increasing and our design wins continue to be strong across our product portfolio. This is driving increased demand for our products, which gives me confidence we have entered a period of accelerated organic growth. We are laser-focused on what we do best, designing custom engineered products and delivering them at scale for customers and markets that value our solutions, positioning us well for growth beyond 2025.

Now let me turn the call over to John to detail our quarterly results and provide our Q3 guidance.

Thanks, Jeff. We reported second quarter revenues of $146 million, up 8% from the year ago period and above the high end of our guidance range. EPS was $0.24 in the quarter, up $0.04 or 20% from the year ago period and above the midpoint of our guidance range. Cash generated by operating activities was $36 million, exceeding the high end of our guidance range, driven by timing of collection activities, lower-than-anticipated inventory and payments received in connection with settlement of foreign currency hedges.

In the MedTech and Specialty Audio segment, Q2 revenue was $67 million, up 10% compared with the year ago period, driven by increased demand in Hearing Health and Specialty Audio. Q2 gross margins were 50.6%, down 280 basis points versus the year ago period, driven by unfavorable product mix and higher factory costs. As expected, gross margins in the second quarter improved 200 basis points sequentially, and we expect gross margins to remain in the low-50% range in the second half of the year.

The Precision Devices segment delivered second quarter revenues of $79 million, up 6% from the year ago period. Segment gross margins were 38.7%, up 150 basis points from the second quarter of 2024, as improved pricing and higher production volumes resulted in increased factory capacity utilization in our legacy Precision Devices business. These improvements were partially offset by higher scrap costs and factory inefficiencies as we continue to ramp up the specialty film product line.

On a total company basis, R&D expense in the quarter was $9 million, up slightly from Q2 2024 levels. SG&A expenses were $28 million, up $2 million from the prior year levels, driven primarily by annual merit increases and higher incentive compensation costs. Interest expense was $3 million in the quarter and down $2 million from the year ago period as we continue to reduce our debt levels.

Now I'll turn to our balance sheet and cash flow. In the second quarter, we generated $36 million in cash from operating activities. It's important to note that cash from operations for the 3 months ended June 30 includes $8 million in cash utilized to settle supplier obligations related to the Consumer MEMS Microphones business, which was sold last year. Capital spending was $5 million in the quarter. We continue to expect to generate operating cash flow of 16% to 20% of revenues for full year 2025.

During the second quarter, we repurchased 1.9 million shares at a total cost of $30 million. We exited the quarter with cash of $103 million and $190 million of debt that includes borrowings under our revolving credit facility and an interest-free seller note that was issued in connection with the Cornell acquisition. Lastly, our net leverage ratio, based on trailing 12 months adjusted EBITDA, was 0.7x, and we have liquidity of more than $350 million as measured by cash plus unused capacity under our revolving credit facility.

Moving to our guidance. For the third quarter of 2025, revenues are expected to be between $144 million and $154 million. R&D expenses are expected to be between $8 million and $10 million. Selling and administrative expenses are expected to be within a range of $25 million to $27 million. We're projecting adjusted EBIT margin for the quarter to be within a range of 22% to 24%. Interest expense in Q3 is estimated at $2 million and includes noncash imputed interest, and we expect an effective tax rate of 13% to 17%.

We're projecting EPS to be within a range of $0.29 to $0.33 per share. This assumes weighted average shares outstanding during the quarter of 88.5 million on a fully diluted basis. We're projecting cash generated by operating activities to be within the range of $20 million to $30 million. Capital spending is expected to be $11 million. We expect full year capital spending to be approximately 5% of revenues as we increase investments associated with capacity expansion related to our specialty film line.

In conclusion, we resumed year-over-year revenue and earnings growth in both segments in the second quarter. And with the strong backlog and increased order activity, we expect to continue to sustain both sequential and year-over-year revenue and earnings growth for the remainder of 2025.

I will now turn the call back over to the operator for the questions-and-answers portion of our call. Operator?

[Operator Instructions] Your first question comes from the line of Christopher Rolland of Susquehanna.

Congrats on these results. So the guide was nicely ahead of what we were thinking and perhaps what you guys were thinking earlier in the year. If you could speak to maybe the delta, what is providing that upside? And then also any update on demand for the thin film opportunity as well?

Yes. So first, I would sit there and say, I think, Chris, as I mentioned on the call, this is the third -- with Q2, the third successive quarter within the PD segment where we've had a book-to-bill over 1. I would note our book-to-bill in Q2 for PD was above 1.15. So we have the very strong bookings quarter again. And it was pretty broad-based. I'd say in the PD segment, it was medical, defense, industrial, it's with our distribution partners as well as with our direct customers. So we're seeing quite a bit of demand on the PD side.

I would sit there and say, on the MSA side, on the Hearing Health side, obviously, we saw Q1 be a little bit weaker in the end market, but it bounced right back in Q2. Kind of like we've said in the past, with these essential devices, maybe somebody stays home for a month and delays getting a hearing aid by a month, but it bounced back very nicely. And we're expecting both segments to have year-over-year growth for full year 2025. So it's really pretty broad-based, Chris, across most markets.

And I think kind of -- it's, I would say, a little bit of a testament to kind of what we laid out at Investor Day, which is around these three markets, medtech, industrial and defense. And I would add -- one last piece I would add, I was just looking at our bookings for July. July to date, we are already having another strong month of bookings in July already.

Excellent. And then I know you're not guiding 2 quarters ahead. But without the MEMS business, I think that was maybe -- could create some volatility for Q4. Did you have any early thoughts on how we should be thinking about Q4? And then secondly, just gross margin expansion. Like with these higher volumes, what should we expect from higher utilizations moving forward here?

Yes. I'll let John cover the gross margin in a second. Just from a revenue base, obviously, you're correct, we're not guiding Q4. But I would say this, we are expecting year-over-year growth again in Q4, and we expect sequential growth again in Q4. That's what I would sit there and say at this point.

I mean, I think we're pretty fully booked already for Q3 with our lead times and our strong intimacy with our customers, we have a pretty good view of Q3. We're starting to get a pretty good view into Q4, but we're still expecting based on the order activity that we'll see year-over-year growth in Q4 as well as sequential growth in Q4.

Yes. Chris, in terms of gross margins and specifically capacity utilization, we delivered gross margins of 44.3% in Q2. We expect sequential to be at least up 100 basis points or more in Q3 and kind of similar levels in Q4. And again, those improvements over the current 44.3%, as you said, it's primarily driven by capacity utilization in our high-performance caps business and also a little bit in our MSA segment.

Your next question comes from the line of Bob Labick from CJS Securities.

Congratulations on continued strong performance. Well, congrats on the strong performance. Let's see. You touched on organic growth accelerating [indiscernible] '25. You mentioned the film expansion and inductor lines. I was hoping you could just expand on that a little bit. And the film is for the energy order you talked about on previous calls? Or how should we think about that?

Well, the film will be, yes, the energy order, but that won't really start hitting revenue line until probably midyear next year when we'll start delivering that order. So the growth in the specialty film line is actually going to be other customers, mainly medtech, defense and industrial shorter term. But I think here's how I kind of would frame it.

If you looked historically, we gave quite a bit of information at the Investor Day. And historically, these businesses that we have owned today, continuing ops have grown over a cycle. They grew at -- we showed 4% organically. We kind of committed that on an organic basis, we think that over a cycle, 4% to 6% now is kind of the growth rate for these businesses. And I would say we're trending toward the higher end of that range right now.

And so it's going to be driven by, first, a lot of new design wins in our core. So I think we got good design wins in our core products. But then there's these other expansionary opportunities. I would sit there and say specialty film is going to really start delivering significant growth in the back half of this year as well as into 2026.

The inductor line is going to take a little longer. We just introduced that product category last week. It builds off of our ceramic capacitor capabilities or ceramic inductors. And we would hope starting in about 24 months from now, we'd start to see some more significant revenue.

So I think I would sit there and say, we've got a lot of design wins in the core, plus we've got some other opportunities that are expanding our TAM and allowing us to grow. So over the next, I would say, year to 2 years, I would sit there and say our growth rate is going to be probably towards the higher end of that organic range that we laid out at the Investor Day.

Okay. That sounds great. And then you touched on this, too. Obviously, you had strong cash flow in the quarter. You bought back stock, but you still mentioned M&A as a potential part of the growth over time. Can you talk just a little bit about the M&A market? It has closed up for a couple of companies or industries with all the macro noise. How does it look now? How is your pipeline? What are your opportunities? How do you feel about it?

Pipeline is good. I'd say, it's obviously hard to predict exactly when this is all going to come to fruition. We want to be disciplined around this, of course, as we've kind of done in the past. We want to make sure that we're thinking about thoughtful what we do. We said at the Investor Day, there's kind of three types of acquisitions: there's consolidation, there's extensions and there's adjacencies. I'd say, again, Q1 into Q2, the market kind of froze up a little bit on doing M&A. It seems like it's starting to reopen again.

So while I don't have anything to announce here today, obviously, and it's hard to predict when things will happen, I think we're being aggressive here in areas where we think we can drive value for the corporation. And so we'll be looking at this. Obviously, we have our metrics. I don't know, John, you want to cover how we look at this, but we're going to be very disciplined about what we do.

Yes. I mean, Bob, we have a lot of optionality. I would say, with our low leverage and our strong cash flow generation, we continue to have a lot of optionality with respect to capital allocation. As you mentioned, we repurchased 30 million in shares -- $30 million in shares in Q2 at an average price of just under $16. I would say likely that we'll continue to buy back shares in the back half of '25.

[Operator Instructions] And there are no further questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.