Knowles(KN) - 2019 Q1 - Quarterly Report

PART I Financial Statements Knowles Corporation reported Q1 2019 revenues of $179.8 million, a net loss of $2.7 million, and increased total assets Consolidated Statements of Earnings Q1 2019 revenues marginally increased to $179.8 million, leading to a widened net loss of $2.7 million due to increased tax provision Consolidated Statements of Earnings (Q1 2019 vs Q1 2018) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Revenues | $179.8 million | $178.5 million | | Gross Profit | $68.5 million | $65.3 million | | Operating Earnings | $4.4 million | $4.3 million | | Loss from Continuing Operations | $(2.7) million | $(0.4) million | | Net Loss | $(2.7) million | $(0.3) million | | Diluted Net Loss Per Share | $(0.03) | $0.00 | Consolidated Balance Sheets Total assets increased to $1,575.0 million driven by inventories and new lease assets, while cash decreased to $41.3 million Key Balance Sheet Items (As of March 31, 2019 vs Dec 31, 2018) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $41.3 million | $73.5 million | | Inventories, net | $159.3 million | $140.1 million | | Total Assets | $1,575.0 million | $1,547.9 million | | Long-term debt | $170.0 million | $158.1 million | | Total Stockholders' Equity | $1,216.5 million | $1,211.6 million | - The company adopted a new lease accounting standard (ASC 842) on January 1, 2019, resulting in the recognition of approximately $40 million of operating lease liabilities and right-of-use assets on its Consolidated Balance Sheets[28][29] Consolidated Statements of Cash Flows Net cash used in operating activities increased, with significant investing outflows, leading to a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows (Q1 2019 vs Q1 2018) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11.2) million | $(5.5) million | | Net cash used in investing activities | $(26.5) million | $(40.4) million | | Net cash provided by (used in) financing activities | $5.3 million | $(3.6) million | | Net decrease in cash and cash equivalents | $(32.2) million | $(49.0) million | Notes to Consolidated Financial Statements Notes detail business, accounting policies, and key events including the DITF acquisition, restructuring charges, and varied segment revenue performance - On January 3, 2019, the Company acquired substantially all of the assets of DITF Interconnect Technology, Inc. for $11.1 million, included in the Precision Devices (PD) segment[23][37] - In Q1 2019, the company recorded restructuring charges of $2.3 million, primarily for workforce rationalization in the Audio segment and transferring capacitor manufacturing operations in the PD segment[57][59] Segment Revenues (Q1 2019 vs Q1 2018) | Segment | Q1 2019 Revenue | Q1 2018 Revenue | Change | | :--- | :--- | :--- | :--- | | Audio | $139.1 million | $146.4 million | -5.0% | | Precision Devices | $40.7 million | $32.1 million | +26.8% | | Total | $179.8 million | $178.5 million | +0.7% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue increase to PD segment growth offsetting Audio decline, with improved gross profit margin and decreased cash position Results of Operations Q1 2019 revenues increased to $179.8 million driven by PD growth offsetting Audio decline, with improved gross profit margin and an unusually high effective tax rate - PD revenues increased $8.6 million due to higher shipments for defense and telecommunications markets and the DITF acquisition[132] - Audio revenues decreased $7.3 million due to lower MEMS microphone shipments to its largest customer, a key Korean OEM, and price erosion on mature products[132] - The effective tax rate was a 2,600.0% provision, compared to 200.0% in Q1 2018, due to accruing taxes in profitable countries while having a valuation allowance in others on near break-even pre-tax income[142] Segment Results Audio segment revenue declined 5.0% with improved adjusted EBIT margin, while Precision Devices revenue grew 26.8% with increased adjusted EBIT margin Audio Segment Performance (Q1 2019 vs Q1 2018) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Revenues | $139.1 million | $146.4 million | | EBIT | $11.8 million | $12.3 million | | Adjusted EBIT | $18.4 million | $17.9 million | | Adjusted EBIT Margin | 13.2% | 12.2% | Precision Devices Segment Performance (Q1 2019 vs Q1 2018) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Revenues | $40.7 million | $32.1 million | | EBIT | $7.5 million | $6.2 million | | Adjusted EBIT | $9.7 million | $7.4 million | | Adjusted EBIT Margin | 23.8% | 23.1% | Liquidity and Capital Resources Cash and cash equivalents decreased by $32.2 million due to operating and investing outflows, partially offset by financing activities, with long-term debt increasing - Cash and cash equivalents decreased from $73.5 million at year-end 2018 to $41.3 million at March 31, 2019[171] - Cash used in investing activities included $11.4 million for the acquisition of DITF and $15.1 million for additions to property, plant, and equipment[17][175] - The company had $170.0 million in total long-term debt as of March 31, 2019, consisting of $151.0 million in convertible senior notes and $19.0 million from its revolving credit facility[179] Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the company's market risk exposure during the first quarter of 2019 - There were no material changes to the information on market risk exposure during the three months ended March 31, 2019[184] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[185] - There were no material changes in the company's internal control over financial reporting during the first quarter of 2019[186] PART II — OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings but does not expect them to have a material adverse effect on its financial condition or results of operations - The company is involved in various legal proceedings arising in the ordinary course of business but does not expect them to have a material adverse effect on its cash flow, results of operations, or financial condition[115][188] Risk Factors There have been no material developments in the company's previously reported risk factors from its 2018 Annual Report on Form 10-K - There are no material developments in the company's previously reported risk factors from its 2018 Annual Report on Form 10-K[190] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL formatted financial information - Exhibits filed with the report include: * CEO Certification (Rule 13a-14(a)/15d-14(a)) * CFO Certification (Rule 13a-14(a)/15d-14(a)) * Joint CEO and CFO Certification (Section 906 of Sarbanes-Oxley) * XBRL formatted financial information[192]