Knowles Corporation — FY2022 Form 10-K
Business context and reporting period: This annual report covers the fiscal year ended December 31, 2022; it does not provide a standalone Q4 income statement. Knowles supplies acoustic components and audio solutions, high-performance capacitors, and RF filters. In Q4 2022, it changed its reportable segments to Precision Devices (PD), Medtech & Specialty Audio (MSA), and Consumer MEMS Microphones (CMM); prior-period segment data was conformed.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $764.7 million | $868.1 million |
| GAAP gross profit / margin | $276.3 million / 36.1% | $359.5 million / 41.4% |
| Operating income (loss) | $(414.8) million | $115.8 million |
| Continuing-operations net income (loss) | $(430.1) million | $150.2 million |
| Diluted continuing-operations EPS | $(4.69) | $1.59 |
| Adjusted EBIT, non-GAAP | $142.4 million; 18.6% margin | $174.3 million; 20.1% margin |
| Non-GAAP net earnings / diluted EPS | $119.3 million / $1.26 | $146.9 million / $1.53 |
| Cash from operations / capital expenditures | $86.3 million / $32.1 million | $182.1 million / $48.6 million |
| Free cash flow, company-defined non-GAAP | $54.2 million; 7.1% of revenue | $133.5 million; 15.4% |
Revenue fell 11.9% year over year. The $470.9 million CMM goodwill impairment was the principal cause of the GAAP loss; it was non-cash. Cash and equivalents were $48.2 million at year-end, versus $68.9 million a year earlier. Revolver borrowings were $45.0 million, down from $70.0 million. Current assets were $362.4 million and current liabilities $99.1 million.
Segment results
- PD: Revenue increased 20.8% to $242.9 million; EBIT was $56.1 million. Growth came from defense, medtech, communications, and industrial markets, plus the IMC acquisition.
- MSA: Revenue declined 0.6% to $229.9 million; EBIT increased to $84.6 million. Pricing and premium-audio softness offset higher hearing-health shipments.
- CMM: Revenue declined 33.0% to $291.9 million; adjusted EBIT fell to $20.0 million from $84.1 million. Segment EBIT included the $470.9 million goodwill impairment.
Material changes and unusual items
- CMM revenue weakness reflected soft consumer-electronics demand, China COVID-related shutdowns, supply-chain inventory correction, lower mature-product pricing, and Knowles’ shift away from commoditized microphones.
- Knowles recorded $41.8 million of restructuring charges, primarily for CMM capacity and cost reductions. These included supplier-obligation settlements, fixed-asset write-offs, and severance.
- The company recorded CMM goodwill impairment charges of $239.8 million in Q2 and $231.1 million in Q4. CMM goodwill was $270.1 million at year-end; management said its carrying value approximated fair value after impairment.
- PD revenue and earnings improved, while MSA revenue was broadly flat. Lower company-wide gross margin reflected restructuring charges, lower CMM factory utilization, and mature-product pricing pressure.
Outlook, risks, and contingencies
Management expected continued weak consumer end-market demand and customer inventory adjustments in Q1 2023. Q4 customer incentives added less than 2% of FY2022 revenue and could adversely affect Q1 revenue. The company forecast 2023 capital expenditures of 4%–5% of revenue, funded from cash and operating cash flow; no revenue or earnings guidance is provided in the supplied filing text.
- Concentration and demand: Apple represented 15% of consolidated revenue and approximately 40% of CMM revenue; CMM’s five largest customers represented approximately 63% of segment revenue. MEMS microphones accounted for approximately 46% of consolidated revenue.
- Impairment sensitivity: Management’s CMM valuation depends on forecasts, margins, and discount rates. Holding other assumptions constant, a 1% increase in discount rate could reduce estimated fair value by about $41.9 million; a 1% reduction in revenue growth by $40.2 million; and a 1% reduction in EBITDA margin by $29.2 million.
- Tax: Knowles did not meet all conditions for its Malaysian tax holiday in 2022 and was discussing revised conditions with tax authorities. Failure to secure favorable terms could raise future tax rates.
- Debt and liquidity: The company reported compliance with its credit covenants at year-end. On February 8, 2023, it amended and extended its $400 million revolving facility to February 8, 2028, with revised covenant terms. Variable-rate debt, cash generation, and covenant compliance remain relevant risks.
- Other exposures: Risks include supplier concentration, customer product-launch timing, pricing erosion, global trade and geopolitical disruptions, foreign exchange and commodity-price movements, cybersecurity, and potential future impairment. Management said ordinary-course legal matters were not expected to have a material adverse effect based on information then available.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Goodwill impairment testing for CMM was identified as a critical audit matter.
Important facts for investors to verify
- Whether CMM demand, inventory levels, pricing, and customer incentive effects improved after Q4 2022.
- Whether restructuring delivers expected cost and capacity benefits, and whether further impairment is required.
- Actual operating cash flow and free cash flow relative to the sharp FY2022 decline.
- Progress and final terms of the Malaysian tax-holiday discussions and resulting effective tax rate.
- Revolver balances, covenant headroom, and compliance under the amended credit agreement.
- Customer concentration and the timing and volume of purchases tied to major OEM product launches.