Knowles Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Knowles supplies micro-acoustic products and specialty components through Mobile Consumer Electronics (MCE) and Specialty Components (SC). Prior-year comparisons include periods before the February 2014 spin-off from Dover, when certain corporate costs were allocated by Dover.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $240.9m | $281.0m | $479.5m | $554.4m |
| Gross profit / margin | $56.6m / 23.5% | $33.8m / 12.0% | $110.4m / 23.0% | $116.9m / 21.1% |
| Operating loss | $(12.9)m | $(44.2)m | $(24.7)m | $(33.0)m |
| Net loss | $(16.1)m | $(78.9)m | $(31.9)m | $(71.3)m |
| GAAP diluted loss per share | $(0.19) | $(0.93) | $(0.37) | $(0.84) |
| Adjusted EBIT / margin | $12.0m / 5.0% | $21.5m / 7.7% | $20.6m / 4.3% | $53.6m / 9.7% |
Q2 non-GAAP net earnings were $7.3m ($0.08 per diluted share), versus $22.2m ($0.26) a year earlier. For the first half, non-GAAP net earnings were $12.2m ($0.14 per diluted share), versus $49.7m ($0.58). These are company-defined non-GAAP measures and should be considered alongside GAAP results.
- Segments: Q2 MCE revenue declined 20.6% to $132.3m; its adjusted EBIT was a $2.4m loss. SC revenue fell 5.0% to $108.6m; adjusted EBIT was $23.9m, with a 22.0% margin. First-half revenue fell 19.3% in MCE and 5.0% in SC.
- Cash flow: First-half operating cash flow was $24.3m, down from $64.8m. Investing outflow was $39.7m; financing outflow was $2.5m. Cash declined $18.2m to $37.0m. Capital expenditure cash outflow was $38.7m.
- Liquidity and debt: At June 30, cash was $37.0m and current assets/current liabilities were $434.0m/$261.6m. Debt totaled $398.5m, including $106.0m drawn on the $350m revolving facility; $22.5m was current. The company reported compliance with debt covenants and expected adequate resources for at least 12 months.
Changes, outlook and notable items
- Revenue declined 14.3% in Q2 and 13.5% in the first half. Management attributed weakness mainly to lower MCE shipments and pricing, with reduced shipments concentrated among three customers. Causes included a product-quality-related shipment hold at a key OEM, softness during another customer’s operating-system transition, and lower handset-market share at a Korean OEM. Shipments at the key OEM had resumed and share recovery began late in Q1.
- SC weakness reflected a pause in China LTE infrastructure build-outs, lower pricing and unfavorable currency translation. Chinese OEM growth, product mix, productivity improvements and Vienna restructuring savings partly offset pressure.
- GAAP gross profit improved in Q2, chiefly because prior-year restructuring and related charges were much higher. On a non-GAAP basis, gross profit fell 20.0% in Q2 and 27.2% for the first half; adjusted EBIT and margins also declined, reflecting lower shipments and selling prices.
- First-half operating cash flow fell substantially. Management cited lower revenue and changes in operating liabilities, particularly other accrued expenses. Cash balances were predominantly outside the U.S. ($35.7m of $37.0m).
- Management expected 2015 capital expenditures of $70m–$80m. No specific revenue or earnings guidance was provided in the filing.
- On July 1, 2015, Knowles completed its acquisition of Audience for approximately $93m net of acquired cash: $61.6m cash and 3.2m Knowles shares, plus assumed unvested awards. The cash portion was funded with cash on hand and revolving-credit borrowings. The company expected Audience to join MCE and said it expected acquisition-related restructuring and transaction expenses in Q3. The acquisition was not included in June 30 balance-sheet debt and cash figures.
- Unusual items included $3.0m of fixed-asset impairment at the Beijing facility, $2.6m of first-half Audience transaction expenses, and a $2.0m U.S. deferred-tax valuation allowance. 2014 comparisons included substantial Vienna restructuring and related charges and unusual tax expense.
- Risk matters include customer concentration, product-quality and customer-qualification issues, handset demand and pricing, foreign exchange, debt and refinancing, goodwill impairment, and execution/integration of Audience. Audience-related shareholder litigation settlements were subject to court approval; an Audience IPO-related class action had an agreement in principle to settle, also subject to court approval. The company said ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification points
- Check whether MCE shipment levels, customer share and mature-product pricing stabilize, and whether adjusted profitability recovers.
- Track operating cash flow, working capital, capital spending and cash availability given the largely non-U.S. cash balance.
- Review post-acquisition debt, covenant headroom, Audience integration costs, restructuring, profitability and expected synergies.
- Monitor resolution and potential cost of the Audience-related lawsuits, including required court approvals.
- Assess sensitivity to China LTE infrastructure spending, foreign exchange, customer concentration and Malaysia tax-holiday conditions.