Knowles Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Knowles supplies audio and precision-device components, principally through its Audio and Precision Devices (PD) segments.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $764.3 million | $854.8 million |
| Gross profit / margin | $271.2 million / 35.5% | $328.0 million / 38.4% |
| Operating earnings | $29.2 million | $81.2 million |
| Continuing-operations earnings / diluted EPS | $2.9 million / $0.03 | $49.7 million / $0.53 |
| Net earnings / diluted EPS | $6.6 million / $0.07 | $49.1 million / $0.53 |
| Operating cash flow | $128.1 million | $123.9 million |
| Capital expenditures | $31.9 million | $41.2 million |
| Free cash flow (non-GAAP) | $96.2 million | $82.7 million |
FY2020 adjusted EBIT, a non-GAAP measure, was $79.3 million (10.4% margin), down from $126.9 million (14.8%). Interest expense, net, was $16.4 million, up from $14.5 million. The effective tax rate was 74.3%, versus 25.0%, reflecting the mix of earnings and losses across jurisdictions and valuation allowances; Malaysian tax holidays partly offset tax expense.
At year-end, cash and cash equivalents were $147.8 million, total assets $1.655 billion, and stockholders’ equity $1.304 billion. Debt carrying value was $165.1 million, classified as current; total third-party debt and finance lease obligations were $173.2 million. The $172.5 million, 3.25% convertible notes mature in November 2021. No revolving-credit borrowings were outstanding at year-end; the new facility provides up to $400 million. The company reported compliance with its debt covenants.
Fourth quarter: Revenue was $243.2 million, gross profit $92.0 million, and continuing-operations earnings $29.6 million, or $0.32 per diluted share.
Material changes and segment performance
- Revenue fell 10.6% year over year. Audio revenue declined 13.4% to $591.2 million, while PD revenue increased 0.6% to $173.1 million.
- Audio’s decline reflected COVID-related lower first-half demand, particularly for hearing-health products and MEMS microphones in ear and IoT markets, plus lower pricing on mature products. Computing demand, supported by remote work and learning, partially offset the decline.
- PD benefited from demand in electric vehicles, industrial, and defense markets, partly offset by weaker medtech demand as elective procedures were reduced.
- Audio EBIT margin fell to 7.6% from 15.7%; PD EBIT margin improved to 18.3% from 17.7%. Consolidated gross margin contracted 2.9 percentage points.
- Knowles recorded $7.6 million of impairment charges and $12.3 million of restructuring charges in 2020, primarily associated with Intelligent Audio and Audio workforce actions. The company also reported $3.7 million of discontinued-operations earnings from a tax refund related to the divested Timing Device Business.
- Cash from operations increased modestly, while free cash flow rose mainly because capital spending was lower. Cash increased by $69.4 million during the year.
Outlook, risks, and unusual items
Management did not provide specific revenue or earnings guidance in the supplied filing text. It expects 2021 capital expenditures of 5%–7% of revenue and states that operating cash flow and capital-market access are expected to fund working capital, capital spending, strategic investments, and repurchases. Management cautions that the duration and effects of COVID-19 remain uncertain.
- COVID-19: Disruption affected demand, factory productivity, and costs; temporary manufacturing-capacity reductions occurred in China, Malaysia, and the Philippines. Future demand and liquidity effects remain uncertain.
- Concentration: Apple represented 23% of consolidated revenue and approximately 29% of Audio revenue in 2020. MEMS microphones represented approximately 59% of consolidated revenue; mobile handsets approximately 28%.
- Debt maturity and covenants: Notes mature in November 2021. The revolving facility includes a springing-maturity provision tied to the notes and a $150 million liquidity condition after August 2, 2021, as described in the filing.
- Other exposures: Risks include competition and audio price erosion, specialized supplier dependence, Asian manufacturing and trade-policy exposure, foreign exchange and commodity fluctuations, product defects, and goodwill impairment. A sustained 10% weakening of the U.S. dollar was estimated to reduce annual pretax operating results by approximately $17.2 million.
- Tax and assets: Malaysian tax holidays were scheduled to expire December 31, 2021, unless extended or renegotiated. The $910 million goodwill balance had no impairment in 2020; reporting-unit fair values exceeded carrying values by at least 25%, but the MCE goodwill test was identified as a critical audit matter. U.S. deferred-tax valuation allowances may change materially in 2021.
- Legal: The company disclosed a California wage-and-hour representative action and intends to defend it; management did not expect a material adverse effect. Other proceedings were not expected to be material based on the company’s assessment.
The company repurchased 1,078,363 shares for $16.2 million in 2020, temporarily suspending and then resuming repurchases during the pandemic. It has not paid cash dividends and did not anticipate doing so in the immediate future.
Important facts for investors to verify
- Whether Audio demand, especially MEMS microphone sales and customer shipments, recovered after the first-half 2020 disruption—and how customer and handset concentration affects results.
- How the 2021 convertible-note maturity was addressed and whether the new credit facility’s springing-maturity and liquidity provisions remain relevant.
- Whether gross margin and Audio profitability improve, and whether the stated cost reductions offset pricing pressure and operating disruption.
- Whether the Malaysian tax holidays were extended and whether U.S. deferred-tax valuation allowances or other tax estimates changed.
- Whether Intelligent Audio facility subleasing, restructuring, or further impairment charges create additional costs.
- Reconcile adjusted, non-GAAP performance measures to GAAP results; FY2020 GAAP continuing-operations earnings were $2.9 million versus non-GAAP net earnings of $63.2 million.