Knowles Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the same period in 2022. Knowles supplies microphones, audio solutions, capacitors and RF products across consumer electronics, medtech, defense, EV, industrial and communications markets. Its reportable segments are Precision Devices (PD), MedTech & Specialty Audio (MSA), and Consumer MEMS Microphones (CMM). Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $144.3 | $201.4 |
| Gross profit / margin | $53.8 / 37.3% | $83.3 / 41.4% |
| Operating income (loss), GAAP | $(1.0) | $21.3 |
| Net income (loss) | $(5.2) | $18.1 |
| Diluted EPS | $(0.06) | $0.19 |
| Adjusted EBIT / margin (non-GAAP) | $8.1 / 5.6% | $39.4 / 19.6% |
| Non-GAAP net income / diluted EPS | $5.1 / $0.05 | $33.6 / $0.35 |
| Cash from operating activities | $21.9 | $0.8 |
| Capital expenditures | $3.9 | $6.8 |
Revenue declined 28.4% year over year; GAAP gross profit fell 35.4%. Lower volume, weaker factory utilization, product mix and mature mobile-product pricing pressured margins. Cost reductions, prior restructuring benefits, favorable currency movements and lower precious-metal costs partly offset those pressures. Net loss also reflected $2.3 of other expense, primarily unfavorable foreign exchange effects, versus $0.5 of other income a year earlier. Interest expense was $0.8 in both periods.
Segments and material changes
- CMM: Revenue was $45.1, down 47.7%; EBIT was a loss of $8.2 versus income of $0.5. Weak consumer-electronics demand, excess supply-chain inventory, post-Q4 customer shipment timing and lower mature-product pricing were key factors.
- MSA: Revenue was $45.5, down 23.5%; EBIT was $11.4 versus $21.7. Customers reduced inventory in hearing health and premium audio; lower utilization, product mix and inflation also weighed on margins.
- PD: Revenue was $53.7, down 3.6%; EBIT was $10.7 versus $12.3. Softer industrial and communications demand was partly offset by stronger EV and medtech demand.
Asia revenue fell to $80.0 from $128.9, the largest regional decline. Restructuring charges were $1.1, compared with $6.6 in Q1 2022; current-quarter actions primarily rationalized the CMM product line.
Cash, debt and liquidity
- Cash was $52.0 at March 31, 2023, including $44.9 held by non-U.S. operations. Long-term debt was $45.0; the filing reports no required principal payments before the February 2028 maturity.
- Knowles amended and extended its senior secured revolving facility in February 2023. The facility provides up to $400.0; $45.0 was drawn at quarter-end. The company reported compliance with its financial covenants and expects to remain compliant over the next 12 months.
- Operating cash flow improved to $21.9, mainly from working-capital movements and incentive compensation payments, partly offset by lower earnings. Receivables decreased, while inventory rose $39.1 from year-end to $208.6, including inventory related to last-time-buy requirements during product-platform transitions.
- Financing cash use was $14.3, including $7.5 of share repurchases and $6.0 of taxes on equity-award settlements. The company repurchased 433,759 shares during the quarter; $137.7 remained available under the program.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Knowles expects 2023 capital expenditures to be 4%–5% of revenue.
- Management cited weak consumer-electronics demand, customer inventory corrections, customer concentration—particularly among CMM’s largest customers—price erosion, product-launch timing, and the risk of building inventory ahead of anticipated orders. Other disclosed risks include supply availability and costs, competition, currency and geopolitical changes, cybersecurity, and product quality.
- The Malaysian tax holiday ended after the company did not meet all conditions; Knowles is appealing and discussing revised conditions with Malaysian tax authorities. No material legal-proceeding developments were reported; management did not expect existing claims to materially adversely affect cash flow, results or financial condition.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether consumer-electronics demand and supply-chain inventory levels recover, and how that affects CMM volumes, utilization and pricing.
- Whether inventory growth and last-time-buy purchases convert into customer shipments without material excess or obsolescence.
- Progress on margin recovery, especially in CMM and MSA, and the continuing impact of cost reductions and restructuring.
- Compliance with credit-facility covenants and the effect of higher borrowing rates; the reported weighted-average borrowing rate was 6.01% in Q1 2023 versus 2.12% a year earlier.
- Outcome of the Malaysian tax-holiday appeal and the resulting tax rate and cash-tax effects.