Knowles Corporation (KN) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Knowles supplies micro-acoustic, audio-processing and precision-device products through its Audio and Precision Devices (PD) segments.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $163.1 million | $179.8 million |
| Gross profit / margin | $56.2 million / 34.5% | $68.5 million / 38.1% |
| Operating earnings (loss) | $(9.6) million | $4.4 million |
| Continuing-operations loss | $(12.8) million; $(0.14) per diluted share | $(2.7) million; $(0.03) per diluted share |
| Net loss | $(9.1) million; $(0.10) per diluted share | $(2.7) million; $(0.03) per diluted share |
| Cash from operating activities | $(1.5) million | $(11.2) million |
| Cash from investing activities | $(7.8) million | $(26.5) million |
| Cash from financing activities | $78.9 million | $5.3 million |
- Revenue declined 9.3%. Audio revenue fell 13.7% to $120.1 million; PD revenue increased 5.7% to $43.0 million.
- Adjusted EBIT, a non-GAAP measure, fell to $5.5 million from $16.7 million; adjusted EBIT margin was 3.4%, versus 9.3%. Non-GAAP diluted EPS was $0.03, versus $0.13.
- At March 31, cash was $147.8 million, versus $78.4 million at year-end 2019. Total debt, net of issuance costs and discount, was $258.8 million, up from $156.8 million; the increase included $100 million borrowed under the revolving facility. Current assets were $443.0 million and current liabilities $132.9 million.
- Capital expenditures were $7.8 million. The company reported a $3.7 million discontinued-operations tax benefit related to a refund for the previously sold Timing Device Business.
Material changes and management commentary
- Management attributed the revenue and profit decline principally to COVID-19-related lower Audio demand, particularly in China, and manufacturing disruption in Asia that reduced productivity and capacity utilization. Lower pricing on mature Audio products also pressured results.
- Audio reported a $6.1 million EBIT loss, versus $11.8 million of earnings a year earlier. PD EBIT was $7.1 million, versus $7.5 million; higher shipments in defense, automotive and medtech were partly offset by weaker communications shipments.
- Restructuring charges were $5.3 million, compared with $2.3 million. The company said Audio cost reductions would continue through the year, with related charges expected primarily in Q2.
- The company repurchased 996,109 shares for $15.0 million under a newly authorized program of up to $100 million, then temporarily suspended repurchases due to COVID-19.
Outlook, risks and contingencies
- Management expected full-year 2020 revenue, net income and cash flow to be below 2019, but could not reasonably estimate the pandemic’s duration or quantify its full impact. No specific revenue or earnings guidance was provided.
- 2020 capital expenditures were expected to be 5%–6% of revenue. Management believed operating cash flow and capital-market access would provide adequate resources, while noting heightened liquidity uncertainty from the pandemic.
- Risks include further demand declines, customer requests for payment deferrals or price concessions, delivery delays, government restrictions and reduced factory capacity, supply-chain disruption, and additional operating costs. Customer concentration, pricing pressure, product launches, competition, product quality and foreign-exchange movements are also identified risks.
- Debt includes $172.5 million principal of 3.25% convertible senior notes due November 2021 and $100 million drawn on a $400 million revolving facility due October 2022. The company reported compliance with debt covenants at quarter-end and expected continued compliance over the next twelve months.
- Management reported no material adverse expectation from ordinary-course legal proceedings, taking account of accruals and insurance; the filing notes intellectual-property disputes and related legal costs can be substantial.
Key facts for investors to verify
- Whether Audio demand, Asian factory productivity and pricing recover, and how these affect margins and cash generation.
- Whether the company’s full-year expectation of results below 2019 changes, and whether COVID-19 creates impairment or working-capital risks.
- Debt maturities, revolving-credit availability, covenant headroom and the company’s ability to refinance the 2021 notes.
- Timing and amount of further restructuring charges and the realization of expected cost savings.
- Whether share repurchases resume; the program is discretionary and was temporarily suspended.