Knowles Corporation — Q1 2024 Form 10-Q
Business and period. Knowles supplies capacitors and RF products, hearing-health and specialty audio products, and MEMS microphones to medtech, defense, industrial, communications, automotive and consumer markets. This unaudited report covers the three months ended March 31, 2024, compared with the same 2023 period. Results include the Cornell Dubilier (CD) business, acquired November 1, 2023, in Precision Devices (PD).
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $196.4 million | $144.3 million |
| Gross profit / margin | $69.9 million / 35.6% | $53.8 million / 37.3% |
| Operating earnings (loss) | $4.3 million | $(1.0) million |
| Net earnings (loss) | $2.5 million | $(5.2) million |
| Diluted EPS | $0.03 | $(0.06) |
| Adjusted EBIT / margin (non-GAAP) | $25.7 million / 13.1% | $8.1 million / 5.6% |
| Operating cash flow | $17.3 million | $21.9 million |
Revenue increased 36.1%. Growth reflected the CD acquisition and higher shipments in Consumer MEMS Microphones (CMM) and MedTech & Specialty Audio (MSA). GAAP gross margin fell 1.7 percentage points, with lower mature-product pricing, weaker legacy PD factory utilization, CD acquisition-related costs and higher restructuring charges among the cited factors. Non-GAAP gross margin was 38.0%, versus 37.7% a year earlier. Net earnings included a $5.4 million net gain on sale of CMM intellectual property; non-GAAP results exclude this and other specified items.
Segment revenue was $74.3 million for PD (up 38.4%), $57.1 million for MSA (up 25.5%) and $65.0 million for CMM (up 44.1%). Segment EBIT was a $2.1 million loss for PD, $22.7 million earnings for MSA and $5.3 million earnings for CMM; CMM EBIT included the $5.4 million asset-sale gain. PD growth was acquisition-led, while legacy PD demand remained weak. MSA benefited from stronger hearing-health demand and product mix. CMM benefited from higher demand in ear, mobile and computing markets, partly offset by lower pricing on mature products.
Cash, debt and liquidity
Cash and equivalents were $122.1 million at March 31, 2024, up from $87.3 million at year-end 2023; $88.1 million was held by non-U.S. operations. Total debt carrying value was $293.2 million: $180.0 million drawn on the $400.0 million revolving facility and $113.2 million for the seller note. Current maturities were $48.0 million. The seller note has principal payments of $50.0 million due November 2024 and $72.9 million due November 2025. Revolver maturity is February 2028.
Operating cash flow was $17.3 million. Investing activities provided $3.8 million, including $7.2 million of proceeds from the intellectual-property sale; capital expenditures were $3.4 million. Financing activities provided $13.6 million, including $20.0 million of net revolver borrowing. Cash increased by $34.8 million during the quarter. The company reported compliance with its debt covenants and expects to remain compliant over the next 12 months. Interest expense rose to $4.4 million from $0.8 million; the weighted-average borrowing rate was 7.03%, versus 6.01%.
Outlook, commentary and risks
- Management expects 2024 capital expenditures of 3%–4% of revenue. It expects cash to decline in the second half, primarily due to the seller-note payment, share repurchases and debt reduction, partly offset by operating cash generation. The filing provides no revenue or earnings guidance.
- The CMM strategic-alternatives review remains ongoing and may result in a sale, restructuring or continued operation as-is. No timetable or outcome is assured; Knowles cautions it may not recover the segment’s carrying value.
- Risks highlighted include weak demand and excess customer/channel inventory in legacy PD markets, MEMS microphone demand or market-share declines, mature-product price erosion, customer concentration, acquisition integration and synergy execution, product quality and launch timing, supply availability and cost, competition, geopolitics, currency exposure, and possible asset impairment.
- Q1 restructuring charges were $2.5 million, all associated with PD. Ordinary-course legal matters were described as not expected to have a material adverse effect, based on current information. The effective tax rate was 56.1%, affected by earnings mix, valuation allowances and discrete items.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; it is reviewing controls at the acquired business.
Important facts for investors to verify
- How much of revenue growth and future profitability is attributable to CD versus underlying demand, particularly given PD’s lower utilization and reported loss.
- Progress and potential financial consequences of the CMM strategic review, including any impairment or restructuring exposure.
- Capacity to meet the $50.0 million seller-note maturity in November 2024 and the $72.9 million due in 2025 while reducing debt and considering buybacks.
- Whether operating cash flow improves, given the quarter’s lower year-over-year cash generation and increased inventory balance.
- Underlying earnings excluding the $5.4 million asset-sale gain and other non-GAAP adjustments; compare these measures with GAAP results and the company’s reconciliation.