All right. Well, Dave Mossberg with Three Part Advisors just wanted to give a quick introduction. Knowles Corporation, this is a good example of kind of how we get companies to, how we kind of curate this list of companies to present at the conference. One of our sponsors had recommended that we visit with this company, and we went and saw them in their offices a couple of years ago, and we finally convinced them to come all the way to Dallas to come to our conference. Really excited about it. It's actually kind of a transition time, and I don't think a lot of people are aware of what's going on with the company, selling off kind of a lower margin business and really much more kind of a concentrated business that has higher margin.
And, I'll let you. I'll just turn it over to John to tell the story.
Sure. Good afternoon. I'm John Anderson. I'm CFO at Knowles. And, yeah, I'll talk about the transformation and what it does to us from a financial profile standpoint. First, I'm assuming a lot of you don't know about a lot about Knowles. So from a history standpoint, you know, Knowles was a family-owned business up until about 2000. In 2000, it was sold to PE, Doughty Hanson, a U.K. PE firm. And then in 2004, Doughty Hanson sold it to Dover. So hopefully some of you are familiar with Dover, industrial conglomerate, large cap company. In 2014, Dover made the decision to spin out Knowles as a separate public company, and they spun out the consumer electronics business with some other businesses. And, again, that took place in 2014.
What we quickly realized as a management team there that we had two dramatically different businesses from a margin profile. We had the consumer electronics MEMS microphones for consumer electronics, and it was high capital intensity, lower margin business, a lot of price pressure. You know, 60% of our total business was in consumer electronics. Apple and Samsung were significant customers. They made up 35% of total revenues. Along with that, a lot of price pressure. So we kind of looked at the portfolio that we had spinning out of Dover and did a fair amount of rationalization over the last few years. We sold off the speaker and receiver business that was again dedicated to consumer electronics. We sold off a crystal oscillator business, which was dedicated primarily to telecom applications, which was very lumpy.
Then most recently, about a year ago, we announced strategic alternatives for the consumer MEMS business. So that was microphones, about a $300 million- $270 million business, microphones for, again, consumer electronic applications. So smartphones, computer, laptops, true wireless. Announced that September 2023. About a month and a half ago, we announced that we signed a definitive agreement to sell that business. So Q3 of 2024 is the, and we expect to close that business late this quarter, could trickle into early Q1 of 2025. I think that business, again, the reasons that we made the decision to divest is it was really camouflaging the margins of our existing business. We were a total company. It was around 40% gross margin.
We had businesses that were generating 50% gross margin being kind of camouflaged with the CMM consumer business, which was kind of in the low 30% gross margin range. Again, we expect to close the business. We sold it for $150 million to a company called Syntiant, an AI company, in Southern California. Once that closes, we'll be, you know, a different margin profile. Q3, when we just filed our quarterly filing for the third quarter, we put the CMM business, the consumer MEMS business, into discontinued operations. For the first time publicly, you can see the margin profile of the business that we're continuing with. I'll actually show. I think this is kind of a preview of what you'll see.
So if you look at 2017 to 2023, the revenue CAGR that we reported on a fully, you know, a complete company basis with CMM, from 2017 to 2023, our revenue decreased by about 1% a year. It was because of the decline in the CMM business. If you strip out CMM, our revenue CAGR was 6.4%. About 5% of that organic growth, about 1.4% of that growth coming from some bolt-on acquisitions we did. In addition, and you'll see this again in the Q3 filing, our gross margin profile increases by more than 500 basis points. We were hovering around 40% for the last several years. In Q3, we reported 45.9%. These 2023 numbers are on a pro forma basis. The outside world won't see this till we file our 10-K in Q1 of 2025, where we'll restate, we'll show 2023, 2022, 2023, 2024 for continuing ops.
So you'll see this margin profile, you'll see this growth rate. But right now we don't screen well. If you pull up FactSet, you're gonna see 2024 consensus of like $680 million, but it, because it includes two quarters, the first two quarters of this year for the whole business. And now Q3, only the discontinued or the continuing ops, and Q4 the guidance that we provided was continuing ops. So it's kind of a mixed bag for 2024. And then again, 2025, the consensus is, I think $580 million is out there. It looks like we're declining in revenue. It's only because the discontinued ops hasn't been stripped out for full- year 2024. So again, from a margin profile, you know, we grew revenues at 6-6.4% from 2017 to 2023. Our EBITDA CAGR was 10%. So growing the revenue line at 6%, growing EBIT at 10%.
Again, due to the increased margin profile. I would say these are 2023 numbers. If you just fast forward to 2024, the revenue CAGR is gonna be closer to 9%. We made a pretty significant acquisition in November, about a year ago, November of 2023. Only two months are in the 2023 actual numbers. Obviously, 2024, we're gonna have full year. So it's gonna add about $100 million of growth to our revenue number from 2023 to 2024, that acquisition. And again, the CAGR will go up to around when we, this is gonna be part of our investor day presentation in the first quarter, that revenue CAGR will go just, just below 9%. And then the EBITDA CAGR will be closer to 15%. In terms of where we're participating, again, this slide is based on the 2023 numbers.
So it only includes two months of the acquisition of Cornell Dubilier. They're heavy in industrial. So right, in 2023, MedTech was 52% of our business. EV electrification 4%, defense applications 21%, and industrial 23%. If you look at this for 2024, think of it this way. Med is roughly 40% of the business in 2024. And that includes our hearing health business. Defense is roughly 20% of the business, and then industrial 40% of the business. So we think we're in pretty attractive end markets with good secular growth. You know, it's, this isn't gonna be double-digit growth, but we think organically we're well positioned in these markets to grow kind of mid- to high-single-digit growth rates organically. From a, a end market standpoint, we'll talk about a little bit the products.
For medical, we're selling. Thing is you don't know Knowles, but you know our customers' products. You don't know our products, you know our customers' products. MRI would be MRI machines, implantables. Implantables would be pacemakers. Hearing health is hearing aids. We're the largest supplier of microphones and speakers going into hearing aids. We don't make the hearing aids itself, but we have $15-$25 of content on a pair of hearing aids. Our customers, there's five major OEMs that make hearing aids globally. We sell to all of them. We've got about a 60%-65% share of that hearing aid market. From a defense standpoint, this is basically millimeter- wave RF filters. Filters for basically electronic warfare. Jamming systems, radar systems, it's capacitors and filters going into those systems.
And we're selling to, you know, familiar names, you know, Raytheon, Harris, the large tier one contractors. Industrial, it's a really wide, you know, breadth of customers and products. We sell to, like you can see at the headline, 50,000 customers going both direct and through distribution. But I would say from an industrial, people always say, "Oh, what part of industrial?" Everything but internal combustion automotive. We don't sell into the automotive market other than some EV applications, which is over in electrification and energy. But that industrial is just think of anything except automotive. We've just struggled with getting the margins we wanna get in the automotive industry. From a product standpoint, three product lines. So the first is basically the high performance capacitors.
This is both ceramic capacitors, which is kind of our legacy precision device business, and then the business we just bought, Cornell Dubilier. They make film and electrolytic capacitors. So two different applications. There's no real overlap in the product portfolio, at all. That capacitor business is, call it today, $250 million, that product. And it's very, we focus on very high performance niche applications. We aren't competing with the Muratas or the TDKs or the Vishays. That's not us. We're in very, very customized solutions for niche applications. So think of, you know, either high perform, high reliability. So these are gonna go into pacemakers. If it's gonna go in somebody's body, it's gotta continuously work. So our testing requirements are significantly more than products that are going into other applications. As a result of the high reliability and high performance, we get higher margins.
If you compare our margins to some of the names that I just talked to, they're kind of in the 30-low 30% gross margins. We're 40+ . It's about a million of a billion dollar TAM, this niche kind of high performance, high reliability part of the capacitor market. And then there's RF microwave filters. That's about a seven, a $1 75 million-$180 million business. Primarily, it's 95% defense applications. Again, think of electronic warfare, think of radar systems, drones, jamming systems, those kinds of things. We aren't into like detonation and bombs and things like that. This is all infrastructure. You know, a big project we have in our filter business is there's a new radar system, Aegis, that's going onto a lot of the, the new boats in the Navy fleet, and then they're retrofitting that radar system for all their existing fleets.
Every year there's two or three boats that are getting retrofitted. Might be for us $5 million-$10 million a year, but it's a long tail, right? This program is probably gonna last 10 years-15 years. So it's really steady, stable business. And then lastly, the product is the hearing health solutions. Again, this is microphones and speakers going into hearing health. So it's about a $250 million business. And again, it's basically hearing aid business. And there we've been a market leader for a long time. Our differentiation there is, you know, high quality audio, which we leverage from that CMM business. There was a lot of IP there that we were retaining. And then it's all about, you know, what hearing aid manufacturers want. They want smaller and smaller size. I don't know if you know people who've worn a hearing aid now.
If they're wearing the very latest, you don't even know they're there. Honestly, they're that small. The battery, we want the lowest power consumption possible. You can't have a hearing aid and then lose power in the middle of the day. It's gotta last at least 20, you know, 24 hours on a single charge. So that's some of the technology that, you know, we're leading on in that area. And the hearing aid business, I would say in general, it's probably as stable a business as you can find. I mean, whether interest rates are 2% or 10%, the hearing aid's an essential device. Now, it doesn't grow fast. It's a GDP plus growth business. But, you know, whether it's COVID, maybe we had a quarter or so where audiologists had shut down, they couldn't dispense.
And so we had a quarter or so of reduced growth, but it bounced right back. 2008, same thing, financial crisis. People were worried for a quarter, but then they realized, "I need to communicate with my family." And so it bounces right back. You can go back, you know, 20 years and you can see it's just quarter- after- quarter, steady eddy. It's 3% growth. The beauty of that business is the margins. Our gross margins in that business are 55%. EBITDA margin's 40%. Cash flow is 30% of sales. So super profitable business. We always refer to the hearing health, hearing aid business as kind of like a blue ocean or blue sea, right? It's smaller than an ocean, but everybody makes money in that market.
You think of a hearing aid and you look at it and like the BOM of a hearing aid is $250-$300. If you're buying it at retail, you go to Costco, you're gonna pay $1,600-$2,000. If you go through an audiologist, you're gonna pay $3,000 or more. So everybody, the audiologists are making great margins. Costco goes, makes great margins. Our customers that make the hearing aid, 70% gross margins. We, as a supplier, 50% gross margins. And it's not big enough for somebody else to come into this market. You know, there's about 15 million hearing aids sold a year. So that's hearing aids. Well, everybody has two. So it's like 7.5 million people globally are buying a hearing aid every year.
So again, it's not big enough for somebody like an Apple to come in and go, "Oh, I'm gonna make hearing aids now." It's, there hasn't been a new entrant in this market in a long time. A little bit more on, on the segments. I mentioned PD. So the PD segment, that's the capacitors high performance capacitors and the filters. Again, this is 2023. So $221 million. The Cornell acquisition I talked about earlier, that adds about $100 million. It, we had $20 million of sales in 2023 related to Cornell. This year it'll be kind of $125 million-$130 million. So think of that business as that segment is $320 million. That's the high performance capacitors I just talked about plus the filters. And then the MedTech and specialty audio last year was $230 million. This year, I mentioned about $250 million business. And we talked about the margins.
In addition, in this MedTech and specialty audio, you can see the, right here, the hearing aid I've got a picture of. That's 90% of the business. We do have some other applications, in-ear monitors. So if you think of, you've been to a concert, you see a musician, they're wearing the in-ear monitors. That's our microphones and speakers. And then there's some communication devices. Like if you've seen military or first responders, they've got what we call boom mics, the mic outside. We make that, but it's a very small portion of that MedTech and specialty audio. Again, of the $250 million, $230 million, $ 220 million is hearing aids. From a capital allocation standpoint, you know, when we spun out at Dover, Dover gave us $400 million of debt. It's kind of a welcoming gift for us as being a separate public company.
Through the divestitures to the portfolio and the cash we've generated, we've paid down that debt. We're gonna exit 2023, and that's also with the $260 million Cornell acquisition we made last year. We're gonna exit this year with net debt of around one time leverage. So about $130 million of net debt. Our EBITDA will be in the $130 million-$140 million range in 2024. So really low leverage, you know, you, that's one thing as an investor, you don't need to worry about liquidity or, you know, insolvency or thing. We're gonna keep our debt at a fairly modest level. You know, we are gonna be acquisitive with the capital, you know, that we're generating. We're generating $100 million or more a year of free cash flow. We've done that the last three years.
And I think capital allocation is a common combination of first, we're gonna fund all the internal projects, right, that have the appropriate ROI, like at least 200 basis points- 300 basis points above our cost of capital, which is 10%-11%. But our business now doesn't require a ton of capital. About 3% of revenues in capital. When we're in that consumer electronics business, we're spending 5%, 6%, 7% of revenues in terms of capital investment. It was a new product, some capacity. The businesses we're in now, PD and the MSA business don't require much more than 3%. And again, that's over a cycle. You might have a year where we're making a major investment, but over a cycle, 3%. And then again, what do we do with that remaining capital that we're generating? It's really a combination of share repurchases.
You know, we'd like to, we're targeting returning 50% of our cash flow back to shareholders through share repurchases. We bought about $180 million of stock back since 2021. At a minimum, you know, if we don't hit this 50% a year, we wanna buy enough back to offset our stock-based comp. We issue about $20 million-$25 million stock-based comp every year. We don't want that share count to be increasing. So at least $20 million-$25 million will go back in terms of back to shareholders through buybacks. And then that's about finding acquisitions. You know, I go back to that first slide. We have, again, we've demonstrated the ability to generate 5% revenue growth, 10% earnings growth. But we think with our balance sheet and our cash flow generation, we can supplement that pretty significantly through acquisitions.
And you know, we've shown now we did four bolt-ons from 2019 to 2022. And then 2023, we did our biggest acquisition with Cornell Dubilier. We're a year into it and it's coming out despite a little tougher industrial market and a little lower growth. We're hitting all the metrics that we had for that business. It'll generate about $22 million-$24 million of EBITDA in 2024, the first year of the deal. And it will be accretive to our earnings. So, you know, now it's about how do we scale up this business a little bit through, again, disciplined acquisitions. And we've got a team, three dedicated people now in our Corp Dev group that's completely focused on really sourcing deals. We try to stay out of the auction process. It's more of the getting relationships. It's a fragmented market for us.
There's a lot of family-owned businesses that are kind of this niche player for either defense applications or medical applications. So we're cultivating a lot of relationships. We have you know last time I looked at the final probably 20 targets out there and there's four that are kind of in active you know discussions. Again, I can't tell you when these are gonna close, if they're gonna close, you know how deals work. It's like there's gotta be sometimes a life event in some of these family-owned businesses and we just wanna be there when you know to pick up the phone when they're ready to sell. But we're cultivating some relationships.
And again, I think if you look at what we can do organically and let's say we can add 2 or 3 percentage points to the CAGR, revenue CAGR through acquisition, we see no reason why we can't, again, over a time period deliver CAGR of high single-digit revenue growth, including acquisitions and then EPS growth 2x. So 15% EPS growth is kind of our target. We're gonna talk a lot more about this. We're gonna have an investor day. And we wanna wait till we finally close on the CMM deal. We're supposed to close, as I said, later this quarter, maybe at latest January, and then get through earnings season. And then our plan would be to have an investor day in late February, early March.
Then we'll really go through a deep dive on the growth rates for each of these markets and what really drives those. Again, I think it's a pretty high confidence that we can kind of all we're asking to do is replicate what we did in those businesses from 2017 to 2023 in the future. With that, I'll open it up for questions. Sure.
Yeah. You threw out the numbers, $15-$20 per hearing aid and
15-25, yeah, per content, $15-$25 for a pair.
Okay. All right. I guess I was just wondering, you know, how do you size that with the $220 million you put forward and the 60%-65% market share of your comps charging a little more or have more down?
If you take the $20 and times the, there's 15 million hearing aids. Yeah. Right. So, I mean, you get pretty close to that. Our share fluctuates, but it's somewhere in this like 60%-70% share. I mean, I think you'll get close if you do that math. Yeah. And again, we feel good about, again, there's a couple things going on in that hearing. It's traditionally been a GDP growth business, but there's some tailwinds that I think are worth mentioning. First is the average age of someone buying a hearing aid is 72. Medically, they need a hearing aid 10 years before that, right? People start losing, I mean, we're all losing hearing. It happens and there's a couple cycles.
It's like the early 50s and then 60s, but it's the stigma that it takes people 10 years or more longer from when they need a hearing aid to actually buy the hearing aid. That stigma's starting to go away. It really is. I mean, how many people do you see walking down the street and they have something in your ear? You don't think about it. The size I mentioned earlier and the seamlessness of 'em, you really don't see 'em. There's some technology enhancements like Bluetooth where you can listen to music through your hearing aid. You can answer phone through the hearing aid. So I think as the stigma goes away, you know, Apple just announced on their AirPods Pro 2 that you can test your hearing. It's not gonna cannibalize the hearing aid business, but you can test your hearing.
So what that does for us creates awareness, right? And if we can get somebody to buy a hearing aid at 62 instead of 72, a hearing aid lasts five years. That's two more turns. It's gonna grow the market immediately if people start buying at 62 instead of 72. And again, you get two more turns, because of the life of it. So that whole awareness we think is a net positive. And you can see there's a lot of research. There's an article a couple weeks ago in the Wall Street Journal about this when Apple made their announcement. But again, we don't view Apple as a threat to the traditional hearing aid business. 'Cause think about it. Are you gonna wear an AirPods Pro to a party for four hours and like talk to somebody with that in your ear?
It's just kind of an awkward, awkward situation, and then again, battery life. An AirPods Pro lasts four hours, four to five hours max. You need a device that can last 24 hours. You also, with the AirPods, you have to have your phone with you everywhere you are. So, I mean, it's good situationally. There might be an opportunity, like you're in a noisy restaurant or something, you wanna put these into block out, you know, the AirPods Pro to block out, but it's not gonna cannibalize and make the hearing aid go away. In addition, Apple is limited in terms of how much gain you can put. You don't wanna allow unlimited gain on a hearing aid 'cause you can damage your ear, right? So they're limited to like 25 decibels of gain.
I don't know if you've noticed, but even on your true wireless devices, I mean, the Apple devices, there's a limit on how loud those will go once to protect yourself, and so again, this will create awareness. The other is, again, baby boomers in the U.S. are starting to hit that late 60, mid to late 60 age, so the aging demographics is gonna help grow that more than, you know, the GDP plus growth rate that we've experienced historically. Good question.
You answered my question. It was gonna be about the Apple, AirPods Pro.
Yeah. Yeah. That was gonna cannibalize the market. Yeah. No, we think it's a net, you know, incrementally a net positive. Again, they aren't gonna go away.
If you need, if you have, I'll call moderate to profound hearing loss, you're gonna need to go to an audiologist 'cause all the Apple devices, it's just software and it allows you to test your hearing. If you have a problem, it doesn't solve the problem. You're gonna have to go to an audiologist to solve the problem. Again, you can maybe in situations use that device to help you a little bit, but it's not a permanent solution for, you know, solving hearing. So it's, it, go ahead.
So I had a follow-up question. The division you're selling now, microphone, that's the consumer side of it.
That's the consumer side. Yeah. Good, good question. So some of the IP is shared. It's used on the consumer side to develop the microphones. It's also used on the hearing aid. We're keeping all the IP.
That's why the price is a little lower on this deal than you might have expected at $150 million for a $270 million revenue business that we're selling. We're keeping all the IP and then we're granting the buyer a royalty-free license into perpetuity, but only for the consumer market. They can't ever come into the hearing aid market. Sure.
Do you have any exposure on the OTC hearing aids?
We do. And for us, it's like we're agnostic. I mean, the hardware, I don't know. So, I don't know if everybody knows, but two years ago, the government put in legislation so you could buy hearing aids over the counter versus having to go through an audiologist. So you can go to Best Buy right now. I think Walmart has a kiosk.
I mean, the issue is there's limitations on, again, the depth, the increase in gain that those devices will allow. It's also, you gotta do it on your own, right? You gotta tune it on your own. You have to clean it on your own. You don't have somebody like an audiologist to go to. For us, the hardware's the same. Whether it's going into one of those devices or going to a device that we're selling through, our customers and going through Costco and audiologists, the hardware's the same. What's different is the software. Again, limiting gain. And you don't get this concierge service, right? Most people that go, I mean, that OTC market hasn't taken off because the return rates have been really high. Think about it. You're gonna go to Walmart, you're gonna spend like $700. This isn't like $100.
You're gonna spend $700, you're gonna get it home and you go, this doesn't work very well, and you're gonna return it. The return rates are like 25% or more on the over-the-counter. And so I think, again, our thought is your willingness to try it is the fact that, okay, you recognize you have hearing loss. That device didn't help you. We think it's gonna move people, not just us, but our customers think it's gonna move more people to a traditional hearing aid, right? Something that actually is effective and works. So but for us, that content is, it might be 10% lower than the $15-$25 I mentioned, but it's essentially the same. But the market is still, I mean, it's been two years since they introduced legislation. It's less than 5% of the hearing aid market is OTC. It just hasn't penetrated.
Again, it's for people with mild hearing loss. Those people are just gonna defer. They're gonna wait till their hearing gets worse before they go to get a hearing aid. Any more? Yeah.
The defense business, have you seen much, if any, benefit from the war in Ukraine or the Middle East?
Not so much. 'Cause again, our business isn't like, you know, I'll call detonation or bombs or something. Ours is like infrastructure. So it's the radar systems. It's components going into radar systems on Joint Strike Fighters. It's not all of a sudden that there's been this boom and, oh, we're trying to build more Joint Strike Fighters. The short answer, no, we haven't seen a big uplift. That business for us grows at, you know, mid-single digits, you know, kind of 5%.
And it's program specific, you know. Joint Strike Fighter is one that I mentioned. This radar system that's getting upgraded, that's called SPY-6. So it's very program specific, long, long tails. But no, we haven't seen a big surge from, you know, the conflict.
And then secondarily, you've made a number of divestitures since you responded.
Yep.
Are there more still to come?
No, no. The rest of our portfolio is, I mean, that's why I say, like, we're kind of in the eighth or ninth innings of this transfer, transformation. Once we close on the CMM deal, I mean, the rest of our businesses are healthy growth rates and really good gross margins. You know, I showed the first slide was the total portfolio and our gross margins are 45%. And that's with kind of, I'll call the industrial piece of Precision Devices, which is about 40%.
It's a little bit depressed right now in demand because there's so much inventory still out in the channel. I don't know if you follow like the Littelfuse of the world or Arrow, one of our distributors, are public still coming out of COVID inventories, both at the channel, both at distributors and at some customers are still at elevated levels. And it's just taking a lot longer than we ever thought to get that inventory out of the channel. You know, our, we talked about it on our last earnings call. Some of our major distributors, their target is like to have two to three months of inventory of our products. They have right now five to six months. So it's just taking longer to kind of get back to normalized levels.
All I can say is like last time we went through this, once there's a turn, it turns. 'Cause right now lead times are short, right? Everybody has capacity. We're running at like 75% capacity. Your lead times are short. Once orders start coming in, lead times go up. Then orders come back in 'cause they go, well, I need the product before that. It's this, it's this, you know, again, we're still kind of, it's not going down any further. It's kind of level, but it's level at a fairly low level versus, you know, 2022 levels, and again, that's for, that's for the industrial portion of the business. Once that comes back, we think we can increase margins by 200 or 300 basis points just with capacity utilization.
You know, we got a lot of fixed cost and, you know, we're keeping it in place 'cause at some point things are gonna recover in industrial. So that 45, you know, we'll talk about it on the investor day, but you know, the preview of it, you know, we think we can get into kind of the high 40s over the next few years. And again, just capacity utilization. Yeah.
You mentioned the, the five-year life on the hearing aid.
Mm-hmm.
Just kind of wanted to get a sense of how that's, how quickly that's trended up over time. And what you expect in the,
you mean how, how the, the life cycle?
Like, yeah, the life of a hearing aid.
It's kind of been this five-year, and I, again, I'm not an engineer.
I can't tell you what it is that causes that life to not be able to be elongated, but it's been pretty consistent. It's like a four- to five-year life for a hearing aid. I mean, it's longer than you think of your phone. It's probably two- to three-year life on your phone, you know, whether it's the battery dying or whether it's the chip. I mean, I can't tell you exactly what the component is, but that five-year has been pretty constant that that's the life of a hearing aid. All right. Well, thanks for your interest and.
I was gonna say, do you see any advancement in making this life longer?
I don't know about the life longer. I mean, again, the focus right now, our customers want every year we have a, there's a big trade show in Germany where they introduce new products.
It's all about making them smaller, smaller and less power consumption. Those are the two things that are really important. We don't want 'em to last too long. That'll hurt our business, right? All right. Thanks, guys.