ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented below refer to and should be read in conjunction with our audited Consolidated Financial Statements and related notes under Item 8. "Financial Statements and Supplementary Data." The following discussion contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”
Management’s discussion and analysis, which we refer to as “MD&A,” of our results of operations, financial condition, and cash flows should be read together with the audited Consolidated Financial Statements and accompanying notes included under Item 8. "Financial Statements and Supplementary Data," to provide an understanding of our financial condition, changes in financial condition, and results of our operations. We believe the assumptions underlying the Consolidated Financial Statements are reasonable. However, the Consolidated Financial Statements included herein may not necessarily reflect our results of operations, financial position, and cash flows in the future.
Our Business
We are a leading manufacturer of specialty electronic components. We design parts that perform unique and critical functions for innovative technologies. Through extreme reliability, custom engineering, and scalable manufacturing, we enable businesses to succeed in the most demanding applications across medtech, defense, industrial, and electrification/energy markets. Our high performance capacitors, radio frequency ("RF") filters, advanced medtech microphones, and balanced armature speakers enable and enhance the performance of technologies with the power to change, improve, and save lives. Our focus on the customer, combined with unique technology, proprietary manufacturing techniques, and global operational expertise, enables us to deliver customized solutions across multiple applications. References to "Knowles," the "Company," "we," "our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.
We sell our products directly to original equipment manufacturers ("OEMs") and to their contract manufacturers and suppliers and through distributors worldwide.
Recent Developments
In May 2025, we held an investor day to announce the progress that we have made on our transformation into a premier industrial technology company. Our strategic plan over the last five years was deliberate and paced, starting with a significant shift in investing in research and development and capital expenditures on core technologies. This resulted in a reduction in investment in the consumer market, and an increased investment in our MSA and PD segments. We have aligned our product profile toward the medtech, defense, industrial, and electrification/energy markets, where we see favorable trends. As we focus on what we do best, designing custom engineered products and delivering them at scale for customers and markets that value our solutions, we believe that we are well-positioned for future growth.
Our Business Segments
At December 31, 2025, we had two reporting segments: (i) PD and (ii) MSA. These segments were determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 280 - Segment Reporting. These segments are aligned around similar product applications serving our key end markets to enhance focus on end market growth strategies.
• PD Segment
Our PD segment specializes in the custom design and delivery of high performance capacitor products and RF solutions primarily serving the defense, industrial, medtech, and electrification/energy markets. PD has sales, support, and engineering facilities in North America, Europe, and Asia as well as manufacturing facilities in North America and Asia.
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• MSA Segment
Our MSA segment designs and manufactures balanced armature speakers and microphones used in hearing health and specialty audio applications that serve the medtech and industrial markets. MSA has sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.
Non-GAAP Financial Measures
In addition to the generally accepted accounting principles ("GAAP") financial measures included in this item, we have presented certain non-GAAP financial measures. We use non-GAAP measures as supplements to our GAAP results of operations in evaluating certain aspects of our business, and our executive management team and Board of Directors focus on non-GAAP items as key measures of our performance for business planning purposes. These measures assist us in comparing our performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in our opinion, do not reflect our core operating performance. We believe that our presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that we use internally for purposes of assessing our core operating performance. The Company does not consider these non-GAAP financial measures to be a substitute for the information provided by GAAP financial results. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, see the reconciliation included herein.
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Results of Operations
Years Ended December 31,
(in millions, except per share amounts)
Revenues
Gross profit
Non-GAAP gross profit
Earnings from continuing operations before interest and income taxes
Adjusted earnings from continuing operations before interest and income taxes
Provision for (benefit from) income taxes
Non-GAAP provision for income taxes
Earnings from continuing operations
Non-GAAP net earnings
Diluted earnings per share from continuing operations
Non-GAAP diluted earnings per share
Revenues
Revenues for the year ended December 31, 2025 were $593.2 million, compared with $553.5 million for the year ended December 31, 2024, an increase of $39.7 million or 7.2%. PD revenues increased $28.9 million due to higher demand from the medtech, defense, electrification/energy, and industrial markets, as well as higher average pricing. MSA revenues increased $10.8 million, primarily due to higher shipping volumes of metal cans that we manufacture and sell to Syntiant as part of our supply agreement associated with the sale of CMM, and higher shipping volumes into the specialty audio market, partially offset by lower average pricing on mature products.
Cost of Goods Sold
Cost of goods sold ("COGS") for the year ended December 31, 2025 was $332.5 million, compared with $316.8 million for the year ended December 31, 2024, an increase of $15.7 million or 5.0%. This increase was primarily due to higher shipping volumes, unfavorable product mix, and lower than expected yields in our CD business as we ramped up our specialty film product line, partially offset by company-wide product cost reductions, increased factory capacity utilization in our ceramic capacitor and RF filter businesses, a reduction of CD-related acquisition and production transfer costs, and lower precious metal costs.
Impairment Charges
During the year ended December 31, 2025, we recorded an impairment charge of $3.6 million to write down the carrying value of certain machinery and equipment to fair value. For additional information, refer to Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements.
Restructuring Charges
During the year ended December 31, 2025, we recorded restructuring charges of $0.8 million within Gross profit and $3.0 million within Operating expenses, primarily related to headcount reductions across the Company to rightsize operating expenses subsequent to the sale of CMM. For additional information, refer to Note 9. Restructuring and Related Activities to our Consolidated Financial Statements.
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During the year ended December 31, 2024, we recorded restructuring charges of $2.0 million related to headcount reductions and $1.4 million for costs associated with transferring certain capacitors manufacturing to existing facilities to further optimize operations within our PD segment. These actions resulted in restructuring charges of $1.9 million within Gross profit and $1.5 million within Operating expenses. For additional information, refer to Note 9. Restructuring and Related Activities to our Consolidated Financial Statements.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the year ended December 31, 2025 was $256.3 million, compared with $234.8 million for the year ended December 31, 2024, an increase of $21.5 million or 9.2%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2025 was 43.2%, compared with 42.4% for the year ended December 31, 2024. The increase in gross profit and gross profit margin were primarily due to higher shipping volumes, company-wide product cost reductions, increased factory capacity utilization in our ceramic capacitor and RF filter businesses, a reduction of CD-related acquisition and production transfer costs, higher average pricing in PD, and lower precious metal costs, partially offset by unfavorable product mix, lower-than-expected yields in our CD business as we ramped up our specialty film product line, lower average pricing on mature products in the MSA business, and impairment charges in 2025.
Non-GAAP gross profit for the year ended December 31, 2025 was $263.7 million, compared with $245.4 million for the year ended December 31, 2024, an increase of $18.3 million or 7.5%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2025 was 44.5%, compared with 44.3% for the year ended December 31, 2024. The increases in non-GAAP gross profit and non-GAAP gross profit margin were primarily due to higher shipping volumes, company-wide product cost reductions, increased factory capacity utilization in our ceramic capacitor and RF filter businesses, higher average pricing in PD, and lower precious metal costs, partially offset by unfavorable product mix, lower-than-expected yields in our CD business as we ramped up our specialty film product line, and lower average pricing on mature products in the MSA business.
Research and Development Expenses
Research and development expenses for the years ended December 31, 2025 and 2024 were $40.2 million and $39.5 million, respectively, an increase of $0.7 million or 1.8%. Research and development expenses as a percentage of revenues for the years ended December 31, 2025 and 2024 was 6.8% and 7.1%. The increase in expenses was primarily driven by increased development activities as we continue to invest in our businesses and higher incentive compensation. The decrease in expenses as a percentage of revenues was driven by higher revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 2025 were $142.8 million, compared with $142.0 million for the year ended December 31, 2024, an increase of $0.8 million or 0.6%. Selling and administrative expenses as a percentage of revenues for the years ended December 31, 2025 and 2024 were 24.1% and 25.7%, respectively. The increase in expenses was primarily driven by the acceleration of stock-based compensation expense for employees who are nearing or have reached retirement eligibility and higher incentive compensation, partially offset by a reduction of CD-related acquisition costs, the benefits of restructuring actions, and reduced intangible amortization costs. The decrease in expenses as a percentage of revenues was driven by higher revenues.
Interest Expense, net
Interest expense, net for the year ended December 31, 2025 was $9.3 million, compared with $16.3 million for the year ended December 31, 2024, a decrease of $7.0 million or 42.9%. The decrease is due to lower imputed interest expense on our Seller Note from the CD acquisition, a lower outstanding revolving credit facility balance, and lower interest rates during the year ended December 31, 2025. For additional information on borrowings and interest expense, refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
Dividend Income
Dividend income for the year ended December 31, 2025 was $6.2 million due to a non-cash dividend on the Syntiant investment in the form of additional Series D-2 shares.
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Other Expense, net
Other expense for the year ended December 31, 2025 was $3.2 million, compared with $0.8 million for the year ended December 31, 2024, a change of $2.4 million. Expense in both 2025 and 2024 is primarily due to unfavorable foreign currency exchange rate changes, partially offset by unrealized gains in our investment balances.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The effective tax rate ("ETR") for the year ended December 31, 2025 was 20.5% or a $13.1 million tax provision, compared with 32.6% or a $11.3 million tax provision for the year ended December 31, 2024. The change in the ETR was primarily related to a decrease in U.S. Subpart F income and U.S. Global Intangible Low-Taxed Income inclusions compared to 2024. The change in ETR was also impacted by the mix of earnings and losses by taxing jurisdictions.
The non-GAAP ETR for the year ended December 31, 2025 was 11.8% or a $13.1 million tax provision, compared with 8.4% or a $7.7 million tax provision for the year ended December 31, 2024. The change in the non-GAAP ETR was primarily due to decreased utilization of foreign tax credits compared to the prior year. As of December 31, 2025, the foreign tax credits have been fully utilized, and we expect the future non-GAAP ETR to increase.
On July 4, 2025, the One Big Beautiful Bill Act was signed into U.S. federal law. The One Big Beautiful Bill Act did not have a material impact on the Company’s fiscal 2025 financial statements and, based on our analysis, we do not anticipate a material impact on subsequent years.
Earnings from Continuing Operations
Earnings from continuing operations for the year ended December 31, 2025 was $50.9 million, compared with $23.4 million for the year ended December 31, 2024, an increase of $27.5 million. As described above, the increase was primarily due to higher gross profit, lower interest expense, and dividend income recorded in 2025, partially offset by higher operating expenses, other expense, and income tax expense.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes from continuing operations ("EBIT") for the year ended December 31, 2025 was $73.3 million, compared with $51.0 million for the year ended December 31, 2024, an increase of $22.3 million or 43.7%. EBIT margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2025 was 12.4%, compared with 9.2% for the year ended December 31, 2024. The increase in EBIT and EBIT margin was primarily due to improved operating leverage on higher revenues, higher gross profit, and dividend income recorded in 2025.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2025 was $120.1 million, compared with $107.9 million for the year ended December 31, 2024, an increase of $12.2 million or 11.3%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2025 was 20.2%, compared with 19.5% for the year ended December 31, 2024. The increase in Adjusted EBIT and Adjusted EBIT margin was primarily due to improved operating leverage on higher revenues and higher non-GAAP gross profit.
Loss from Discontinued Operations, net
Loss from discontinued operations for the year ended December 31, 2025 was $6.7 million, compared with a loss of $261.2 million for the year ended December 31, 2024. Loss from discontinued operations for the year ended December 31, 2025 was primarily driven by adjustments to the loss on sale of CMM and tax expense. Loss from discontinued operations for the year ended December 31, 2024 was primarily driven by CMM goodwill impairment charges and tax expense, partially offset by income from CMM operations prior to disposal and a gain on sale of technology. For additional information, refer to Note 2. Discontinued Operations to our Consolidated Financial Statements.
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Diluted Earnings per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share
Diluted earnings per share from continuing operations was $0.58 for the year ended December 31, 2025, compared with $0.26 for the year ended December 31, 2024, an increase of $0.32. As described above, the improvement is primarily due to higher gross profit, lower interest expense, dividend income recorded in 2025, and reduced share count, partially offset by higher operating expenses, other expense, and income tax expense.
Non-GAAP diluted earnings per share for the year ended December 31, 2025 was $1.11, compared with $0.92 for the year ended December 31, 2024, an increase of $0.19. As described above, the improvement is primarily due to higher non-GAAP gross profit, lower interest expense, and reduced share count, partially offset by higher non-GAAP income tax expense, non-GAAP operating expenses, and other expense.
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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1)
Years Ended December 31,
(in millions, except per share amounts)
Gross profit
Stock-based compensation expense
Impairment charges
Restructuring charges
Production transfer costs (2)
Acquisition-related costs (3)
Transition services credit (4)
Other (5)
Non-GAAP gross profit
Net earnings from continuing operations
Interest expense, net
Provision for (benefit from) income taxes
Earnings from continuing operations before interest and income taxes
Stock-based compensation expense
Intangibles amortization expense
Impairment charges
Restructuring charges
Production transfer costs (2)
Acquisition-related costs (3)
Transition services credit (4)
Dividend income (6)
Other (5)
Adjusted earnings from continuing operations before interest and income taxes
Provision for (benefit from) income taxes
Income tax effects of non-GAAP reconciling adjustments (7)
Non-GAAP provision for income taxes
Net earnings from continuing operations
Non-GAAP reconciling adjustments (8)
Income tax effects of non-GAAP reconciling adjustments (7)
Non-GAAP net earnings
Diluted earnings per share from continuing operations
Earnings per share non-GAAP reconciling adjustment (7) (8) (9)
Non-GAAP diluted earnings per share (9)
Diluted average shares outstanding
Non-GAAP adjustment (9) (10)
Non-GAAP diluted average shares outstanding (9) (10)
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(1) In addition to the GAAP financial measures included herein, Knowles has presented certain non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable GAAP measures. Knowles believes that non-GAAP measures are useful as supplements to its GAAP results of operations to evaluate certain aspects of its operations and financial performance, and its management team primarily focuses on non-GAAP items in evaluating Knowles' performance for business planning purposes. Knowles also believes that these measures assist it with comparing its performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in Knowles' opinion, do not reflect its core operating performance. Knowles believes that its presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that Knowles uses internally for purposes of assessing its core operating performance.
(2) Production transfer costs represent duplicate costs incurred to migrate manufacturing to existing facilities.
(3) These expenses are related to the acquisition of CD by the PD segment. These expenses include ongoing costs to facilitate integration, the amortization of fair value adjustments to inventory, and costs incurred by the Company to carry out this transaction.
(4) Transition services represent amounts charged to Syntiant in connection with post-closing transition and separation costs.
(5) O ther expenses include non-recurring professional service fees related to the execution of various reorganization projects and foreign currency exchange rate impacts on restructuring balances.
(6) During the year ended December 31, 2025, the Company recorded a non-cash dividend on the Syntiant investment in the form of additional Series D-2 shares with a value of $6.2 million.
(7) Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments. In 2023, these adjustments include one-time tax benefits.
(8) The non-GAAP reconciling adjustments include stock-based compensation expense, intangibles amortization expense, impairment charges, restructuring charges, production transfer costs, acquisition-related costs, and other expenses, partially offset by dividend income and a credit to transition services.
(9) In the third quarter of 2025, the Company modified its calculation method of non-GAAP diluted average shares outstanding to exclude the potential dilution impact from performance share units ("PSUs") as these equity awards have not yet been earned. Our PSUs are market-based awards and have fluctuated based on the Company's total shareholder return performance relative to the Russell 2000 during the measurement period. The calculation methodology change in non-GAAP diluted average shares outstanding increased non-GAAP diluted earnings per share by $0.01 for the year ended December 31, 2024.
(10) The number of shares used in the diluted average shares outstanding calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method. Non-GAAP diluted average shares outstanding also excludes the impact of certain equity awards that are not yet earned.
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Segment Results of Operations
Precision Devices
Years Ended December 31,
(in millions)
Percent of Revenues
Percent of Revenues
Percent of Revenues
Revenues
Earnings from continuing operations before interest and income taxes
Stock-based compensation expense
Intangibles amortization expense
Restructuring charges
Production transfer costs (1)
Acquisition-related costs (2)
Other
Adjusted earnings from continuing operations before interest and income taxes
(1) Production transfer costs represent costs incurred to migrate manufacturing to existing facilities.
(2) These expenses are related to the acquisition of CD. These expenses include ongoing costs to facilitate integration and the amortization of fair value adjustments to inventory.
Revenues
PD revenues were $328.9 million for the year ended December 31, 2025, compared with $300.0 million for the year ended December 31, 2024, an increase of $28.9 million or 9.6%. Revenues increased due to higher demand from the medtech, defense, and industrial markets, as well as higher average pricing.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
PD EBIT from continuing operations was $37.6 million for the year ended December 31, 2025, compared with $14.8 million for the year ended December 31, 2024, an increase of $22.8 million or 154.1%. EBIT margin for the year ended December 31, 2025 was 11.4%, compared with 4.9% for the year ended December 31, 2024. The increases were primarily due to higher gross profit and lower operating expenses. The gross profit increase was primarily driven by higher shipping volumes, increased factory capacity utilization in our ceramic capacitor and RF filter businesses, higher product cost reductions, higher average pricing, lower CD-related acquisition and production transfer costs, reduced precious metal costs and restructuring charges, partially offset by unfavorable product mix and lower than expected yields in our CD business as we ramped up our specialty film product line. The lower operating expenses were primarily driven by a reduction of CD acquisition-related costs, partially offset by higher incentive and stock-based compensation.
PD Adjusted EBIT was $63.3 million for the year ended December 31, 2025, compared with $50.0 million for the year ended December 31, 2024, an increase of $13.3 million or 26.6%. Adjusted EBIT margin for the year ended December 31, 2025 was 19.2%, compared with 16.7% for the year ended December 31, 2024. The increases were primarily due to higher non-GAAP gross profit and lower non-GAAP operating expenses. The non-GAAP gross profit increase was primarily driven by higher shipping volumes, increased factory capacity utilization in our ceramic capacitor and RF filter businesses, higher product cost reductions, higher average pricing, and lower precious metal costs, partially offset by unfavorable product mix and lower than expected yields in our CD business as we ramped up our specialty film product line. The lower non-GAAP operating expenses were primarily driven by a reduction of CD acquisition-related costs, partially offset by higher incentive compensation.
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MedTech & Specialty Audio
Years Ended December 31,
(in millions)
Percent of Revenues
Percent of Revenues
Percent of Revenues
Revenues
Earnings from continuing operations before interest and income taxes
Stock-based compensation expense
Impairment charges
Restructuring charges
Adjusted earnings from continuing operations before interest and income taxes
Revenues
MSA revenues were $264.3 million for the year ended December 31, 2025, compared with $253.5 million for the year ended December 31, 2024, an increase of $10.8 million or 4.3%. Revenues increased primarily due to higher shipping volumes of metal cans that we manufacture and sell to Syntiant as part of our supply agreement associated with the sale of CMM and higher shipping volumes into the specialty audio market, partially offset by lower average pricing on mature products.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
MSA EBIT from continuing operations was $92.7 million for the year ended December 31, 2025, compared with $97.5 million for the year ended December 31, 2024, a decrease of $4.8 million or 4.9%. EBIT margin for the year ended December 31, 2025 was 35.1%, compared with 38.5% for the year ended December 31, 2024. The decreases were primarily due to lower gross profit and higher operating expenses. The gross profit decrease was primarily due to lower average pricing on mature products, higher factory costs, unfavorable product mix, impairment charges recorded in the second quarter of 2025, and the impact of higher shipping volumes of our lower margin metal can products to Syntiant, partially offset by product cost reductions and higher shipping volumes of specialty audio products. The higher operating expenses were primarily driven by dis-synergies following the sale of CMM and higher stock-based compensation.
MSA Adjusted EBIT of $102.4 million for the year ended December 31, 2025 was relatively flat compared with $102.3 million for the year ended December 31, 2024. Adjusted EBIT margin for the year ended December 31, 2025 was 38.7%, compared with 40.4% for the year ended December 31, 2024. The decrease in Adjusted EBIT margin was driven by lower average pricing on mature products, higher factory costs, unfavorable product mix, and the impact of higher shipping volumes of our lower margin metal can products to Syntiant, partially offset by product cost reductions and higher shipping volumes of specialty audio products. The increase in operating expenses was primarily driven by dis-synergies following the sale of CMM.
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Liquidity and Capital Resources
Historically, we have generated and expect to continue to generate positive cash flow from operations. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access to capital markets. We believe that our future cash flow from operations and access to capital markets will provide adequate resources to fund our working capital needs, capital expenditures, strategic investments, and share repurchases. We have secured a revolving line of credit in the United States from a syndicate of commercial banks to provide additional liquidity. Furthermore, if we were to require additional cash above and beyond our cash on the balance sheet, the free cash flow generated by the business, and availability under our revolving credit facility, we would most likely seek to raise long-term financing through the U.S. debt or bank markets.
On December 27, 2024, we completed the sale of CMM to Syntiant for approximately $141.9 million in total consideration, consisting of $63.6 million in cash ($58.0 million net of cash sold), Syntiant Series D-2 preferred stock with a fair value of $77.2 million, and $1.1 million for estimated purchase price adjustments. The purchase price adjustment is still being finalized and is subject to change. For additional information, refer to Note 2. Discontinued Operations to our Consolidated Financial Statements. The Company shares in certain separation costs pursuant to a credit for up to $13.5 million that Syntiant may apply to specified separation costs post-closing. As the balance of the separation credit is now below the $7.0 million contractual threshold, costs will be shared equally by the Company and Syntiant. For additional information, refer to Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data.
On November 1, 2023, we acquired (i) all the issued and outstanding shares of Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier" or "CD") for aggregate consideration of $259.8 million, which equated to a total fair value of consideration transferred of $246.8 million. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisition to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On September 25, 2023, the Company amended its Amended and Restated Credit Agreement (the "A&R Credit Agreement") to, among other things, (a) permit the Company in connection with the acquisition of Cornell Dubilier, to incur senior priority seller financing indebtedness (the “Seller Note”) in an aggregate principal amount of $122.9 million secured by certain assets (including equity interests) acquired in connection with such acquisition and the capital stock of Cornell Dubilier, LLC (the “Acquisition Assets”), which matured two years after the effective date of such Seller Note (the “Seller Note Maturity Date”) and (b) extend the requirement to pledge the Acquisition Assets that would otherwise constitute collateral under the Credit Agreement to the date that is 90 days after the Seller Note Maturity Date. All other terms remain the same as the A&R Credit Agreement dated February 8, 2023.
On February 8, 2023, we entered into the A&R Credit Agreement that amends and restates the prior Credit Agreement (the "2020 Credit Agreement"), which provides for a senior secured revolving credit facility with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. As of December 31, 2025, outstanding borrowings under the Credit Facility were $114.0 million. At any time during the term of the Credit Facility, we may request to increase the commitments under the Credit Facility or to establish one or more incremental term loan facilities under the Credit Facility in an aggregate principal amount not to exceed the sum of $200.0 million, plus additional amounts, so long as the senior secured leverage ratio does not exceed 2.00 to 1.00. Commitments under the Credit Facility will terminate, and loans outstanding thereunder will mature, on February 8, 2028. For additional information, refer to Note 11. Borrowings to our Consolidated Financial Statements.
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On February 24, 2020, we announced that our Board of Directors had authorized a share repurchase program of up to $100.0 million of our common stock. On April 28, 2022, we announced that our Board of Directors had increased the authorization by up to $150.0 million in additional aggregate value. On February 13, 2025, the Company announced that its Board of Directors had increased its share repurchase authorization by an additional $150.0 million in additional aggregate value. At December 31, 2025, we have $129.0 million remaining that may yet be purchased under our share repurchase program. The timing and amount of any shares repurchased will be determined by us based on our evaluation of market conditions and other factors, and will be made in accordance with applicable securities laws in either the open market or in privately negotiated transactions. We are not obligated to purchase any shares under the program, and the program may be suspended or discontinued at any time. The actual timing, number, and share price of shares repurchased will depend on a number of factors, including the market price of our common stock, general market and economic conditions, and applicable legal requirements. Any shares repurchased will be held as treasury stock. During the years ended December 31, 2025, 2024, and 2023 we repurchased 3,571,865, 2,987,697, and 2,851,604 shares of common stock, respectively, for a total of $65.0 million, $53.7 million, and $47.5 million, respectively.
Cash flows from operating, investing, and financing activities as reflected in our Consolidated Statements of Cash Flows are presented on a consolidated basis (including discontinued operations). Cash flows are summarized in the following table:
Years Ended December 31,
(in millions)
Net cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Operating Activities
Cash provided by operating activities adjusts net earnings for certain non-cash items, including impairment charges, depreciation expense, amortization of intangible assets, stock-based compensation, changes in deferred income taxes, dividend income, and the effects of changes in operating assets and liabilities. The decrease in cash provided by operating activities in 2025 is primarily due to $32.5 million of payments in 2025 to settle supplier obligations and separation costs related to CMM, the absence of $24.4 million of cash generated by CMM in 2024, and an increase in net working capital. This decrease was partially offset by higher 2025 earnings from continuing operations and customer prepayments of $19.8 million. In addition, the Company's 2025 payments for taxes, interest, incentive compensation, and restructuring charges were all lower than 2024.
Investing Activities
The cash used in investing activities during 2025 was driven by capital expenditures, which is primarily driven by capacity expansion related to our specialty film product line and cost savings. The cash provided by investing activities in 2024 is driven by the proceeds from the sale of CMM and proceeds from the sale of technology, partially offset by capital expenditures and payments to finance the seller loan to Syntiant in conjunction with the sale of CMM.
Our 2025, 2024, and 2023 capital expenditures attributable to continuing operations as a percentage of revenues (see Adjusted free cash flows below) were 5.4%, 2.1%, and 2.7%, respectively. In 2026, we expect capital expenditures to be in the range of 4% to 5% of revenues. We expect to fund these capital expenditures through our existing cash balances and cash flows from operating activities.
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Financing Activities
Cash used in financing activities during 2025 is primarily related to the $72.7 million payment on the CD Seller Note, $65.0 million of repurchases of common stock, $20.0 million net payments on the revolving credit facility, and $7.4 million of tax payments related to net share settlement of equity awards, partially offset by proceeds of $6.7 million from the exercise of options. Cash used in financing activities during 2024 is primarily related to $53.7 million of repurchases of common stock, the $50.0 million payment on the CD Seller Note, $26.0 million net payments on the revolving credit facility, and $6.6 million payment of taxes related to net share settlement of equity awards, partially offset by proceeds of $5.8 million from the exercise of options.
Adjusted Free Cash Flow
In addition to measuring cash flow generation based on the operating, investing, and financing classifications included in the Consolidated Statement of Cash Flows (including discontinued operations), Knowles also measures adjusted free cash flow and adjusted free cash flow as a percentage of revenues. Adjusted free cash flow is defined as non-GAAP net cash attributable to continuing operations less non-GAAP capital expenditures attributable to continuing operations. Non-GAAP net cash attributable to continuing operations is defined as net cash provided by operating activities less amounts utilized in or provided by discontinued operations. Non-GAAP capital expenditures attributable to continuing operations is defined as capital expenditures less amounts attributable to discontinued operations. Knowles believes these measures are helpful in measuring its cash generated from its continuing operations that is available to repay debt, fund acquisitions, and repurchase Knowles common stock. Adjusted free cash flow and adjusted free cash flow as a percentage of revenues are not presented in accordance with GAAP and may not be comparable to similarly titled measures used by other companies in our industry. As such, adjusted free cash flow and adjusted free cash flow as a percentage of revenues should not be considered in isolation from, or as an alternative to, any other liquidity measures determined in accordance with GAAP.
The following table reconciles our adjusted free cash flow to cash flow provided by operating activities:
Years Ended December 31,
(in millions)
Net cash provided by operating activities
Amounts utilized in (provided by) discontinued operations
Non-GAAP net cash attributable to continuing operations
Capital expenditures
Amounts attributable to discontinued operations
Non-GAAP capital expenditures attributable to continuing operations
Non-GAAP net cash attributable to continuing operations
Non-GAAP capital expenditures attributable to continuing operations
Adjusted free cash flow
Adjusted free cash flow as a % of revenues
In 2025, we generated adjusted free cash flow of $114.4 million compared to adjusted free cash flow in 2024 of $93.8 million. The increase in adjusted free cash flow in 2025 compared to 2024 was primarily due to higher adjusted earnings from continuing operations before interest and income taxes and also due to customer prepayments received in 2025. In addition, the Company's 2025 payments for taxes, interest, incentive compensation, and restructuring charges were all lower than 2024. The increase in adjusted free cash flow was partially offset by an increase in net working capital.
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Contingent Obligations
From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of its business. Legal contingencies are discussed in Note 14. Commitments and Contingent Liabilities to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
A summary of our significant contractual obligations and commitments as of December 31, 2025 and the years when these obligations are expected to be due is as follows:
Payments Due by Period
(in millions)
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Debt (1)
Operating leases (2)
Purchase obligations (3)
Finance leases (2)
Total obligations
(1) Relates to the maturity of indebtedness under our Revolving Credit Facility; does not give effect to any early repayment of or future amounts which may be drawn under the Revolving Credit Facility.
(2) Represents commitments related to operating and finance leases. See Note 7. Leases to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
(3) Represents off-balance sheet commitments for purchase obligations related to open purchase orders with our vendors.
Risk Management
We are exposed to certain market risks which exist as part of our ongoing business operations, including changes in currency exchange rates, the dependence on key customers, price volatility for certain commodities, and changes in interest rates. We do not engage in speculative or leveraged transactions and do not hold or issue financial instruments for trading purposes.
Foreign Currency Exposure
We conduct business through our subsidiaries in many different countries and fluctuations in currency exchange rates could have a significant impact on the reported results of operations, which are presented in U.S. dollars. A significant portion of our products are manufactured in lower-cost locations and sold in various countries. Cross-border transactions, both with external parties and intercompany relationships, could result in increased foreign exchange exposures. A weakening of foreign currencies relative to the U.S. dollar would adversely affect the U.S. dollar value of the Company’s foreign currency-denominated sales, but would be beneficial to the cost of materials, products, and services purchased overseas. A strengthening of foreign currencies relative to the U.S. dollar would positively affect the U.S. dollar value of the Company’s foreign currency-denominated sales, but would have a negative effect on the cost of materials, products, and services purchased overseas. Our foreign currency exposure is primarily driven by our manufacturing activity in lower-cost locations and changes in the Chinese renminbi (yuan), the Malaysian ringgit, the Philippine peso, and the Mexican peso. Based on our current manufacturing activity and to a lesser extent sales, a sustained 10% of the U.S. dollar for a period of one year would reduce our pre-tax earnings by approximately $14.8 million, excluding the impact of our hedging program. See Note 10. Hedging Transactions and Derivative Instruments to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for information on the Company's hedges of foreign currency exchange rate risk.
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Dependence on Key Customers; Utilization of Distributors
The loss of any key customer or a reduction in the purchases of our products by such customers or our large distribution partners and our inability to replace those revenues may have a material adverse effect on our business and financial condition. In addition, if a key customer or distribution partner fails to meet payment obligations, our operating results and financial condition could be adversely affected. Further, our distributors could retain inventory levels that exceed their future anticipated sale, which could adversely impact our future sales to those distributors. Our only customers that accounted for 10% or more of total revenues in 2025 were WS Audiology A/S and TTI, Inc. WS Audiology, a hearing aid manufacturer, accounted for approximately 11%, 14%, and 16% of our revenues attributable to continuing operations for the years ended December 31, 2025, 2024, and 2023, respectively. TTI is a distributor of electromechanical components. For the year ended December 31, 2025, TTI, Inc. accounted for approximately 10% of our revenues attributable to continuing operations. In prior years, TTI accounted for less than 10% of our revenues attributable to continuing operations.
Commodity Pricing
We use a wide variety of raw materials, primarily metals and semi-processed or finished components, which are generally available from a number of sources. While the required raw materials are generally available, commodity pricing for various precious metals, such as palladium, gold, brass, stainless steel, and copper, fluctuates. As a result, our operating results are exposed to such fluctuations. Although some cost increases may be recovered through increased prices to customers if commodity prices trend upward, we also attempt to control such costs through fixed-price contracts with suppliers and various other programs through our global supply chain activities.
Interest Rates
Borrowings under our Revolving Credit Facility are at variable interest rates. A hypothetical 100 basis point increase in interest rates affecting our external variable rate borrowings as of December 31, 2025 would increase our annual interest expense by approximately $1.1 million.
Critical Accounting Estimates
Our Consolidated Financial Statements are based on the application of GAAP. GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues, and expense amounts we report. These estimates can also affect supplemental information contained in our public disclosures, including information regarding contingencies, risk, and our financial condition. The significant accounting policies used in the preparation of our Consolidated Financial Statements are discussed in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. By their nature, these judgments and estimates are subject to an inherent degree of uncertainty. Although we believe our use of estimates and underlying accounting assumptions conforms to GAAP and is consistently applied, actual results could differ from our estimates. We review valuations based on estimates for reasonableness on a consistent basis.
Revenue Recognition: Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The terms of a contract or historical business practice can give rise to variable consideration, including customer discounts, rebates, and returns. We estimate variable consideration using either the expected value or most likely amount method. We include amounts in the transaction price to the extent it is probable that a significant reversal of revenue will not occur in a subsequent reporting period. Our estimates of variable consideration are based on all reasonably available information (historical, current, and forecasted). Rebates are recognized over the contract period based on expected revenue levels. Estimation of variable consideration requires judgment and actual results may differ from estimated amounts, which could result in adjustments to revenue.
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Inventories: Inventories are stated at the lower of cost or net realizable value, determined on the first-in, first-out ("FIFO") basis. The value of inventory may decline as a result of surplus inventory, price reductions, or technological obsolescence. It is our policy to carry reserves against the carrying value of inventory when items have no future demand (obsolete inventory) and additionally, where inventory items on hand have demand, yet have insufficient forecasted activity to consume the entire stock within a reasonable period. We recognize reserves against the carrying value of such at-risk inventory items after considering the nature of the risk and any mitigating factors. These estimates require judgment with respect to future demand and market conditions. Additional reserves could be required if actual demand and market conditions differ from our estimates.
Goodwill: The Company tests goodwill for impairment annually as of October 1, or more frequently if there are events or circumstances indicating it is more likely than not (that is, a likelihood of more than 50 percent) that the carrying value of individual reporting units may exceed their respective fair values. Recoverability of goodwill is measured at the reporting unit level. The Company’s four reporting units are High Performance Capacitors ("HPC"), Radio Frequency Microwave Filters ("RFMW"), Cornell Dubilier ("CD"), and MedTech & Specialty Audio ("MSA").
Management first reviews relevant qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management determines it is more likely than not that the carrying value of a reporting unit might be impaired, a quantitative analysis is performed.
In the quantitative impairment assessment, fair value is estimated using a discounted cash flow model that includes market participant assumptions, forecasted future cash flows based on historical performance and future estimated results, and other assumptions which are considered reasonable in the discounted cash flow analysis. Significant assumptions used in the model include forecasted revenue and terminal growth rates, profit margins, income tax rates, capital expenditures, working capital requirements, and the Company's weighted average cost of capital. The fair value measurements for reporting units are based on significant unobservable inputs.
The Company performed a qualitative goodwill impairment test for the HPC, RFMW, and MSA reporting units and a quantitative impairment test for the CD reporting unit as of October 1, 2025. No goodwill impairment charges were recorded in continuing operations during the years ended December 31, 2025, 2024, or 2023.
Fair value measurements require considerable judgment and are sensitive to changes in underlying assumptions. As a result, there can be no assurance that estimates and assumptions made for purposes of the impairment assessment will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting units include, but are not limited to, lower than forecasted revenue and terminal growth rates, decreased profit margins, higher income taxes, increased capital expenditures, higher working capital requirements, and an increase in the weighted average cost of capital.
The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill. Changes in interest and income tax rates could impact the weighted average cost of capital used in our estimates of fair value for our reporting units.
Other Intangible and Long-Lived Assets: Long-lived assets and intangible assets with determinable lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows is produced and compared to its carrying value. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value as determined by an estimate of discounted future cash flows. The Company recorded an impairment charge of $3.6 million during the year ended December 31, 2025 to write down the carrying value of certain machinery and equipment sold to Syntiant Corp. No impairment of other intangible or long-lived assets was recorded for the years ended December 31, 2024 or 2023.
Income Taxes: We use judgment in determining our provision for income taxes, including our assessment of the need for a valuation allowance against our deferred tax assets and our determination of whether tax positions will be sustained on examination by taxing authorities based on the technical merits of the positions. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
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A valuation allowance is recorded to reduce deferred tax assets to the net amount that is more likely than not to be realized. The need to establish valuation allowances for deferred tax assets is assessed at each reporting date. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning strategies.
At December 31, 2025, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets for certain of our U.S. state tax attributes and determined that it was more likely than not that the deferred tax assets for these attributes would be realized. As a result, we recognized income tax benefit of $2.6 million related to the reversal of our deferred tax valuation allowance during the fourth quarter of 2025.
In 2024, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that the deferred tax asset established for a current year net operating loss in Luxembourg would not be realized. As a result, we recognized income tax expense of $18.2 million (primarily through discontinued operations) related to the accrual of our deferred tax valuation allowance during the fourth quarter of 2024.
In 2023, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets for U.S. foreign tax credits and certain of our U.S. state tax attributes and determined that it was more likely than not that the deferred tax assets for these attributes would be realized. As a result, we recognized an income tax benefit of $15.1 million related to the reversal of our deferred tax asset valuation allowance during the fourth quarter of 2023.
