Knowles Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Knowles supplies audio and acoustic products and high-performance capacitors and RF solutions. Its reportable segments are Audio and Precision Devices (PD).
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $178.2 million | $233.0 million | $567.6 million | $633.8 million |
| GAAP gross profit / margin | $40.0 million / 22.4% | $96.9 million / 41.6% | $201.0 million / 35.4% | $258.6 million / 40.8% |
| Operating income (loss) | $(14.6) million | $34.6 million | $(207.9) million | $75.2 million |
| Net income (loss) | $2.7 million | $27.7 million | $(222.1) million | $57.8 million |
| Diluted EPS | $0.03 | $0.29 | $(2.42) | $0.61 |
| Operating cash flow | Not presented quarterly | $39.5 million | $116.6 million |
- Q3 non-GAAP gross margin was 38.5% versus 41.8%; adjusted EBIT was $28.2 million versus $52.6 million, with a 15.8% adjusted EBIT margin versus 22.6%. Non-GAAP net income was $23.3 million and non-GAAP diluted EPS was $0.25. These company-defined measures exclude specified items and are not GAAP results.
- Cash and cash equivalents were $41.5 million at September 30, down from $68.9 million at year-end 2021. Long-term revolver debt was $78.0 million, up from $70.0 million. The company reported compliance with credit covenants and no required principal payments before the facility’s January 2024 maturity.
- Nine-month investing cash outflow was $25.4 million, including $24.7 million of capital expenditures. Financing cash outflow was $40.1 million; cash declined by $27.4 million over the period.
- Current assets were $377.2 million and current liabilities were $131.3 million. Inventory increased to $194.6 million from $153.1 million at year-end 2021.
Changes and segment performance
- Q3 revenue fell 23.5% year over year. Audio revenue declined 36.0% to $113.8 million, while PD revenue grew 16.5% to $64.4 million.
- For the first nine months, Audio revenue fell 20.9% to $388.0 million; PD revenue increased 25.4% to $179.6 million, reflecting organic growth and the IMC acquisition.
- Management attributed weaker Audio sales chiefly to soft consumer-electronics demand, China COVID-related shutdowns, supply-chain inventory excess, lower mature-product pricing, and its move away from commoditized products. Q3 hearing-health demand also softened following customer demand pulled forward into the first half. PD growth reflected defense, medtech, and electric-vehicle demand in Q3, and broader defense, industrial, medtech, and communications growth year to date.
- Q3 GAAP results included $30.8 million of restructuring charges. Nine-month restructuring charges totaled $37.9 million. A $239.8 million goodwill impairment recorded in Q2, following reduced consumer-electronics demand and lower growth and margin expectations for the Mobile Consumer Electronics reporting unit, drove much of the nine-month GAAP loss. Goodwill declined to $702.1 million from $941.3 million at year-end 2021.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects 2022 capital expenditures of 4% to 5% of revenue and says it expects to remain in compliance with debt covenants over the next 12 months.
- Management described the restructuring as an effort to rightsize MEMS microphone capacity and costs and shift toward higher-value solutions. The filing estimates possible additional restructuring charges of up to $5.0 million for the Q3 action and up to $9.4 million during the remainder of the fiscal year for assets under review; the amounts are not yet reasonably estimable.
- Key stated risks include concentrated exposure to large Audio customers, demand and OEM launch variability, consumer-electronics weakness, China-related operating and supply-chain disruption, inventory and component availability, pricing pressure, execution of restructuring and diversification, currency movements, and potential further asset impairment if forecasts weaken.
- The company says ordinary-course legal proceedings are not expected, based on information currently available, to materially adversely affect its financial condition, results, or cash flow. It reported no material changes to previously disclosed risk factors and no material developments in legal proceedings.
Most important facts for investors to verify
- Whether consumer-electronics and MEMS microphone demand stabilizes, including customer inventory levels and the impact of China disruptions.
- Whether restructuring delivers sustainable cost and capacity benefits, and whether additional charges approach the disclosed estimates.
- Whether goodwill valuation assumptions remain supportable and whether weaker forecasts could prompt further impairment.
- Whether cash generation and working capital improve, particularly given higher inventory and lower year-to-date operating cash flow.
- Debt-facility covenant headroom and refinancing plans ahead of the January 2024 maturity; the filing states compliance but does not provide a clear covenant-headroom value.