Knowles Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Knowles supplies micro-acoustic and audio products, capacitors, and RF solutions through its Audio and Precision Devices (PD) segments. Results include Integrated Microwave Corporation (IMC) from its May 3, 2021 acquisition.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $199.8m | $152.2m | $400.8m | $315.3m |
| Gross profit / margin | $83.7m / 41.9% | $47.8m / 31.4% | $161.7m / 40.3% | $104.0m / 33.0% |
| Operating earnings (loss) | $22.3m | $(12.4)m | $40.6m | $(22.0)m |
| Continuing operations earnings (loss) | $17.4m | $(19.5)m | $29.9m | $(32.3)m |
| Net earnings (loss) | $17.6m | $(19.5)m | $30.1m | $(28.6)m |
| Diluted EPS, continuing operations | $0.18 | $(0.21) | $0.31 | $(0.35) |
| Operating cash flow | Not separately provided for quarter | $61.0m | $25.0m |
- Q2 revenue rose 31.3%; Audio revenue increased 43.3% to $149.8m, while PD revenue increased 4.8% to $50.0m. For the first half, Audio revenue grew 39.3% to $312.9m; PD declined 3.1% to $87.9m.
- Management attributed improvement chiefly to higher volumes as markets recovered from pandemic disruption, stronger hearing-health demand, and MEMS microphone shipments for IoT, true wireless stereo, and computing. Work-from-home and remote-learning trends supported computing demand. Mature-product price erosion partly offset growth.
- Q2 adjusted EBIT was $35.8m (17.9% margin), versus $0.6m (0.4%) a year earlier. First-half adjusted EBIT was $70.1m (17.5%), versus $6.1m (1.9%). These are non-GAAP measures; consult the filing’s reconciliation.
Cash, debt, and liquidity
- Cash and equivalents were $94.2m at June 30, 2021, down from $147.8m at year-end 2020. Cash held outside the U.S. was $81.1m.
- First-half cash flow: $61.0m provided by operations, $97.3m used in investing, and $17.3m used in financing; cash declined $53.6m. Investing outflows included $78.6m for the acquisition, net of cash acquired, and $16.0m of capital expenditures.
- Debt carrying value was $169.5m, all current; principal of $172.5m was due November 1, 2021 on 3.25% convertible senior notes. The company said it currently intended to repay principal in cash at maturity. It had no revolving-credit borrowings and a $400m revolving facility.
- The credit facility included a springing maturity provision tied to the notes and a $150m minimum-liquidity condition after August 2, 2021 if the notes were not repaid, refinanced, or converted. Knowles reported covenant compliance at quarter-end and expected to remain compliant over the next twelve months.
Material changes, outlook, and risks
- IMC was acquired for $80.8m; its preliminary purchase-price allocation included $31.4m goodwill. The allocation remained subject to change. IMC contributed $1.4m revenue and a $1.5m pretax loss from acquisition through June 30.
- Knowles expected 2021 capital expenditures of 5%–7% of revenue. The filing gives no specific revenue or earnings guidance.
- The Malaysia tax holidays benefiting earnings were scheduled to expire December 31, 2021 unless extended or renegotiated, and depend on meeting conditions. The reported benefit was approximately $3.0m for Q2 and $5.4m for the first half.
- COVID-19 remained an uncertain risk to demand, operations, and supply chains. Knowles disclosed that the global semiconductor shortage had an immaterial impact on its MEMS microphone business to date, but could worsen and cause production delays. Other cited risks include dependence on large OEM customers and specialized suppliers, pricing pressure, raw-material costs, product quality, and customer product-launch timing.
- Restructuring charges were $0.1m in Q2 and $0.3m for the first half of 2021, compared with $7.4m and $12.7m, respectively, in 2020. Q2 and first-half results also reflected higher stock-based compensation; first-half expense was $18.5m versus $7.6m.
- A California wage-and-hour representative action had a proposed class-wide settlement described as immaterial, subject to court approval. The company said other ordinary-course proceedings were not expected to materially affect its financial condition, results, or cash flows.
Key facts for investors to verify
- How the $172.5m notes were repaid, refinanced, or converted and the resulting cash and liquidity position after maturity.
- Whether the Malaysia tax holiday was extended or renegotiated, and the effect on the effective tax rate.
- Whether volume recovery continued and how mature-product pricing, supply constraints, and customer concentration affected subsequent results.
- IMC’s finalized purchase-price allocation, subsequent performance, and expected contribution to PD.
- Actual 2021 capital expenditures versus the stated 5%–7% of revenue expectation, and progress on share repurchases ($20.0m in the first half).