Knowles Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Knowles supplies micro-acoustic products and specialty components through Mobile Consumer Electronics (MCE) and Specialty Components (SC). Q1 2014 comparisons include pre-spin-off results through February 28 and allocated Dover costs, so they may not be fully comparable with standalone 2015 results.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $238.6 million | $273.4 million |
| Gross profit / margin | $53.8 million / 22.5% | $83.1 million / 30.4% |
| Operating income (loss) | $(11.8) million | $11.2 million |
| Net income (loss) | $(15.8) million | $7.6 million |
| Diluted EPS | $(0.19) | $0.09 |
| Operating cash flow | $6.8 million | $43.2 million |
| Cash and cash equivalents, at quarter-end | $38.6 million | $55.2 million at Dec. 31, 2014 |
| Total debt, at quarter-end | $396.3 million | $400.0 million at Dec. 31, 2014 |
Revenue declined 12.7% year over year. GAAP gross margin fell 7.9 percentage points. Adjusted EBIT was $8.6 million versus $32.1 million, and adjusted EBIT margin was 3.6% versus 11.7%. Adjusted net income was $4.9 million and adjusted diluted EPS was $0.06, compared with $27.5 million and $0.32, respectively; these are non-GAAP measures.
- MCE: Revenue fell 17.9% to $134.7 million; segment EBIT was a $12.0 million loss versus $6.8 million income. Lower shipments and pricing hurt results.
- SC: Revenue fell 5.0% to $103.9 million; segment EBIT declined to $12.7 million from $15.7 million.
- Cash flow and liquidity: Investing cash outflow was $18.3 million, including $17.7 million of capital expenditures; financing cash outflow was $4.6 million. Cash decreased $16.6 million during the quarter. Cash less capital expenditures was a $10.9 million outflow, calculated from reported figures.
- Debt: Debt comprised a $296.3 million term loan and $100 million drawn on a $350 million revolving facility. The company reported covenant compliance and expected to remain compliant over the next 12 months. Credit-facility rates are variable; weighted-average rate was 1.93% in Q1 2015.
Changes, outlook and risks
- MCE shipments were affected by one customer’s reduced handset market share and a production and shipment hold on a microphone version after a low-level defect; shipments resumed late in Q1. Chinese OEM growth partly offset declines.
- SC faced lower pricing, weaker timing-device sales amid a pause in China LTE infrastructure build-outs, and unfavorable foreign exchange. Lower selling and administrative expense mainly reflected reduced legal costs.
- Management said operating cash flow fell primarily because of lower revenue and a $13.1 million increase in adjusted working capital. It expected adequate resources for working capital, capital spending and strategic investments for at least 12 months.
- 2015 capital expenditures were expected to be $70–$80 million. No earnings or revenue guidance was stated in the provided filing text.
- On April 29, 2015, Knowles agreed to acquire Audience, Inc. for approximately $5 per share, half cash and half Knowles stock. The transaction’s enterprise value was approximately $85 million, net of Audience cash; closing was expected in Q3 2015, subject to customary conditions. Knowles planned to fund the cash portion with existing cash and credit lines.
- Unusual items included a $2.0 million valuation allowance on certain U.S. deferred tax assets and a $2.3 million benefit from Malaysian tax holidays. Foreign currency translation contributed a $51.4 million other comprehensive loss.
- Key risks include customer concentration, product quality and qualification, rapid demand changes, pricing pressure, execution of restructuring and acquisitions, foreign exchange, debt and access to overseas cash. The company said legal proceedings were not expected to materially affect its financial position, results or cash flows; legal reserves were not significant.
Important facts for investors to verify
- Whether MCE customer shipment levels recovered after the microphone production hold and how concentrated future sales remain.
- Whether the sharp decline in gross and adjusted EBIT margins stabilizes, and how much improvement depends on cost savings or product mix.
- Working-capital trends, cash generation, and ability to fund planned capital expenditures and the Audience acquisition while servicing variable-rate debt.
- Audience transaction completion, final financing and credit-agreement amendment terms, and expected integration costs or benefits.
- Whether Malaysian tax-holiday conditions remain satisfied and whether deferred tax assets are realizable.