Knowles Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Knowles supplies audio, micro-acoustic and precision-device products. It reorganized reporting into Audio and Precision Devices (PD) segments in January 2017; comparative segment figures were recast.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $193.7 million | $185.3 million |
| Gross profit / margin | $67.6 million / 34.9% | $66.8 million / 36.0% |
| Operating earnings (loss) | $2.6 million | $(5.9) million |
| Loss from continuing operations | $(4.7) million | $(12.5) million |
| Net loss | $(3.2) million | $(29.4) million |
| Net loss per diluted share | $(0.04) | $(0.33) |
| Cash from operating activities | $17.9 million | $19.8 million |
Revenue increased 4.5%. Audio revenue was $144.2 million, up 4.6%, and PD revenue was $49.5 million, up 4.4%. The filing attributes Audio growth mainly to higher MEMS microphone shipments to North American and Chinese customers; PD growth reflected timing-device shipments and the capacitor acquisition. Pricing pressure partly offset growth in both segments.
Gross margin declined year over year, primarily due to lower average selling prices, higher restructuring charges and weaker fixed-cost absorption in hearing-health production. Selling and administrative expense fell $5.0 million to $38.1 million, helped by lower amortization and cost-reduction initiatives. Adjusted EBIT, a non-GAAP measure, rose to $15.8 million from $10.7 million; adjusted EBIT margin increased to 8.2% from 5.8%. GAAP continuing-operations results remained loss-making.
Discontinued operations contributed $1.5 million of earnings in Q1 2017, versus a $16.9 million loss in Q1 2016. The prior-year period included results from the speaker and receiver product line, sold in July 2016; Q1 2017 discontinued-operations earnings were primarily due to income-tax benefits.
Operating cash flow was $17.9 million. Investing used $20.2 million, including $17.7 million of capital expenditures and $2.5 million paid toward the capacitor acquisition. Financing used $1.0 million. Cash declined $2.9 million to $63.3 million; $53.4 million was held outside the U.S. Management said operating cash flow and capital-market access should fund working-capital and capital-expenditure needs for at least 12 months.
At March 31, cash was $63.3 million and total debt carrying value was $299.8 million, including $13.2 million of current maturities. Debt comprised convertible notes and term-loan/revolver borrowings; $45.0 million was drawn on the $300.0 million revolving facility. The company reported compliance with debt covenants and expected to remain compliant for the next 12 months. Current assets were $324.3 million and current liabilities were $147.6 million.
Material changes and notable items
- Revenue grew 4.5%, while gross margin fell 1.1 percentage points. Management cited shipment growth and productivity gains, partly offset by pricing pressure and hearing-health under-absorption.
- Restructuring charges totaled $5.0 million, compared with $4.7 million in Q1 2016. The principal current initiative transfers hearing-health manufacturing to a lower-cost Asian facility; Knowles expects another $0.5 million of related charges through Q4 2017 and substantial completion by year-end.
- Knowles acquired certain capacitor-manufacturer assets on January 11 for $4.0 million; $2.5 million was paid in Q1, with the remaining $1.5 million payable in installments through 2019, subject to purchase-price adjustments.
- Q1 2017 included a $1.1 million correcting entry related to inventory reserves and incentive-compensation accruals. The filing says it reduced the pretax loss and was not material to any affected period.
Outlook, risks and contingencies
No formal revenue or earnings guidance is provided in the supplied filing text. Knowles expects 2017 capital expenditures of 6%–8% of revenue. Management cited growth opportunities in multi-microphone adoption and intelligent-audio products, while emphasizing execution of cost savings and restructuring.
Key disclosed risks include price erosion, customer concentration and demand variability, customer product-launch timing, adoption of new audio technologies, factory utilization, quality and supply constraints, competition, foreign-exchange movements, litigation and the ability to achieve restructuring savings. Malaysian tax holidays that benefit the effective tax rate depend on meeting specified conditions and are currently scheduled to expire December 31, 2021. Ordinary-course legal proceedings and intellectual-property claims were not expected by management to have a material adverse effect, based on information available at filing. The company reported no material developments in previously disclosed risk factors.
Important facts for investors to verify
- Whether microphone shipment growth continues to outweigh average-selling-price declines and customer concentration risks.
- Whether restructuring and productivity initiatives deliver expected savings, and whether the hearing-health transfer stays on schedule and within expected cost.
- Capital spending against the 6%–8% of revenue expectation, and the effect of working-capital investment on operating cash flow.
- Debt maturities, variable-rate borrowing costs, covenant headroom and access to cash held outside the U.S.
- The sustainability of earnings comparisons, given the sale of the speaker and receiver product line and the tax-driven Q1 2017 discontinued-operations benefit.