Knowles Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. Knowles supplies micro-acoustic and audio products, high-performance capacitors, and RF solutions through its Audio and Precision Devices (PD) segments.
Financial performance
- Revenue: $201.4 million, up 0.2% from $201.0 million. Audio revenue fell 10.7% to $145.7 million; PD revenue rose 47.0% to $55.7 million, reflecting the IMC acquisition and organic growth.
- Profit and margins: Gross profit was $83.3 million, up 6.8%; gross margin improved to 41.4% from 38.8%. Operating earnings were $21.3 million versus $18.3 million. Net earnings rose to $18.1 million from $12.5 million; diluted EPS increased to $0.19 from $0.13.
- Non-GAAP measures: Adjusted EBIT was $39.4 million versus $34.3 million, with adjusted EBIT margin of 19.6% versus 17.1%. Non-GAAP diluted EPS was $0.35 versus $0.29. These are company-defined measures, not substitutes for GAAP results.
- Segment results: Audio EBIT declined to $22.2 million from $30.4 million; Audio EBIT margin was 15.2% versus 18.6%. PD EBIT increased to $12.3 million from $4.5 million; PD EBIT margin was 22.1% versus 11.9%.
- Cash flow: Operating cash flow was $0.8 million, down from $39.7 million. Capital expenditures were $6.8 million, and cash used in investing activities was $6.8 million. Cash declined $18.2 million during the quarter to $50.7 million.
- Liquidity and debt: At March 31, cash was $50.7 million and long-term debt was $70.0 million, with no required principal payments until the credit facility matures in January 2024. The $400 million revolving facility had $70 million outstanding. The company reported compliance with its debt covenants and expected to remain compliant over the next 12 months.
- Balance sheet: Current assets were $383.9 million and current liabilities $143.0 million. Inventory rose to $177.0 million from $153.1 million; total assets were $1.719 billion.
Material changes and drivers
- Revenue was nearly flat overall as PD growth, including IMC, largely offset lower Audio sales. Audio weakness reflected lower MEMS microphone demand in computing and mobile, reduced China demand, supply-chain challenges, and lower pricing on mature products. Hearing-health growth and share gains partly offset the declines.
- Gross margin improved mainly from favorable product mix and cost reductions, partly offset by lower factory utilization and higher precious-metal costs. Net earnings also benefited from lower stock-based compensation and lower interest expense; higher restructuring charges were a partial offset.
- PD growth included the contribution of IMC, acquired in May 2021 for $81.4 million, as well as organic growth in defense, industrial, medtech, and communications markets.
- Operating cash flow fell sharply year over year, primarily due to working-capital timing, increased procurement to mitigate supply-chain risk, and larger incentive-compensation payments.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expected 2022 capital expenditures to be 4%–6% of revenue and stated it expected operating cash flow and capital-market access to support working capital, investment, and repurchases.
- COVID-19 and supply chain: China lockdowns negatively affected first-quarter demand, particularly for MEMS microphones, and aggravated shipping, logistics, and component-supply challenges. Further lockdowns or facility disruption could affect demand, operations, and costs; the duration and full financial impact were uncertain.
- Restructuring: The company recorded $6.6 million of charges, including $5.4 million tied to termination of a MEMS microphone R&D project and workforce reduction, and $1.2 million for Intelligent Audio workforce rationalization. It may record up to $4 million more in 2022 for project-related fixed assets; the amount was not yet reasonably estimable.
- Capital allocation: Knowles repurchased 313,395 shares for $6.8 million during the quarter. On April 28, 2022, after quarter-end, the board increased the repurchase authorization by an additional $150 million.
- Taxes: Malaysia and China tax holidays reduced the first-quarter tax burden by approximately $2.6 million, or $0.03 per basic share. The China holiday expires December 31, 2023, and the Malaysia holiday December 31, 2026; benefits depend on meeting conditions.
- Other risks and contingencies: The filing cites customer concentration and demand, pricing pressure, product quality and launch timing, supply availability and costs, competition, intellectual-property matters, cybersecurity, currency, and tax risks. Ordinary-course legal matters were not expected by management to have a material adverse effect based on information available; indemnity-related legal accruals were not significant.
Most important facts for investors to verify
- Whether Audio demand and China-related disruptions continued to weaken, and whether growth in PD can offset that pressure.
- Whether the working-capital cash drain and elevated inventory convert into sales and operating cash flow.
- The final cost and timing of the MEMS microphone restructuring, including any additional fixed-asset charges.
- Debt covenant headroom and refinancing plans ahead of the January 2024 facility maturity.
- Progress and execution of the expanded share repurchase authorization, alongside capital-spending needs.