Knowles Corp annual report, FY2021

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Knowles Corporation — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; filed February 9, 2022. This is an annual report, not a standalone Q4 results filing. Knowles sells audio components and solutions through its Audio segment and high-performance capacitors and RF products through Precision Devices (PD).

Financial results and liquidity

  • Revenue: $868.1 million, up 13.6% from $764.3 million in 2020. Audio revenue rose 12.8% to $667.0 million; PD revenue rose 16.2% to $201.1 million.
  • Profit and margins: Gross profit was $359.5 million, with a 41.4% gross margin, versus $271.2 million and 35.5% in 2020. Operating earnings were $115.8 million. Earnings from continuing operations were $150.2 million, or $1.59 diluted per share, compared with $2.9 million, or $0.03 per share, in 2020.
  • Tax and adjusted results: The 2021 tax benefit was $45.6 million, including a $59.1 million benefit from releasing a significant portion of the U.S. deferred-tax valuation allowance. Non-GAAP diluted EPS was $1.53, versus $0.67 in 2020; this non-GAAP measure excludes specified items and should be considered alongside GAAP results.
  • Cash flow: Operating cash flow was $182.1 million, compared with $128.1 million. Capital expenditures were $48.6 million; company-defined free cash flow was $133.5 million, up from $96.2 million.
  • Cash and debt: Cash and equivalents were $68.9 million at year-end, down from $147.8 million. Debt was $70.0 million, all drawn under the revolving facility; the $172.5 million convertible notes were repaid at maturity in November 2021. The $400 million revolver matures January 2, 2024, and the company reported compliance with its financial covenants.
  • Other balance-sheet items: Current assets were $380.3 million and current liabilities $166.2 million. Inventory increased to $153.1 million from $130.1 million. Goodwill was $941.3 million; total assets were $1.73 billion.

Changes versus 2020

  • Revenue recovery reflected higher Audio shipments, especially in hearing health, IoT, and computing, and growth in PD, including the contribution from the IMC acquisition. Customer demand had returned to pre-pandemic levels, according to management.
  • Profitability improved substantially, with higher volumes, factory utilization, cost reductions, and favorable mix supporting gross margin. Mature-product price declines, precious-metal costs, foreign exchange, and supply constraints were offsets.
  • PD’s year-over-year revenue growth included the acquisition of Integrated Microwave Corporation for $80.7 million, completed May 3, 2021. IMC contributed $11.2 million in revenue and $0.3 million in pretax earnings from acquisition through year-end.
  • Cash used in financing rose to $131.4 million, chiefly due to repayment of the convertible notes and $44.5 million of share repurchases. The company repurchased 2.14 million shares in 2021.

Outlook, commentary, and risks

  • Management said raw-material shortages affecting MEMS microphones and capacitor products were expected to continue impacting production during 2022; the duration and full impact were uncertain. Demand exceeded available capacity, and pandemic-related workforce and supply-chain disruptions remained risks.
  • Management expected 2022 capital expenditures of 5%–6% of revenue, funded from cash and operating cash flow. The filing does not provide a revenue or earnings forecast.
  • Key exposures include customer concentration (Apple represented 16% of consolidated revenue in 2021; the top five Audio customers represented about 50% of Audio revenue), dependence on MEMS microphones, mobile-handset cyclicality, price erosion, specialized and sometimes sole-source suppliers, and manufacturing concentration in Asia.
  • Other material risks include COVID-19 disruptions, foreign-exchange and commodity-price movements, trade restrictions, product defects, cybersecurity and intellectual-property matters, and debt covenant or refinancing risks. A sustained 10% weakening of the U.S. dollar was estimated to reduce annual pretax earnings by about $20.7 million, excluding hedging effects.
  • Unusual items include the $59.1 million U.S. valuation-allowance release and $4.0 million of impairment charges for Intelligent Audio facilities. Knowles also committed to additional Audio restructuring actions in Q1 2022. Goodwill impairment testing found reporting-unit fair values at least 35% above carrying values; no goodwill impairment was recorded.
  • The board had authorized a $100 million repurchase program; $39.2 million remained available at December 31, 2021. Knowles said it did not anticipate cash dividends in the immediate future.

Important facts for investors to verify

  • Whether supply constraints, capacity limits, and pandemic-related disruptions affected 2022 production, shipments, and demand as anticipated.
  • How much of 2021 earnings growth reflected recurring operating performance versus the nonrecurring tax valuation-allowance benefit and other adjustments; compare GAAP and non-GAAP reconciliations.
  • Whether Audio customer concentration, Apple sales, and mature-product pricing changed, and whether product mix continued to offset price erosion.
  • Cash conversion, inventory and receivables growth, capital spending, and the company’s use of the revolver and remaining repurchase authorization.
  • Progress integrating IMC, realization of expected benefits, and finalization of its preliminary purchase-price allocation.
  • Performance of the large goodwill balance—particularly the Mobile Consumer Electronics reporting unit—and the assumptions behind impairment tests.