Knowles Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Knowles supplies microphones, speakers and audio solutions, as well as high-performance capacitors and RF products. Its reportable segments are Audio and Precision Devices (PD).
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $188.0 million | $199.8 million | $389.4 million | $400.8 million |
| Gross profit / margin | $77.7 million / 41.3% | $83.7 million / 41.9% | $161.0 million / 41.3% | $161.7 million / 40.3% |
| Operating income (loss) | ($214.6) million | $22.3 million | ($193.3) million | $40.6 million |
| Net income (loss) | ($242.9) million | $17.6 million | ($224.8) million | $30.1 million |
| Diluted EPS | ($2.64) | $0.19 | ($2.44) | $0.32 |
| Adjusted EBIT | $37.6 million | $35.8 million | $77.0 million | $70.1 million |
| Adjusted EBIT margin | 20.0% | 17.9% | 19.8% | 17.5% |
The $239.8 million goodwill impairment charge, recorded in Q2 against the Mobile Consumer Electronics reporting unit, drove the reported operating and net losses. It was non-cash. Excluding specified items, non-GAAP net earnings were $31.7 million in Q2 and $65.3 million for the first half; non-GAAP diluted EPS was $0.33 and $0.68, respectively. These company-defined non-GAAP measures are not substitutes for GAAP results.
Segment trends: Q2 Audio revenue fell 14.2% to $128.5 million, while PD revenue rose 19.0% to $59.5 million. For the first half, Audio revenue declined 12.4% to $274.2 million; PD revenue increased 31.1% to $115.2 million, reflecting organic growth and the IMC acquisition.
Cash flow, balance sheet and capital
- First-half operating cash flow was $20.4 million, versus $61.0 million a year earlier. Capital expenditures were $13.9 million; investing cash use was $14.6 million and financing cash use was $26.2 million.
- Cash declined to $47.7 million at June 30 from $68.9 million at year-end. The company attributed lower operating cash flow mainly to working-capital changes, including increased procurement to mitigate supply-chain risks and payment timing.
- Long-term debt was $73.0 million, all under a $400 million revolving facility; no principal was due before its January 2024 maturity. The company reported compliance with its financial covenants and expected to remain compliant over the next 12 months.
- Total current assets were $378.7 million and current liabilities $149.1 million. Inventory increased to $188.8 million from $153.1 million at year-end.
- Knowles repurchased 1.25 million shares for $25.4 million in the first half. It increased its repurchase authorization by $150 million in April 2022; purchases are discretionary.
Changes, outlook and risks
- Revenue declined 5.9% in Q2 and 2.8% in the first half year over year. Management cited weaker consumer-electronics demand, China COVID-related shutdowns, excess supply-chain inventory, lower MEMS microphone volumes, a move away from commoditized products and lower pricing on mature products. Hearing-health growth partly offset Audio weakness. PD growth provided another offset.
- Q2 GAAP gross margin declined 0.6 percentage points, with lower utilization, volume, and unfavorable MEMS microphone mix and pricing partly offset by cost reductions. First-half gross margin increased 1.0 percentage point, supported by cost reductions and favorable mix, partly offset by utilization, pricing and precious-metal costs.
- On July 28, 2022, after quarter-end, Knowles committed to an Audio/MEMS microphone restructuring expected to cost $35–$45 million and generate $25–$30 million in annual savings. Estimated costs include $19–$22 million of supplier settlements and $4–$6 million of severance, expected to be cash costs, plus $12–$17 million of non-cash asset write-offs. Completion was expected in Q4 2022. The filing also says up to $4 million of additional 2022 charges may arise from assets connected with an earlier terminated project.
- Management expected 2022 capital expenditures of 4%–5% of revenue. The filing provides no broader revenue or earnings guidance.
- Key exposures include uncertain consumer and MEMS microphone demand, reliance on large OEM customers, China lockdowns and supply-chain disruption, pricing pressure, raw-material availability and costs, and execution of restructuring and cost reductions. The goodwill valuation is sensitive to forecast growth, margins and discount rates; further deterioration could cause additional impairment.
- Knowles reported ordinary-course legal claims and intellectual-property disputes, but said their resolution was not expected to have a material adverse effect based on information then available. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether consumer-electronics and MEMS microphone demand, customer inventories and Audio utilization stabilize, and how the shift away from commoditized products affects revenue and margins.
- Whether the announced restructuring meets its cost, timing and annual-savings estimates, and whether further impairment or restructuring charges arise.
- Whether PD growth and margins continue, and how much reflects organic demand versus the IMC acquisition.
- Cash conversion, elevated inventory, capital spending, share repurchases and debt covenant headroom ahead of the January 2024 facility maturity.
- Tax expense despite the reported loss, including the conditions and expiration dates of the China tax holiday in 2023 and Malaysia tax holiday in 2026.