Knowles Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Knowles supplies microphones, audio products, capacitors and RF solutions across consumer electronics, medtech, defense, industrial, communications and other markets. Results are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $175.1 million | $178.2 million | $492.4 million | $567.6 million |
| Gross profit / margin | $77.5 million / 44.3% | $40.0 million / 22.4% | $205.0 million / 41.6% | $201.0 million / 35.4% |
| Operating earnings (loss) | $21.6 million | ($14.6) million | $37.5 million | ($207.9) million |
| Net earnings (loss) | $16.6 million | $2.7 million | $25.0 million | ($222.1) million |
| Diluted EPS | $0.18 | $0.03 | $0.27 | ($2.42) |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $62.3 million | $39.5 million |
- Nine-month non-GAAP net earnings were $56.3 million versus $88.6 million; non-GAAP diluted EPS was $0.60 versus $0.93. These company-defined non-GAAP measures exclude specified items.
- Nine-month adjusted EBIT was $72.6 million, down from $105.2 million; adjusted EBIT margin was 14.7%, compared with 18.5%.
- Cash and cash equivalents were $75.1 million at September 30, 2023, including $67.0 million held outside the U.S. Current assets were $387.8 million and current liabilities $107.0 million.
- Long-term debt was $45.0 million, unchanged from year-end 2022. The $400 million revolving facility matures in February 2028; the company reported compliance with its financial covenants and expected to remain compliant over the next 12 months.
- For the nine months, investing activities provided $0.3 million, including proceeds from asset sales, while financing activities used $35.3 million, mainly for share repurchases and tax payments on equity awards. Cash increased by $26.9 million.
Material changes and operating trends
- Q3 revenue declined 1.7% year over year; nine-month revenue declined 13.2%. The nine-month decline reflected weaker demand and excess channel inventory, particularly in consumer electronics, plus lower shipments in Precision Devices and customer inventory reductions in MedTech & Specialty Audio.
- Q3 segment revenue and EBIT: Precision Devices revenue was $50.2 million, down 22.0%, and EBIT was $6.1 million versus $16.2 million. MedTech & Specialty Audio revenue rose 20.2% to $56.5 million and EBIT rose to $22.2 million from $15.4 million. Consumer MEMS Microphones revenue rose 2.4% to $68.4 million and EBIT was $11.1 million versus a $32.3 million loss.
- Q3 gross margin improvement reflected lower restructuring charges, cost reductions, favorable mix and foreign exchange, and a $5.2 million gain on sale of equipment. The nine-month results included a $10.0 million asset-sale gain. Lower factory utilization and mature-product pricing were offsets.
- 2022 comparisons were affected by substantial charges: nine-month 2022 included a $239.8 million goodwill impairment and significant restructuring charges. No impairment charge was recorded in the first nine months of 2023. The 2022 impairment related to reduced forecasts for the consumer MEMS business.
- At September 30, treasury shares were 6.98 million versus 5.35 million at December 31, 2022. The company repurchased 1.63 million shares for $27.5 million during the first nine months of 2023.
Outlook, commentary and risks
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expected 2023 capital expenditures to be 2%–3% of revenue and said operating cash flow and available financing should fund working capital, capital expenditures, strategic investments and repurchases.
- On September 18, 2023, Knowles announced a strategic alternatives review for Consumer MEMS Microphones (CMM). There was no timetable, and the company gave no assurance that the review would result in a transaction or other outcome.
- After quarter-end, on November 1, 2023, Knowles completed its acquisition of Cornell Dubilier for approximately $263 million: $140 million cash and an approximately $123 million interest-free seller note, with $50 million due in one year and $73 million in two years. The cash portion was funded with cash on hand and revolver borrowings. Purchase-price allocation remained in progress.
- Management cited risks including dependence on major customers, consumer microphone demand, excess inventory, price erosion, product quality, OEM launch timing, supply availability and costs, competition, foreign exchange, geopolitical and trade uncertainty, cybersecurity, acquisition integration and potential impairment of long-lived assets or goodwill.
- Knowles said ordinary-course legal matters were not expected, individually or collectively, to materially adversely affect cash flow, results or financial condition. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the CMM strategic review results in a sale, restructuring or other change, and how any outcome affects reported segments and results.
- The acquisition’s final purchase-price allocation, post-close cash and revolver borrowings, seller-note repayment sources, and contribution to Precision Devices.
- Whether demand, channel inventory and factory utilization improve across Precision Devices and CMM, and whether pricing pressure persists.
- How much of reported profit and margin improvement depends on asset-sale gains, restructuring comparisons and other adjustments; compare GAAP results with non-GAAP measures.
- Whether liquidity and covenant headroom remain adequate following the acquisition, and whether foreign-held cash can be repatriated without material tax cost.