Knowles Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018. Knowles supplies micro-acoustic, audio-processing, capacitor, and mmWave RF products across consumer, communications, medical, defense, automotive, and industrial markets.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $179.8 million | $178.5 million |
| Gross profit / margin | $68.5 million / 38.1% | $65.3 million / 36.6% |
| Operating earnings | $4.4 million | $4.3 million |
| Continuing-operations EBIT | $3.4 million | $4.4 million |
| Net loss | $2.7 million | $0.3 million |
| Diluted loss per share | $0.03 | Nil, as reported |
| Cash used in operating activities | $11.2 million | $5.5 million |
| Cash and cash equivalents at period end | $41.3 million | $62.7 million |
| Debt, net carrying amount | $170.0 million | $158.1 million at Dec. 31, 2018 |
Q1 2019 investing activities used $26.5 million, including $15.1 million of capital expenditures and the DITF acquisition. Financing activities provided $5.3 million, including $10.0 million of revolver borrowings. The company had $19.0 million drawn on its $400.0 million revolving facility and reported compliance with its debt covenants. Current assets were $344.9 million and current liabilities were $127.4 million.
Performance changes and business drivers
- Revenue grew 0.7% year over year. Audio revenue fell 5.0% to $139.1 million, reflecting lower shipments to major customers and lower pricing on mature products; growth with Chinese OEMs and in Ear and IoT applications partly offset the declines.
- Precision Devices revenue increased 26.8% to $40.7 million, driven by higher defense and telecommunications shipments and the January 2019 DITF acquisition. DITF contributed $1.8 million in revenue and a $0.2 million pretax loss through quarter-end.
- Gross margin improved to 38.1%, primarily from factory productivity, favorable foreign exchange, and higher volume, partly offset by lower mature-product pricing and higher PD personnel costs.
- Continuing-operations loss widened to $2.7 million, mainly because the income-tax provision rose to $2.6 million despite pretax results near breakeven. The reported effective tax rate was unusually high for that reason and the mix of taxable income and losses across jurisdictions.
- Management’s non-GAAP measures showed adjusted EBIT of $16.7 million versus $14.7 million and non-GAAP diluted EPS of $0.13 versus $0.11. These company-defined measures exclude specified costs and adjustments and are not GAAP results.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided in the filing. Knowles expects 2019 capital expenditures of 6.0%–7.0% of revenue and said operating cash flow and capital-market access should support working capital, capital spending, and strategic investments.
- Operating cash use increased year over year, primarily because of higher payments for annual incentive compensation. Inventory rose to $159.3 million from $140.1 million at year-end.
- Restructuring charges totaled $2.3 million, mainly for Audio workforce rationalization and transfer of certain capacitor manufacturing operations. Selling and administrative costs also included professional fees related to shareholder activism and DITF.
- Malaysia tax holidays provided an estimated $3.4 million benefit in the quarter and run through December 31, 2021, subject to conditions. Failure to meet those conditions could materially affect the tax rate.
- Knowles identified risks including demand changes at large OEM customers, handset inventory corrections, price erosion, customer concentration, product quality and launch execution, China’s economic slowdown, trade tensions and tariffs, and foreign-exchange exposure. It reported no material change to previously disclosed risk factors.
- The company adopted lease accounting guidance on January 1, 2019, recording about $40 million of operating lease assets and liabilities; management said the adoption did not materially affect earnings or cash flows. Legal proceedings and claims arise in the ordinary course; management did not expect them to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether Audio demand at major customers stabilizes and whether growth in Ear, IoT, and Chinese OEM shipments offsets continued mature-product pricing pressure.
- Whether Precision Devices growth and the DITF acquisition translate into sustained earnings and cash contribution.
- Whether inventory and operating cash flow improve after the quarter’s working-capital and incentive-payment outflows.
- Whether Knowles continues to meet conditions for its Malaysian tax holidays and how the tax provision develops.
- Debt repayment and covenant capacity ahead of the $172.5 million principal amount of convertible notes due in November 2021; the filing reports covenant compliance at March 31, 2019.