Knowles Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Knowles supplies micro-acoustic and audio-processing products and precision devices. It reports Audio and Precision Devices (PD) segments; prior-period segment data was recast to the new structure.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $190.2m | $190.3m | $383.9m | $375.6m |
| Gross profit / margin | $71.7m / 37.7% | $72.9m / 38.3% | $139.3m / 36.3% | $139.7m / 37.2% |
| Operating loss | $16.4m | $1.8m | $13.8m | $7.7m |
| Continuing-operations loss | $30.3m | $6.8m | $35.0m | $19.3m |
| Net loss | $29.7m | $24.6m | $32.9m | $54.0m |
| Net loss per diluted share | $0.33 | $0.28 | $0.37 | $0.61 |
Cash flow: In the first half, operating cash flow was $21.4m, versus $10.2m a year earlier. Capital expenditures were $31.4m, and investing cash use was $33.8m. Cash decreased $17.6m to $48.6m.
Liquidity and debt: At June 30, cash was $48.6m and current assets and liabilities were $334.8m and $156.8m. Debt carrying value was $298.1m, including $13.3m current maturities, versus $298.2m at year-end 2016. Knowles reported compliance with credit-facility covenants and expected to remain compliant over the next 12 months.
Material changes and segment performance
- Q2 revenue was essentially flat year over year. First-half revenue grew 2.2%, with Audio up 1.5% and PD up 4.3%.
- Audio Q2 revenue fell 1.6% to $138.1m; segment EBIT was a $7.1m loss, including impairment charges. PD revenue rose 4.2% to $52.1m, and EBIT increased to $5.9m.
- Lower microphone and hearing-health selling prices pressured revenue and margins. Higher MEMS microphone shipments, including IoT-related demand, partly offset the pressure. PD benefited from defense timing-device shipments and the capacitor acquisition.
- Knowles recorded $21.3m of impairment charges in Q2 for long-lived assets in an Audio product line after revised plans indicated lower future demand and insufficient projected cash flows to recover carrying value.
- GAAP net loss improved year over year in both periods partly because the speaker and receiver product line, sold in July 2016, no longer generated the prior-year discontinued-operations loss. Continuing-operations losses worsened. Q2 non-GAAP diluted EPS was $0.13, unchanged year over year; first-half non-GAAP diluted EPS rose to $0.25 from $0.21. These are company-defined non-GAAP measures.
- Q2 restructuring was $2.2m net of a $0.9m reversal. First-half restructuring was $7.2m. Cost-reduction actions include transferring hearing-health manufacturing to a lower-cost Asian facility.
Outlook, risks and contingencies
- No revenue or earnings guidance is provided in the filing. Management expects 2017 capital expenditures of 6%–8% of revenue and says operating cash flow and access to capital should cover working-capital needs and capital expenditures for at least 12 months.
- The hearing-health manufacturing transfer was expected to be substantially complete by year-end 2017, with approximately $0.2m of additional related restructuring charges expected through Q4.
- Key risks identified include microphone price erosion and demand, customer concentration and product-launch timing, adoption of multi-microphone and intelligent-audio products, Audio capacity utilization, competition, foreign-exchange movements, supply and quality issues, and intellectual-property litigation.
- Malaysia tax holidays benefit results but are conditional and, unless extended or renegotiated, expire December 31, 2021. The company reported a $2.1m discrete tax expense in first-half 2017, including expense related to settlement of a 2013 pre-spin U.S. tax examination.
- Management stated that ordinary-course legal claims are not expected to have a material adverse effect, based on information available. The filing reports no material developments in previously disclosed risk factors.
Important facts for investors to verify
- Whether the impaired Audio product line’s lower-demand outlook and any further impairment risk are reflected in subsequent results.
- Whether Audio pricing and hearing-health demand stabilize, and whether microphone, IoT and multi-microphone growth offsets price erosion.
- Whether restructuring and production-transfer savings materialize as planned, and how much additional cost remains.
- Working-capital trends, particularly inventory growth, capital spending, cash balances and debt service; also monitor covenant headroom.
- The sustainability of non-GAAP earnings relative to GAAP losses and the continuing benefit and conditions of the Malaysian tax holidays.