Knowles Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Knowles supplies micro-acoustic and audio products and precision devices, including capacitors and RF solutions. Its reportable segments are Audio and Precision Devices (PD). Figures are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $233.0m | $205.8m | $633.8m | $521.1m |
| Gross profit / margin | $96.9m / 41.6% | $75.2m / 36.5% | $258.6m / 40.8% | $179.2m / 34.4% |
| Operating earnings (loss) | $34.6m | $13.6m | $75.2m | $(8.4)m |
| Net earnings (loss) | $27.7m | $5.6m | $57.8m | $(23.0)m |
| Diluted EPS | $0.29 | $0.06 | $0.61 | $(0.25) |
| Adjusted EBIT margin (non-GAAP) | 22.6% | 14.0% | 19.4% | 6.7% |
- Q3 revenue rose 13.2%; Audio revenue increased 7.8% to $177.7m and PD revenue increased 34.9% to $55.3m. PD growth included the May acquisition of Integrated Microwave Corporation (IMC).
- For the first nine months, revenue rose 21.6%; Audio grew 26.0% to $490.6m and PD grew 8.7% to $143.2m. Management attributed improvement mainly to stronger shipment volumes and improved factory utilization versus pandemic-affected 2020, along with cost reductions and mix. Mature-product pricing pressure, foreign exchange and precious-metal costs were offsets.
- Nine-month operating cash flow was $116.6m, versus $52.6m. Investing cash outflow was $109.4m, including $78.5m for acquisitions and $28.2m of capital expenditures. Financing cash outflow was $14.9m. Cash declined $7.8m to $140.0m.
- At September 30, cash was $140.0m, current assets $435.4m and current liabilities $313.5m. Debt carrying value was $171.8m, all current; no revolving-facility borrowings were outstanding. The company repurchased $20.0m of shares during the first nine months; none in Q3.
Changes, outlook and key risks
- Compared with 2020, earnings and margins improved substantially, while 2020 results included significant restructuring costs. The 2021 period included $4.0m of impairment charges, principally for Intelligent Audio facilities affected by COVID-era market conditions; management said further impairment could arise if estimates change.
- IMC was acquired for $80.7m on May 3, 2021. It contributed $7.0m revenue and a $0.2m pretax loss through September 30; purchase-price allocation remained preliminary.
- Management reported demand exceeding available capacity and continued raw-material shortages affecting MEMS microphones and capacitor products. It expected China power curtailments to affect production in Q4 2021; duration and impact were uncertain. COVID-19 effects on operations, demand and facilities also remained difficult to predict.
- Capital expenditures were expected to be 5.0%–6.0% of revenue in 2021. The filing provides no specific revenue or earnings guidance.
- The $172.5m principal amount of 3.25% convertible notes matured November 1, 2021. A subsequent-events disclosure says the company would deliver $172.5m cash and approximately 0.4m shares to settle the notes, with note hedges expected to return approximately 0.4m shares. At September 30, the company reported compliance with credit covenants and stated it maintained required liquidity of at least $150m during the specified period.
- Malaysia tax holidays supported earnings; the significant existing holiday was due to expire December 31, 2021. Knowles was pursuing an extension or other mitigation, and warned that failure to secure acceptable terms could significantly increase its effective tax rate.
- Other risks highlighted include reliance on large OEM customers, demand and pricing changes, supply availability and cost, product quality and launches, competition, foreign exchange, and intellectual-property disputes. Management said ordinary-course legal matters were not expected to have a material adverse effect, based on information available; no other material legal developments were reported.
Important facts for investors to verify
- Confirm the completed settlement of the November 2021 convertible notes, including cash paid, shares delivered and hedge proceeds.
- Track whether raw-material constraints and anticipated China power curtailments affected Q4 production, shipments and customer demand.
- Check the final IMC purchase-price allocation and subsequent contribution to PD results.
- Verify the outcome of the Malaysia tax-holiday extension and the resulting effective tax rate.
- Assess cash conversion and inventory: inventory rose to $155.7m from $130.1m, while nine-month operating cash flow included a $24.0m inventory-related cash use.
- Compare GAAP performance with management’s non-GAAP measures, which exclude specified items including stock compensation, amortization, impairments and other adjustments.