Knowles Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Knowles supplies microphones, speakers, audio processing, capacitors and RF solutions through its Audio and Precision Devices segments.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $201.0 million | $163.1 million |
| Gross profit / margin | $78.0 million / 38.8% | $56.2 million / 34.5% |
| Operating earnings (loss) | $18.3 million | $(9.6) million |
| Continuing-operations earnings (loss) | $12.5 million | $(12.8) million |
| Net earnings (loss) | $12.5 million | $(9.1) million |
| Diluted EPS from continuing operations | $0.13 | $(0.14) |
| Operating cash flow | $39.7 million | $(1.5) million |
- Revenue rose 23.2%. Audio revenue grew 35.8% to $163.1 million; Precision Devices revenue declined 11.9% to $37.9 million.
- Management attributed the Audio recovery to higher MEMS microphone shipments in computing, IoT and mobile, and returned-to-pre-pandemic volumes in hearing health. Lower mature-product pricing partly offset volume growth. Precision Devices was affected by weaker defense and medtech demand, partly offset by electric-vehicle growth.
- Gross margin improved 4.3 percentage points, primarily on higher volume, productivity and capacity utilization, partly offset by pricing. Adjusted EBIT was $34.3 million, or 17.1% of revenue, versus $5.5 million, or 3.4%, a year earlier. Non-GAAP diluted EPS was $0.29 versus $0.03; these non-GAAP measures exclude specified items.
- Cash and equivalents were $181.6 million at quarter-end, up from $147.8 million at year-end. Current assets were $450.6 million and current liabilities $302.2 million. Capital expenditures were $5.2 million; investing cash outflow was $7.0 million.
Debt, liquidity and material changes
- Debt carrying value was $167.3 million, representing $172.5 million principal of 3.25% convertible senior notes due November 1, 2021. The notes were classified as current maturities. The company said it currently intended to settle principal in cash.
- No revolving-credit borrowings were outstanding. The secured revolving facility provides up to $400 million, subject to covenants. The facility has a January 2024 maturity, but a springing maturity may apply if the notes are not repaid, refinanced or converted by August 2, 2021, unless the specified liquidity condition is met. Knowles reported covenant compliance and expected to remain compliant over the next 12 months.
- Operating cash flow improved by $41.2 million year over year, reflecting better earnings and working-capital movements. Cash generated by operations and cash balances include $134.0 million held outside the United States; repatriation may incur taxes.
- The 2020 comparison included a $3.7 million discontinued-operations tax benefit from a refund; Q1 2021 had no discontinued-operations impact. The company recorded $0.2 million of restructuring charges in Q1 2021, versus $5.3 million in Q1 2020.
Outlook, risks and unusual items
- Knowles forecast 2021 capital expenditures of 5%–7% of revenue. The filing provides no specific revenue or earnings guidance.
- COVID-19 remained an uncertain risk to demand, supply chains, facility productivity and financial estimates. Management cited ongoing effects particularly in medtech and hearing health markets, and said the pandemic’s duration and future impact could not be reasonably estimated.
- Other highlighted risks include dependence on a limited number of large OEM customers, customer demand and product-launch timing, pricing pressure, raw-material availability and costs, competition, product quality, and execution of market and customer diversification.
- Malaysia tax holidays benefited Q1 continuing-operations earnings by approximately $2.4 million, or $0.03 per share, and were scheduled to expire December 31, 2021 unless extended or renegotiated. Eligibility depends on meeting conditions.
- Stock-based compensation expense increased to $11.1 million from $3.5 million. PSU award modifications related to pandemic effects produced $3.9 million of incremental expense recognized in Q1; additional modification-related expense is expected in future periods.
- A California wage-and-hour representative action reached a class-wide settlement described as immaterial, subject to court approval. Other proceedings and intellectual-property claims remain potential contingencies; the company said recorded legal accruals for customer-specific IP indemnities were not significant.
Investor verification points
- Confirm the plan and funding for the $172.5 million note principal due in November 2021 and the facility’s springing-maturity and liquidity requirements.
- Track whether Audio shipment recovery continues and whether mature-product pricing pressure offsets volume and productivity gains; monitor Precision Devices demand in defense and medtech.
- Assess the sustainability of operating cash flow and inventory growth, and the cash available after planned capital expenditures.
- Verify conditions and timing for the Malaysian tax holiday, and monitor the associated effect on the effective tax rate after its scheduled expiry.
- Review court approval and final terms of the California settlement, and the continuing effects of PSU modifications and elevated stock-based compensation.