Knowles Corporation, a name often associated with microphones and audio solutions, is undergoing a subtle yet potentially transformative shift. While the company's strategic alternatives process for its Consumer MEMS Microphone (CMM) segment continues to grab headlines, a closer look at the recent earnings call transcript reveals a compelling narrative hidden beneath the surface: the Cornell Dubilier acquisition and its potential to dramatically reshape Knowles' profitability.

Cornell Dubilier, a leading capacitor manufacturer, was acquired by Knowles in Q4 2023. The move, initially viewed as a straightforward expansion of Knowles' Precision Devices (PD) segment, is proving to be a shrewd strategic play with far-reaching implications. During the earnings call, CEO Jeffrey Niew highlighted a key revelation: the potential for significant margin expansion within the Cornell Dubilier business, driven primarily by pricing optimization.

While Knowles initially projected $4 million in annual cost synergies within three years of the acquisition, Niew now suggests the possibility of substantial margin improvement solely from pricing adjustments, particularly within the vast distribution channel. Cornell Dubilier, serving over 30,000 unique customers in the 12 months before the acquisition, boasts a strong presence in distribution, reaching a vast network of smaller customers.

This, Niew believes, creates a powerful pricing lever. By implementing modest price increases across this vast customer base, Knowles can achieve significant margin gains without necessarily relying on a full recovery of underlying demand.

Hypothetical Revenue Impact of a 5% Price Increase

Let's hypothesize that Cornell Dubilier had an average order size of $50,000 per customer (the actual figure was not disclosed). A 5% price increase across the board would translate to an additional $2,500 per customer, potentially generating an additional $75 million in revenue. While this is a simplified calculation, it underscores the untapped pricing power Knowles has identified within the acquired business.

Furthermore, the distribution channel offers a distinct advantage in terms of pricing implementation. Distributors typically pass on price increases to their customers, absorbing much of the friction that can arise from direct price negotiations. This allows Knowles to focus on optimizing margins without directly impacting customer relationships.

Projected Gross Margin Improvement for Cornell Dubilier

Niew hinted that this pricing optimization effort will primarily manifest in the second half of 2024, given the inherent lag time associated with distribution inventory. However, the long-term impact on Knowles' margin profile could be profound, extending well into 2025 and beyond.

This pricing opportunity within Cornell Dubilier, coupled with the ongoing cost synergy realization, paints a compelling picture for Knowles' PD segment. While the macro headwinds impacting industrial and distribution channels may temper overall revenue growth in the near term, the margin expansion story is poised to take center stage.

Knowles Corporation's quiet revolution is taking shape. The Cornell Dubilier acquisition, quietly humming in the background, could prove to be a margin engine that propels Knowles into a new era of profitability. While the CMM segment's strategic alternatives process continues to dominate the spotlight, the real story, for astute investors, lies in the potential for a margin explosion within the company's evolving Precision Devices segment.

"Fun Fact: Did you know that Knowles balanced armature speakers are found not only in hearing aids, but also in high-end earphones and in-ear monitors used by professional musicians? The company's audio technology, honed over decades, spans a surprisingly diverse range of applications, showcasing the company's commitment to innovation and its quiet expertise in miniature audio solutions."