Knowles Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Knowles became an independent, publicly traded company on February 28, 2014, following its spin-off from Dover Corporation. The 2013 and earlier financial statements reflect the business as part of Dover and may not be directly comparable with results as an independent company.
Business context
Knowles supplies micro-acoustic products and specialty electronic components. Its two segments are Mobile Consumer Electronics (MCE), serving handset, tablet and consumer-device markets, and Specialty Components (SC), serving medical, telecom infrastructure, aerospace, defense and industrial markets. FY2014 revenue mix was 60% MCE and 40% SC.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,141.3 million | $1,214.8 million |
| Gross profit / margin | $232.7 million / 20.4% | $427.9 million / 35.2% |
| Operating income (loss) | $(53.1) million | $143.8 million |
| Net income (loss) / diluted EPS | $(87.0) million / $(1.02) | $105.8 million / $1.24 |
| Adjusted EBIT / margin (non-GAAP) | $113.4 million / 9.9% | $222.3 million / 18.3% |
| Operating cash flow | $115.5 million | $174.3 million |
| Capital expenditures | $83.9 million | $105.2 million |
| Free cash flow (non-GAAP) | $31.6 million | $69.1 million |
FY2014 revenue fell 6.1%. MCE revenue declined 12.0% to $684.1 million and reported an operating loss of $74.7 million; SC revenue rose 4.5% to $457.2 million and operating earnings increased to $69.5 million. At year-end, cash was $55.2 million, current assets $474.0 million and current liabilities $288.6 million. Debt was $400.0 million ($300.0 million term loan and $100.0 million revolver); selected data reports $407.0 million including lease obligations. The revolving facility was expanded to $350.0 million, and Knowles reported compliance with its debt covenants.
Fourth quarter: Revenue was $286.1 million, gross profit $63.6 million and net loss $1.1 million, compared with revenue of $330.4 million, gross profit of $114.2 million and net income of $32.9 million in Q4 2013.
Material changes, outlook and unusual items
- A low-level defect in a new MEMS microphone led to a production and shipment hold at a key MCE customer beginning in Q3. The customer requalified the microphone in February 2015; Knowles expected shipments to resume no later than Q2 2015, while warning that lost shipments and price reductions would continue to affect 2015 results.
- FY2014 results included significant costs: $39.5 million in fixed-asset and inventory charges, $29.6 million in restructuring charges, $25.2 million in production-transfer costs and a $15.0 million charge resolving customer claims. A $36.8 million deferred-tax valuation allowance contributed to the reported net loss and 57.9% effective tax rate. Non-GAAP adjusted results exclude specified items and should not be treated as GAAP results.
- The Vienna facility closure and related actions generated $45.7 million of restructuring and related costs; Knowles anticipated another $1–$2 million and estimated annual savings of $25–$30 million. The company planned to reduce its worldwide facilities from 18 to 11 by the end of 2016.
- Management expected 2015 capital expenditures of 6%–7% of revenue. It stated that expected operating cash flow and capital-market access should provide resources for working capital, capital spending and strategic investment. No specific revenue or earnings guidance was provided in the filing.
- After year-end, Knowles and GoerTek reached a confidential global settlement of their MEMS microphone patent disputes, including cross-licensing and a commercial relationship. The settlement resolved pending litigation, including Chinese judgments totaling approximately $12 million; some patent-validity challenges brought by other parties were expected to continue.
- Other notable exposures include concentrated customers (Apple 20% and Samsung 12% of 2014 revenue; top ten customers about 61%), foreign-exchange risk, variable-rate debt, dependence on certain limited-source suppliers, tax and indemnification obligations related to the Dover separation, and product qualification, defect and short product-cycle risks. Knowles paid no cash dividends and did not anticipate doing so in the immediate future.
Investor facts to verify
- Whether microphone production resumed on schedule and the resulting volume, pricing, warranty and margin effects.
- Whether restructuring savings are achieved, and whether further closure, transfer or impairment costs arise.
- Underlying cash generation, working-capital needs, capital spending and debt repayment capacity; confirm the availability of the expanded revolver and covenant headroom.
- Customer concentration and MCE design wins, particularly changes in major handset customers’ market share and sourcing decisions.
- Tax valuation allowances, Malaysian tax-holiday conditions, overseas cash accessibility and potential separation-related indemnities.
- Any further developments in patent disputes, including challenges continuing after the GoerTek settlement.