Knowles Corp annual report, FY2023

Knowles Corporation — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied text does not provide a standalone fourth-quarter income statement or cash-flow summary. Knowles makes capacitors, RF filters, microphones, speakers, and audio solutions for medtech, defense, industrial, electric-vehicle, communications, and consumer markets.

Financial performance

Metric20232022
Revenue$707.6 million$764.7 million
Gross profit / margin$283.4 million / 40.1%$276.3 million / 36.1%
Adjusted gross profit / margin (non-GAAP)$285.4 million / 40.3%$310.1 million / 40.6%
Operating earnings (loss)$51.1 million$(414.8) million
Continuing-operations earnings (loss)$72.4 million; diluted EPS $0.79$(430.1) million; diluted EPS $(4.69)
Adjusted EBIT / margin (non-GAAP)$105.8 million / 15.0%$142.4 million / 18.6%
Non-GAAP net earnings / diluted EPS$82.2 million / $0.88$119.3 million / $1.26
Cash from operations / free cash flow$122.7 million / $105.8 million$86.3 million / $54.2 million

Revenue declined 7.5%. GAAP gross profit and margin increased, helped by lower restructuring charges, cost reductions, prior restructuring benefits, favorable currency, and a $10.0 million equipment-sale gain. However, adjusted gross profit fell 8.0%, and adjusted EBIT fell 25.7%, reflecting lower volume, weaker factory utilization, lower pricing on mature mobile products, and unfavorable mix. The GAAP earnings recovery largely reflects the absence of the $470.9 million CMM goodwill impairment recorded in 2022 and a 2023 tax benefit.

Segment results

  • Precision Devices (PD): Revenue $221.4 million, down 8.9%; adjusted EBIT $40.5 million, down 40.4%. Lower demand and defense shipment timing weighed on results; the Cornell Dubilier acquisition partly offset the decline.
  • MedTech & Specialty Audio (MSA): Revenue $230.0 million, essentially flat; adjusted EBIT $88.7 million, up 1.4%. Premium-audio volume gains were offset by lower hearing-health shipments as customers reduced inventory.
  • Consumer MEMS Microphones (CMM): Revenue $256.2 million, down 12.2%; adjusted EBIT $23.5 million, up 17.5%, while GAAP EBIT was $13.6 million. Weaker mobile demand and lower mature-product pricing were partly offset by ear, IoT, and computing demand and cost actions.

Liquidity, debt, and capital allocation

  • Cash and cash equivalents were $87.3 million at year-end, versus $48.2 million in 2022. Current assets were $428.8 million and current liabilities $164.6 million.
  • Year-end debt carrying value was $271.2 million: $160.0 million drawn on a $400 million revolving facility and $111.2 million carrying value for the seller note. The seller note has $50.0 million principal due in November 2024 and $72.9 million in November 2025. The facility matures in February 2028.
  • Knowles reported compliance with its debt covenants at year-end and expected to remain compliant over the next 12 months. It repurchased $47.5 million of stock in 2023; $97.7 million remained authorized. The company has not paid cash dividends and did not anticipate doing so in the immediate future.
  • Capital expenditures were $16.9 million, or 2.4% of revenue, in 2023. Management expects 2024 capital expenditures of 3.0%–4.0% of revenue.

Material changes, outlook, and risks

  • Knowles acquired Cornell Dubilier on November 1, 2023, for $246.8 million fair value consideration, funded with $136.9 million cash and an interest-free seller note. The acquired capacitor business contributed $20.2 million revenue from acquisition through year-end. Purchase accounting remains preliminary.
  • Management announced a strategic alternatives review of CMM in September 2023, including a potential sale, restructuring, or continued operation. There is no set timetable or assurance of an outcome. CMM goodwill was $270.2 million; its estimated fair value exceeded carrying value by approximately 7% at the annual test date. Changes in assumptions or the review outcome could lead to impairment.
  • No general revenue or earnings guidance is provided in the supplied filing text. Management cites excess customer and channel inventory, weak consumer-electronics and industrial demand, defense-project timing, and customer inventory reductions. It is pursuing growth in higher-value PD and MSA markets and reducing exposure to lower-value microphone products.
  • Reported 2023 income-tax benefit was $27.4 million, including the impact of intangible-property transfers and a $15.1 million release of part of the U.S. deferred-tax valuation allowance. The non-GAAP tax provision was $18.2 million; management cited loss of a Malaysian tax holiday as a factor in the higher non-GAAP effective tax rate.
  • Key risks include customer and product concentration (Apple was 16% of consolidated revenue; WS Audiology was 10%; MEMS microphones were about 44%), price erosion and product-launch timing, supplier concentration, geopolitical and trade risks, foreign exchange and commodity volatility, acquisition integration, and debt covenants. A 10% sustained weakening of the U.S. dollar was estimated to reduce annual pretax earnings by about $17.2 million; a 100-basis-point rate increase would add about $2.7 million annual interest expense, based on year-end exposure.

Investor verification priorities

  1. Track the CMM strategic review, performance, and goodwill headroom; test the assumptions underlying its valuation.
  2. Separate recurring operating performance from the tax benefit, 2022 impairment comparison, equipment-sale gain, restructuring items, and other non-GAAP adjustments.
  3. Assess whether customer and channel inventory correction has eased, especially in CMM and PD, and monitor Apple and WS Audiology purchasing patterns.
  4. Review Cornell Dubilier integration, final purchase-price allocation, and the ability to meet the 2024 and 2025 seller-note payments while maintaining covenant compliance.
  5. Note that the auditor and management excluded Cornell Dubilier from their 2023 internal-control assessment; Knowles otherwise reported effective controls, and the financial statements received an unqualified audit opinion.