Knowles Corporation (KN) Q4 2020 Earnings Call Transcript

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Knowles Corporation (KN -0.26%)
Q4 2020 Earnings Call
Feb 4, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to Knowles Corporation Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]

With that said, here with opening remarks is Knowles Vice President of Investor Relations, Mike Knapp. Please go ahead.

Mike Knapp -- Vice President of Investor Relations

Thanks, Alain. You're welcome to our earnings call. I'm Mike Knapp and presenting with me on the call today are Jeffrey Niew, our President and Chief Executive Officer and John Anderson, our Senior Vice President and Chief Financial Officer.

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, 2019, 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 at our website at knowles.com, and in our current report on Form 8-K filed with the SEC today, including a reconciliation to the most directly comparable GAAP measures.

All references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also, we have made selected financial information available on webcast slides which can be found on the IR section of our website.

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

Jeffrey S. Niew -- President and Chief Executive Officer

Thanks, Mike. Thanks to all of you for joining us today. For Q4, we reported revenue of $243 million, up 18% sequentially and up 4% from the year ago period. As we mentioned in our pre-announcement release, stronger than expected MEMS microphone demand in multiple end markets and improving trends and Hearing Health Solutions drove the upside. Gross margins improved a 130 basis points to 38% and our earnings per share was above the high end of our guidance range at $0.41. Overall, a very solid quarter where we saw an improving demand in audio, in combination with solid operational execution across our businesses.

Now, let me update you on current customer demand across our end markets. In audio, sales were up 22% from the prior quarter versus our expectations of more than 7%. In the second half of 2020, we saw broad-based sequential improvement in MEMS mic sales across mobile and non-mobile end markets. In Mobile, stronger sales to North American and Chinese OEMs drove the majority of the increase as 5G phones business accelerated. Non-mobile applications also increased, with sales in the Ear, IoT and computing markets, driven by work from home and remote schooling trends. We expect these trends in non-mobile applications to continue to be favorable for MEMS microphone in the first half of 2021. For hearing health, shipments were higher than expected going into the quarter, but remained lower than the year ago period as COVID challenges persist.

Data from the Hearing Industry Association showed that unit sales of hearing aids in the U.S. declined by 7.5% year-over-year in Q4 with only modest improvement in the BA channel during the quarter. Under the umbrella of our hearing health business, we also sell high-performance microphones and speakers to premium audio company as well as to many smaller customers for a diverse set of niche application unrelated to Hearing Health. One example is in ear Headset monitors used by musicians in live music performances. These type of customers have been severely impacted by COVID, and account for the majority of the shortfall relative to pre-pandemic sales. We remain confident that the hearing health business will fully recovered in the near future as the COVID vaccine becomes more widely available.

In Precision Devices Q4 sales were flat sequentially as expected, as COVID continued to impact our medtech and defense end markets. Shipments of high performance capacitors into the medtech market continued to be negatively impacted by COVID related delays in elective surgery. We are confident this market will recover as the vaccine becomes more widely distributed. In defense, COVID related program delays were a drag on growth in 2020 but we are beginning to see a recovery as bookings in this market have improved in the last 2 months. These products have longer lead times and we expect these shipments to begin to positively impact Q2.

Overall, I was pleased we were able to grow our precision device revenue in 2020, despite headwinds from the pandemic with growth coming from electric vehicles, defense and industrial, partially offset by medtech. I anticipate we will return to more robust growth in PD as medtech and defense markets recover. I'm very proud of our team's execution during these challenging times. We not only weathered an extremely difficult first half of 2020. We also took significant actions to improve our business. As our MEMS microphone business fully recovered in the second half of 2020, we saw the strong operating leverage and cash flow potential inherent in our business model, even while COVID is still having a negative impact on a number of our end markets. I believe the leadership position across the markets we serve and our strategy to deliver high-value differentiated solutions to a diverse set of growing end markets will enable us to come out of this pandemic well positioned to take advantage of future growth.

In addition, we have several opportunities to improve our gross margin, I expect we'll drive additional earnings in 2021 and beyond.

With that, I'll turn it over to John to expand on our financial results and provide guidance for the first quarter.

John Anderson -- Senior Vice President and Chief Financial Officer

Thanks, Jeff. We reported fourth quarter revenues of $243 million, up 18% sequentially and 4% from the year ago period, driven by increased shipments in the Audio segment. Audio revenues of $202 million were up 22% sequentially due to increased shipments of MEMS microphones across multiple end markets and continued recovery in the hearing health market. The Precision Device segment delivered revenues of $41 million, flat sequentially and in line with our expectations.

Fourth quarter gross profit margins were 38%, at the high end of our guidance range and up a 130 basis points sequentially. Audio segment gross margins improved 260 basis points, driven by higher factory capacity utilization and lower cost as well as favorable product mix related to increased shipments into the hearing health market.

In the Precision Devices segment, gross margins were lower sequentially due to lower factory capacity utilization and unfavorable product mix. R&D expense in the quarter was $20 million, up $1 million sequentially as higher incentive compensation costs and a non-recurring supplier payment was partially offset by reduced spending in Intelligent Audio. SG&A expenses were $27 million, flat sequentially and $2 million above our guidance due to higher incentive compensation costs. For the quarter. adjusted EBITDA margin was 18% at the high end of our guidance range and up 430 basis points sequentially, driven by increased shipment volumes, higher gross profit margins and improved operating leverage. EPS was $0.41 above our guidance range due to higher revenue and gross margins and at $0.03 discrete tax benefit, partially offset by higher incentive compensation costs.

Further information including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release and can also be found on our website at knowles.com.

Now I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled a $148 million at the end of Q4. For the fourth quarter of 2020, cash generated by operations of $76 million was a record high and well above our guidance range due to higher EBITDA and lower than expected net working capital. Capital spending was $12 million in the quarter. For full year 2020, cash generated from operations was a $128 million and free cash flow was $96 million, representing more than 12% of revenues. We exited the year with net debt of less than $25 million and repurchased 1.1 million shares in 2020.

Moving to the first quarter of 2021. We expect total company revenue to be between a $190 million and $210 million, up 23% at the midpoint, versus the same period a year ago. Revenue from the Audio segment is expected to be up approximately 35% from Q1 2020 due to increased MEMS microphone shipments into non-mobile applications as work from home and remote learning trends continue. In addition, we expect higher mobile microphone demand at both our largest customer and Chinese OEMs. Precision Device revenue is expected to be down approximately 12% over prior year levels, driven by defense project push outs and the continued impacts of COVID-19 and elected medical procedures, specifically for implantable devices.

As Jeff noted, defense bookings have strengthened over the last 2 months and we are optimistic about growth in this market in 2021. We estimate gross margins for the first quarter to be approximately 37% to 39%, up 230 basis points from the year ago period, driven by increased audio demand and improved factory capacity utilization in our MEMS microphone business, partially offset by price erosion and unfavorable FX impacts. R&D expense is expected to be between $19 million and $21 million, down $2 million from prior year levels due to a reduction in spending related to Intelligent Audio products, partially offset by increases in MEMS microphone and Precision Device spending.

We're projecting, selling and administrative expense to be between $24 million and $26 million, down $9 million from the year ago period due to a $4 million reduction in legal expense and the impact of restructuring actions taken in the second quarter of 2020. We're projecting adjusted EBITDA margin for the quarter to be in the range of 13% to 17% and expect EPS to be within a range of $0.23 to $0.27 per share.

This assumes weighted average shares outstanding during the quarter of $95.1 million on a fully diluted basis. We're forecasting an effective tax rate of 14% to 18% for the quarter. Please refer to our press release and to our Form 8-K filed today with the SEC for a GAAP and non-GAAP reconciliation. For the quarter, we expect cash generated by operations to be between $25 million and $35 million and capital spending to be approximately $10 million.

I'll now turn the call back over to Jeff for closing remarks and then we'll move to the Q&A portion of the call, Jeff.

Jeffrey S. Niew -- President and Chief Executive Officer

Thanks John. Our company remains uniquely positioned across a diverse set of end markets poised to grow over the next several years. We remain the leader in Hearing Health Solutions and expect recovery to 2019 levels in the next few months. In MEMS mics, we expect non-mobile applications to drive future growth and the mobile market stabilize as more 5G phones are introduced. For Precision Devices, we expect revenue to grow in 2021 driven by continued momentum in defense and electric vehicles and recovery in the medtech market.

As we look further into 2021, there are markets continue to recover. I believe we can drive shareholder value by delivering earnings and cash flow above pre-COVID levels.

Operator, we can now take questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Harsh Kumar with Piper Sandler.

Harsh Kumar -- Piper Sandler -- Analyst

Yeah. Hey, guys. First of all, let me just say congratulations. This has been a phenomenal turnaround that you guys have executed across all measures, controlling opex and now I think you guys are really seeing the results of it. So really appreciate what you guys are doing from the side of investors. Jeff, I had a quick question, if I was to try and ask you, what do you think the handset growth is for the year, we are hearing 10%? But I want to hear you talk a little bit about what you're expecting in Ear and IoT growth for the year or call it mid-term. And then also, what do you think would be the PD growth rate? In other words, I'm trying to get an idea of yield growth rate for the mid term, two to three years out.

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah. So first I will talk about mobile first. I think we've talked about this for a while and I think that overall that obviously the last three years, when you talk of full year mobile, the unit sales have not been like, great. We're kind of thinking about that, that we kind of looked at the numbers, Harsh and I would sit there and say is, I went back into' 17 -- about 36% of the company revenue came from mobile in '17. We're expecting in '21, it's going to be less than 25%. And so, our expectations for mobile are is, that you know that right now people are saying it will probably get back to pre-pandemic levels in 2022 and I think -- and but again it's not that we're leaving the mobile market, but we have other places, where we are growing much faster and I think we can get better gross margins.

And so I think this is an area that we'll continue to work in, but I don't think we have super high expectations for mobile. Now and if I go to the non-mobile applications, I would say obviously that's a little different. And if I look at the same numbers about 19% of the company's total revenue in '17 came from non-mobile applications in MEMS mics. You'll probably be close to 30% in 2021 and so this is an area where we still see growth right? We've talked about Ear, we've talked about IoT. I think the other one that we're talking about more recently is computing. The whole work from home and the idea of school from home is driving a lot of demand in the laptop PC market and I would say it may not stay sustained at this level indefinitely, but I think it's definitely going to be larger than it was in the '17 to '18 timeframe. And so I think we're still very bullish on the non-mobile applications. That -- I think the last question you went kind of on to PD. I think, if this is still get -- We have two separate businesses here with a number of markets and it's probably a lot to digest in a quick call here, but just generally speaking, the RF business which is been primarily driven by defense. We still think that's going to grow, going forward. Now we don't have -- we still had growth in that business in 2020, but it wasn't as great as we thought it was going to be based on the delays in defense. We think it's going to get stronger again in 2021 and we expect that it's going to continue to grow. As far as about the high-performance capacitor business, EV starting from small base, but we've had nice growth, we expect to have growth again in '21, '22 and beyond. And this will be a lot in the high-voltage portion of the all-electric vehicle markets and we're specifically targeting -- like on bar chargers and battery management. That's kind of where we're really focused in, in the EV market. And then we're expecting a recovery in the medtech market in '21 and you know it's hard to say exactly when that comes but elective surgery start to come and we're seeing kind of a lot of our big customers in that market -- like the average of the world and because they're talking about, but longer term we think medtech will be a growth business for us.

Harsh Kumar -- Piper Sandler -- Analyst

Hey, thanks Jeff. I think you answered a lot of my other questions and only other quick one that I have and I'll jump back in line was, you know the timing of Hearing Health -- is there -- I mean I know it's a moving target with all the COVID stress going on but do you want to even try to guess when you might be back to kind of year ago or full levels, as you might think about it?

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, I would say, as we look in Q1 Hearing Health getting -- hearing health as in the traditional hearing aid market is getting pretty close to normal. I think the one piece that we're missing, I know we haven't talked a lot about this, but about 10% of the sales in this division, go to these other applications. And when I talk about other applications, I'm not talking about the balanced armature or true wireless. I'm talking about like audio files, like performers on stage that are wearing headsets, they have our speakers in them. We sell to the aviation market. We sell to other non-Hearing Health med markets and it is about 10% of the market.

That business is still significantly down. We're hoping as the vaccine obviously gets out. Performers are going to start coming and there's going to concerts again, this business is going to pick up. So I would say again Hearing Help is pretty close back to normal, in Q1 and very close with kind of other category, which is about 10% of the business, still being significantly impacted.

Harsh Kumar -- Piper Sandler -- Analyst

Thanks Jeff. Thank you John. Congrats again, guys.

Jeffrey S. Niew -- President and Chief Executive Officer

Thanks, Harsh.

John Anderson -- Senior Vice President and Chief Financial Officer

Thanks, Harsh.

Operator

And your next question comes from the line of Anthony Stoss from Craig-Hallum.

Anthony Stoss -- Craig-Hallum. -- Analyst

Hey, Jeff, John and Mike. Jeff, in your prepared remarks you talked about gross margins and that you have some more improvements to be made or some more programs to improve in. You know if you could offer a guess, maybe a range as to where you think you're exits the December quarter of this year, what you need to do to get there? And then secondly, maybe more for John, are you done with all opex cuts or there's still more to go? And then Jeff also, last question, are you seeing any component shortages every chip company is talking about it, on wafers, et cetera. I'm just curious what you guys are seeing?

Jeffrey S. Niew -- President and Chief Executive Officer

So let me answer that last question first. In terms of wafer shortages I would sit there and say, we have not had any wafer shortages. What we have had is lead times go out, right. So the risk here with lead time going out is we're trying to predict mix further out, right. And so that is the best challenge so far we've seen. But as far as not having enough wafers, that has not been an issue for us. We've got a good group of partners that gets done pretty well for us. On the gross margin, talking about gross margin at the end of obviously 2021 two quarters of the year and I would say a lot of the work that we've been doing -- the good work we've been doing is being masked by two things, one is mix, right? I mean two of our highest gross margin businesses are hearing health business, coupled with the medtech business and PD are down, right. So mix is not helping us even now. And then the second thing is, obviously the absorption with all the factories that we have, that we're running full and how it impact as well.

Now I'd like to turn it over to John. He will talk a little bit about some of the things that we're doing. What that really -- how that translates to what it means for 2021.

John Anderson -- Senior Vice President and Chief Financial Officer

Sure. Yes, first of all, I'd say, I'm pleased with the trajectory in our gross margin, which was up more than a 130 basis points sequentially. We had gross margins of about 36.7 in Q3, they are up to 38 in Q4 and then if you think about to potentially improve those margins. Jeff talked about selected portions of our business are still being impacted, the audio file business, PD, the medtech business and defense, all three of those end markets typically carry above average gross margins. So when we recover to fully recover in those markets. I think there's clearly some tailwinds. In addition we did in the fourth quarter, despite delivering 38%, we had some workforce disruptions in our North American manufacturing facilities related to COVID. And so again, if those -- we don't expect those to continue, that will also be a tailwind for us moving forward. So I think if you take all that together, I think, based on current end market conditions, there is no reason we can't have full-year 2021 gross margins above 2019 levels. We finished right around just 39.1 I think in 2019. So hopefully that gives some color.

Anthony Stoss -- Craig-Hallum. -- Analyst

Got it. If I could sneak in one more. Jeff, any update on when you can get the automated BA equipment in and then up and running?

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah. We give you a quick update on that. The line is shipped, it's actually on the ground in the Philippines, in the facility. We have not yet been able to get the installation team there in order to install the machine. But we're hopeful with the distribution of vaccine that we're not too far off from being able to send the team there and that any restrictions relative to travel to Philippines will be fully cleared. Once we get it there, I'm anticipating it's about 8 to 10 weeks to get it fully installed and so we have a pretty good pipeline of opportunities for the back half of the year, which I hope we don't have to push out. Well, I think we're going to get this line up and going, but I think the pipeline for the back half is looking pretty good. And so we got to get thing installed. But I think it should happen sometime in late Q2.

Anthony Stoss -- Craig-Hallum. -- Analyst

Thanks for the details.

John Anderson -- Senior Vice President and Chief Financial Officer

Did we address your opex question?

Anthony Stoss -- Craig-Hallum. -- Analyst

Not yet. I think, as I was going to save that for a follow-up in our call tonight, but go ahead. I would assume you get pretty close to be that the tail on it.

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, in Q4 we incurred about $47 million of opex. A couple of items that I want to pull out is, we had abnormally high incentive compensation costs. About $2 million higher than normal. We really finished strong. And on the higher EBITA, we had higher incentive comp cost. We also had some engineering NRE which is a little more than $1 million. So if you take those out, call it a $44 million to $45 million run rate, I would say very modest increases from there going into 2021. There is nothing line of site where we see this big opportunity to reduce further. But I think we can get great operating leverage if we can grow the topline and really just we shouldn't have much more than 2% to 3% increases in 2021 and opex.

Anthony Stoss -- Craig-Hallum. -- Analyst

Thanks. Best of luck, guys.

Jeffrey S. Niew -- President and Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Bob Labick from CJS.

Bob Labick -- CJS Securities -- Analyst

Good afternoon and also congratulations on some very strong results. I wanted to stick with the gross margin question. And obviously, you just spoke about the opportunity to have very strong gross margins this year. Looking out further, can you talk a little bit about the opportunity to perhaps get about 40% and what would be the drivers there and maybe is your mix changing even within mobile or what are the current drivers right now of the improved gross margins despite having some of the higher-margin businesses being suffered, so I guess there is two questions there. Sorry.

Jeffrey S. Niew -- President and Chief Executive Officer

That's OK. Yes, so I would say, I think we talked a little bit about 2020 being kind of like a little bit more challenged in terms of pricing. We've made some decisions on pricing, I would say in the February-March-April time frame for the back half of the year that without -- it's hard to tell what the demand is going to be, but it's clear about that the pricing and the demand are much better aligned now and going even as we are in 2021, there are last aligned. And so I think we talked about this before, which was, if you go back a few years, we were averaging on mature products like 7% 8% price erosion on mature products, by the time we got to '19, it was less than 4% and we kind of fell off the rail here with the demand how it kind of came in, in Q1 and Q2, and we're making decisions on pricing for the back half of the year. I don't see that being sustained. So I think as we're introducing products in MEMS mics, if they're are coming in at higher gross margins and as also we have lots mobile, I cover this kind of in that the earlier question that the non-mobile applications continue to grow where the gross margin is higher. And so I think within MEMS mics it's mix, it's for sure mix is what's helping us in 2021.

As we look at the other businesses, I think about where we think our growth is going to come from in Hearing Health, we talked about balanced armature receivers. I think that is going to be -- as that grows that the higher gross margins in our corporate average. There is still ongoing within the hearing health market, a shift from the old style microphones to MEMS microphones and while it doesn't add to our sales level, it changes the growth margin and then of course in PD, defense and medtech are areas and EV where we're focused, where gross margin is higher. So what you see is the R&D dollars for new products are being focused toward the markets that have a higher gross margin and you're going to start to see some of that come through in 2021.

Bob Labick -- CJS Securities -- Analyst

Okay, great. And then I think you started to touch on this a little bit too. But what you could talk about your thoughts on your kind of the longer-term consequences of COVID, you had mentioned that in the computing market work from a remote school and stuff should increase that over pre-COVID levels. Are there any other like changes in your end markets or your thoughts about the future, that have changed as a result of COVID?

John Anderson -- Senior Vice President and Chief Financial Officer

No i'll make a couple of comments on the hearing health market, which is kind of interesting, which is if you go back when we were talking about this in February, March, last year we were saying that there are two things that had happened. One was people had to feel comfortable. We don't have a solution to COVID. And number two is, people had to feel comfortable coming out. As I talked to the hearing out customers, if the audiologist are open, the consumers are coming. We're not seeing people staying home. So, I think the recovery once the vaccine is out, should be pretty good for us in these market, I do think there is especially in our PD side, medtech it would appear to me that there is some pent-up demand in medtech. And I think the other thing I would say is, and this is not COVID-related, but I think we're very well positioned in defense with PD. I think we've worked in the areas where investments being made relative to electronic warfare. We got some variety of products there and I think that's going to be a nice growth market, but I see that recovering again, as COVID starts to dissipate.

Bob Labick -- CJS Securities -- Analyst

Okay, super. Thank you.

Operator

And your next question comes from the line of Christopher Rolland from Susquehanna.

Christopher Rolland -- Susquehanna -- Analyst

Thanks guys. I guess my first question is a follow-up. Can you talk about -- and I didn't totally understand Jeff, what you were talking about with pricing? Were you saying that pricing has improved from down 3% to 4% that you talked about, could we even see pricing up in this kind of environment? And then secondly, is capacity utilization, nearly 100 percent for the full year here as we trying to stretch visibilty into perhaps some tightness into back half? How hard are we going to running this year?. Thank you.

Jeffrey S. Niew -- President and Chief Executive Officer

Yes. So, yeah, that's, I think the first question on pricing, again 2020 was a kind of a difficult year having made some decisions on pricing, when the market was very poor, right? About that -- what about the back half. But as we go into 2021, pricing is stabilized, and what's happening is new products of course are being introduced, like we normally do, which is resetting the numbers and price erosion is becoming in the less that 4%. It could be even less than 3% for quite frankly for MEMS Mike. So we're seeing a lot better pricing environment as we go into 2021. So I think that was the comment. And then, your second question relative to utilization?

Christopher Rolland -- Susquehanna -- Analyst

Capacity utilization.

Jeffrey S. Niew -- President and Chief Executive Officer

So let me just make it -- I am also going to let John talk about the utilization but let me just make one quick comment, right. Right now that the demand, obviously, based on our guide gives for Q1 is quite strong in Q1, I think the areas that we're talking about for the back half of the year and getting prepared for is -- you know our largest customer, is it going to be another big year for mobile followed in the back half of the year. That's a question that we have to think about right? The second one is that within our non-mobile applications, PC and laptop and tablet have been extremely strong through the COVID and the question is, I do believe they'll be above 2019 levels, but the question is, will they sustain at this level, all the way through the back half of the year. Yeah. Yes, that's right. I think it's yet to be seen. And then the last piece before we talk about capacity utilization is, I would just say that you know, kind of what we're saying or how I see it, is that, even if some of these markets are a little bit weaker in the back half say 2020, we do have all these other stuff coming back, right. Medtech within PD we have defense, we have this audio file/aviation/other medtech for HHT, so the stuff should be coming back. So, I kind of view this is the value a diversified business right that you have something up something down, but overall I guess we feel pretty good about 2021 right now. John, you mind telling about capacity?

John Anderson -- Senior Vice President and Chief Financial Officer

Sure just in terms of capacity utilization, I'm really talking about the MEMS business but Q4 we ran close to -- very close to a 100%, we actually in addition to that 100%, we actually sold and took down our inventory as well. I would say as we look into Q1 is higher than normal and we're actually going to work through Chinese New Year. And it would be higher than the normal, normal first quarter is seasonally low.

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah. And let me. Yeah, I mean I will comment I think normally, we expect that Q1 with some of the dynamics in the mobile market, it's the seasonally low quarter. It could shift slightly in Q2 on mobile, right, because, because of the timeline of when things were introduced.

John Anderson -- Senior Vice President and Chief Financial Officer

That's kind of where I was going. Q1, we're going to have a normally high or higher than normal utilization. Q2, we will, but it will be replenishing inventory in Q2, Q1 we were kind of all out to meet demand and again that's based on kind of conditions that we see right now. No significant supply chain constraints today. Lead times for wafers have extended a little bit but it's not a bottleneck for us today.

Christopher Rolland -- Susquehanna -- Analyst

Okay, understood. Very helpful, thank you guys. And I guess my second question is around 5G handsets. The kind of China handset complex in particular here, can you talk about some trends that you're seeing there in terms of content for you guys, in terms of multi-mic adoption in terms of better mics, is this a driver for you guys as well and then people have gone to talk about an inventory of handsets building in China as people aggressively attack the lost wallet share that's out there, are you seeing that as well? Thanks.

Jeffrey S. Niew -- President and Chief Executive Officer

So we saw a very strong Q4 sequentially from Q3 in China. Looking at the numbers here, yeah, we saw very strong -- and it was -- So, it's definitely going to be down sequentially from Q4 to Q1. We're already projecting that but it is up significantly over Q1 of 2020. So I would say, just generally speaking that the end- right market has been kind of a little bit of a mixed bag here and Chuck obviously China drives a lot of this, and my personal feeling right now is, I'm not feeling like there is a big inventory issue. If I look at kind of the forecast, we're starting to see for Q2. China is still will be up sequentially in Q2, so although again I always preface that with, we got to wait till after Chinese New Year right. So, but right now our forecast seems pretty good sequentially from Q1 to Q2.

Christopher Rolland -- Susquehanna -- Analyst

Understood. Thanks guys. Appreciate it. And congrats on solid quarter.

Operator

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

Tristan Gerra -- Baird -- Analyst

Hi, good afternoon. Given your commentary that you were almost at 100% utilization rates in Q4 and you're going to be higher than normal in Q1. If we assume 10% growth in Smartphones this year, would you have to build capacity for the second half of this year and also wanted to go back to the commentary that you expect Q1 shipments in small firm to be higher than normal and in Q2, you expect that there's going to be some inventory replenishment given that some investors have been concerned about that the shipping in Q1. Is that something that you believe could impact the second half of the year, where there is at some point just excess inventories in the channel? And I'm just trying to put this together and what it means for your utilization rates of course margin and shipments relative to real end demand.

John Anderson -- Senior Vice President and Chief Financial Officer

Yeah, I mean right now kind of I feel, Tristan about the full year is that we will be probably building full out through the full year with Q2 being more of building inventory. I mean I think we talked about before our kind of the strategy here is because we have such diversity of customers and markets that you know that we don't, in the back half of the year because we're very confident are going to buy and what part numbers that you can build-out in the first half.

So right now I would sit there and say I would think, we're going to build pretty close to full out for the full year. That would be my guess. As far as mobile, I think mobile is for us, if I think about it is going to continue to decline as a percentage of our total company revenue and I think one of the things that we are thinking more about, Tristan as we go into this year is that we've got a great product portfolio, we've got a lot of great end markets.

Yes. At the higher end of the market. We still sell microphone we like those sales, but when we start thinking of the lower end of the market, there may be other methods for us besides selling the full microphone to sell in the lower portion of the mobile market and so what I think about that is, over the long-term is we are trying to start moving away from the lower end of the markets in mobile and what really drives me there first is this first all the gross margin, but it's also the absolute AFP, that I'm filling my factory with. When we sit there and we see microphones in the low-end being sold at $0.10 to $0.15 at a gross margin that is some of the corporate average versus we could sell that to Ear, IoT compute or higher end mobile at a higher gross margin, it's both a revenue driver and is the gross margin driver. I think we're getting the point where I again when I see that the demand for microphones continues to rise. And so we're able to kind of like not go is aggressively after the low end of the market.

Tristan Gerra -- Baird -- Analyst

Great, that's it. That's very useful. And then as a follow-up so you mentioned that the new products that you're going to launch outside of smartphones that are presumably higher ASPs and driving mix. Is this going to be trusted shifting to higher ASPs, higher margin products outside of smartphone or do you think those products can also help you gain share outside of smartphone or are you just reliant on those non- smartphones end markets to just grow faster year-over-year.

John Anderson -- Senior Vice President and Chief Financial Officer

Well, I mean I don't know if I've done the analysis of the results in share gains or -- but I would just say the primary goal here is higher ASP and higher gross margins, that's where we're focused and in some of the cases, it will be dual source; in others, they won't be; and I think what we feel Tristan is that, I think we talked about it, it's really a two competitor situation here within the microphone market and I don't see anything really changing with that. So I think we'll get our fair share with the new products that we have in the market that we're advancing.

Tristan Gerra -- Baird -- Analyst

Great, thank you.

Operator

And your next question comes from the line of Suja DeSilva from ROTH Capital.

Suja DeSilva -- ROTH Capital

Yeah, hi. Congrats on the results here. The balanced commentary you talked about the supply side, you got to kind of get equipment installed and understand travel, but on the demand side, the programs that would on capacity in second half, I think it ramps. Are those programs waiting for your product, are they pushed out or -- I'm just understand if the demand aspect of that project.

John Anderson -- Senior Vice President and Chief Financial Officer

I would say the way this is working is like I literally meet with the team about the demand side of weekly and we've been trying to supplement, some of the lower volume opportunities with manual production. We don't want to do a lot of it's because it's not good for gross margins. So we haven't done a lot of it, but what we keep talking about it, we're not ready. how is the next one? And so I wouldn't say is waiting. But I would sit there, let's say, is that people want to use the product, but we haven't been ready to say, we're going to give us in high volumes and so, I think we're getting much closer to being able to say that. And I think if you remember this produces -- the line produces about a million units a month, so we think we can get this going by the end of Q2, that would say that there's probably somewhere depending on yield first running full out somewhere in neighborhood of 4 million to 6 million units in the back half of the year incrementally.

Suja DeSilva -- ROTH Capital

Okay, great. And then on the hearing health business, just trying to actually back too wide, how close you are to pre-pandemic levels, whether we should get back to those levels or above them?

John Anderson -- Senior Vice President and Chief Financial Officer

Yeah, I mean again, what I would say is in Q1, we're pretty close back to pre-pandemic levels. The one piece that still not come back, is the other half of patients that we sell, the same exact technology to like the live musicians, we sell fair amount of microphones in the aviation. We sell a fair amount of what we call microphones into non-Hearing health medical application and these businesses are still like -- not still down and interestingly these are all smaller customers. So if you imagine, these are some of our highest gross margin customers as well. They have not come back.

Suja DeSilva -- ROTH Capital

Okay. And if I could get one quick one in. Can you maybe comment about smartphones and the launches being kind of an irregular timing, I was curious if you could elaborate on that comment? Things from 2020 pulled and pushed out to 2021 or things pulled later 2021 on or is it just, there was no pattern because we didn't know?

John Anderson -- Senior Vice President and Chief Financial Officer

We already saw that normally our peak quarter is Q3, it got pushed to Q4, which is kind of leading us into the path, that the low quarter in Mobile specifically may be Q2. And so that's something we're saying is because of that delay that you know that the mobile specific portion, it will be probably less in Q2 than Q1.

Suja DeSilva -- ROTH Capital

Okay, great, thanks guys.

Operator

And your next question comes from the line of Bill Peterson from JPMorgan.

Bill Peterson -- JPMorgan

Yeah, hi, thanks for taking my question and a nice job on execution amid the pandemic here. My first question, and I know, it's a smaller part of the business, but the Intelligent Audio refocused on IoT, hopefully if you can just give us an update, what type of IoT markets, are you focusing on from here. What does the competition look like? Where is your best chances for success? Any updated products beyond the dual-core and quad-core processors you have and can you give us an update for this business?

John Anderson -- Senior Vice President and Chief Financial Officer

Yeah. And I think we talked about, there is a fair amount of applications now that we're in that are relatively low volume. To give you some examples, we're in a number of now Sound bars. I think we have won designs on some consumer brands, you would recognize for Bluetooth speakers, I think in other area that we seem to be doing well is remote controls. We have a couple of ear applications, appliances. We've got a few design wins that are more reference at the beginning, but Smart TVs. So they're all lower volume applications, and I think there's a couple of points I would make on this Bill, first, obviously we're not spending anywhere near as much money as we were a year ago. And I think we're at a position now where this is not only driving sales of the DSP, but it's also driving sales of microphones to customers in this long tail that we really haven't dealt with in the past. The third piece is that, I would sit there and say as I'm looking at the DSPs, we're selling because of these smaller customers. The gross margins are in excess of -- it takes time to develop, because it's a lot of small customers. But I think the positive thing I have seen so far as we win a design with some of these customers, sometimes it with their own software, they are writing software to our DSPs. They use the next generation in the next generation. And so I think it -- and I don't see it as being $100 million business, but I do see that maybe being a $20 million to $30 million possibly. With microphones sales being driven toward more digital mics, toward more high-performance mics in order to get more

Bill Peterson -- JPMorgan

Okay, so 2030 probably more long term plus, mic as it matter.

John Anderson -- Senior Vice President and Chief Financial Officer

Yeah, let me just, we will let the comment, driving to new applications, where microphones weren't used before and I think that's like in a TV is a good example of that. If we're successful at TV, yet to be seen, microphones are a big portion of TVs, and we've talked about this before, and the fact that there is no reason your TV can't act like your Amazon echo which sits in your room, your TV can do the exact same function and so these are the type of things, which -- if we could start having every TV app, for microphones, there's millions of TVs built every year. They don't have that today.

Bill Peterson -- JPMorgan

I've Understood. In terms of use of cash, hoping to get an update, maybe on your capex plans for this year or maybe even above that any sort of idea on cash flow from operation and working capital constraints are things going on related to COVID and then use of cash, debt pay down and things like that, if you can give us a feel for the priorities this year?

John Anderson -- Senior Vice President and Chief Financial Officer

Yes, sure, Bill. I was hoping, somebody was going to add through our cash flow and liquidity. At the metric, I'm pretty proud of the team's execution on, but I think as we exit 2020, we've got about $550 million of liquidity as I mentioned in my script a $150 million of cash and then we've got a revolver that's untapped for $400 million. We do have converts $172 million of converts that will mature in this November. So we've got a lot of optionality with how we retire those converts. It's a combination of either using existing cash on hand or borrowing from the revolver. And in terms of capex for the year, I mean I will say 2020 was unusually low. We are right around $32 million in capex, I think as you look out into 2021 will be closer to the 5% to 7% of revenue type of capex level primarily on new products. And then I think your other question with capital allocation. I don't think there is a big change in priority, our priorities will continue to be funding all of the organic growth opportunities we have. We will kind of step up the pace that looking at accretive acquisitions and in Precision Devices. And then lastly we'll always look at, opportunistically at return of capital through share repurchases. We purchased -- we repurchased about a little over a million shares in 2020.

Bill Peterson -- JPMorgan

Very clear. Thank you.

Operator

And we have no further questions in the queue.

Mike Knapp -- Vice President of Investor Relations

Great. Well, thanks very much for joining us today. As always, we appreciate your interest in Knowles and we look forward to speaking with you on our next earnings call. Thanks, and goodbye.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Mike Knapp -- Vice President of Investor Relations

Jeffrey S. Niew -- President and Chief Executive Officer

John Anderson -- Senior Vice President and Chief Financial Officer

Harsh Kumar -- Piper Sandler -- Analyst

Anthony Stoss -- Craig-Hallum. -- Analyst

Bob Labick -- CJS Securities -- Analyst

Christopher Rolland -- Susquehanna -- Analyst

Tristan Gerra -- Baird -- Analyst

Suja DeSilva -- ROTH Capital

Bill Peterson -- JPMorgan

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