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
| Metric | 2023 | 2022 |
|---|---|---|
| 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
- Track the CMM strategic review, performance, and goodwill headroom; test the assumptions underlying its valuation.
- Separate recurring operating performance from the tax benefit, 2022 impairment comparison, equipment-sale gain, restructuring items, and other non-GAAP adjustments.
- Assess whether customer and channel inventory correction has eased, especially in CMM and PD, and monitor Apple and WS Audiology purchasing patterns.
- Review Cornell Dubilier integration, final purchase-price allocation, and the ability to meet the 2024 and 2025 seller-note payments while maintaining covenant compliance.
- 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.