Knowles Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Knowles supplies micro-acoustic, audio-processing and specialty components through Mobile Consumer Electronics (MCE) and Specialty Components (SC). It acquired Audience, Inc. on July 1, 2015.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,084.6 million | $1,141.3 million |
| Gross profit / margin | $242.5 million / 22.4% | $232.7 million / 20.4% |
| Operating loss | $235.1 million | $53.1 million |
| Net loss / diluted loss per share | $233.8 million / $2.69 | $87.0 million / $1.02 |
| Adjusted EBIT / margin (non-GAAP) | $66.6 million / 6.1% | $113.4 million / 9.9% |
| Operating cash flow | $78.4 million | $115.5 million |
| Free cash flow (non-GAAP) | $15.3 million | $31.6 million |
Revenue declined 5.0%. MCE revenue fell 4.0% to $656.7 million; SC revenue fell 6.4% to $427.9 million. At year-end, cash was $63.3 million, total debt was $430.0 million, and total assets were $1,697.7 million. Debt comprised a $285 million term loan and $145 million drawn on the revolving facility. The company reported compliance with its debt covenants. Cash and cash equivalents included $59.7 million held outside the U.S.
FY2015 fourth-quarter revenue was $310.5 million, gross profit was $43.4 million, and net loss was $187.0 million ($2.11 per share). The quarter included the speaker and receiver product line impairment.
Material changes and unusual items
- Knowles recorded a $191.5 million pre-tax impairment of the speaker and receiver product line: $143.3 million of intangible-asset impairment and $48.2 million of fixed-asset impairment. The product line generated $235.0 million in FY2015 revenue and a $272.4 million pre-tax loss.
- Audience contributed $19.0 million of revenue and $31.6 million of net losses in the six months after acquisition. The acquisition involved $61.6 million cash and 3.2 million Knowles shares; net consideration was approximately $92.8 million after acquired cash and short-term investments.
- GAAP gross margin improved year over year, partly reflecting lower prior-year charges and restructuring savings. However, non-GAAP gross profit declined 4.5% to $320.7 million, while adjusted EBIT declined 41.3%. Management cited pricing pressure, weaker fixed-cost absorption, product mix and Audience-related expenses.
- Apple represented approximately 25% of FY2015 revenue; the top ten customers represented approximately 58%. MCE accounted for 61% of consolidated revenue.
Outlook, risks and contingencies
- In February 2016, Knowles announced its intention to sell the speaker and receiver product line. No definitive sale agreement was in place at filing; sale proceeds were not estimable. Management anticipated improved margins, lower capital spending and better free cash flow from exiting the line, but warned that a failed or unfavorable sale could lead to further charges or restructuring.
- Management expected 2016 capital expenditures of 5%–6% of revenue. The filing provides no specific revenue or earnings guidance.
- Key risks include customer and mobile-handset concentration, product-cycle volatility and price erosion, competition and technology execution, supplier disruption, foreign exchange exposure, goodwill and asset impairment, and debt covenant and refinancing risk. A sustained 10% weakening of the U.S. dollar was estimated to reduce annual pre-tax operating results by approximately $44.1 million.
- Foreign tax holidays in Malaysia were expected to continue through December 31, 2021, subject to conditions. The company had a $182.8 million deferred-tax valuation allowance and approximately $1.8 billion of foreign earnings intended to remain permanently reinvested.
- Audience-related class action settlements remained subject to court approval. Management said it did not expect ordinary-course legal proceedings, individually or collectively, to materially affect financial condition, results or cash flow.
Most important facts for investors to verify
- Whether the speaker and receiver product line is sold, on what terms, and what additional costs or impairment charges result.
- Whether underlying margins and cash generation improve after separating the large impairment and other non-GAAP adjustments from reported results.
- Audience’s integration, profitability and expected contribution, including the impact of acquisition-related expenses.
- Customer exposure, especially Apple, and the effect of handset demand, OEM market-share shifts and pricing on MCE results.
- Debt covenant headroom, access to the revolving facility, and the availability of overseas cash for U.S. obligations.