Knowles(KN) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q1 2020 and 2019 provide a comprehensive view of the company's financial performance and position Consolidated Statements of Earnings (Q1 2020 vs Q1 2019) | (in millions, except per share amounts) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Revenues | $163.1 | $179.8 | | Gross profit | $56.2 | $68.5 | | Operating (loss) earnings | $(9.6) | $4.4 | | Loss from continuing operations | $(12.8) | $(2.7) | | Net loss | $(9.1) | $(2.7) | | Diluted loss per share from continuing operations | $(0.14) | $(0.03) | | Diluted net loss per share | $(0.10) | $(0.03) | Consolidated Balance Sheets (as of March 31, 2020) | (in millions) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $443.0 | $388.4 | | Total assets | $1,696.8 | $1,654.6 | | Total current liabilities | $132.9 | $151.5 | | Long-term debt | $258.8 | $156.8 | | Total liabilities | $443.0 | $339.1 | | Total stockholders' equity | $1,253.8 | $1,288.5 | Consolidated Statements of Cash Flows (Q1 2020 vs Q1 2019) | (in millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1.5) | $(11.2) | | Net cash used in investing activities | $(7.8) | $(26.5) | | Net cash provided by financing activities | $78.9 | $5.3 | | Net increase (decrease) in cash and cash equivalents | $69.4 | $(32.2) | Notes to Consolidated Financial Statements Detailed explanations supporting the financial statements cover the business, COVID-19 impact, acquisitions, and segment performance Note 1. Basis of Presentation The company operates as a global solutions provider, acknowledges COVID-19's impact on estimates, and initiated a now-suspended share repurchase program - Knowles is a global provider of advanced micro-acoustic, audio processing, and precision device solutions for various markets including mobile consumer electronics, communications, and medtech[20] - The Board of Directors authorized a share repurchase program of up to $100 million, and during Q1 2020, the company repurchased 996,109 shares for $15.0 million before temporarily suspending the program due to the COVID-19 pandemic[23] - Management acknowledges that the COVID-19 pandemic's duration and impact cannot be reasonably estimated, which could adversely affect future estimates regarding the recoverability of goodwill, long-lived assets, and deferred tax assets[22] Note 3. Disposed and Discontinued Operations Discontinued operations include the sold Timing Device Business, which generated a $3.7 million tax benefit in Q1 2020 - The company recorded earnings from discontinued operations of $3.7 million in Q1 2020, which was entirely due to a tax benefit from a refund related to the previously sold Timing Device Business[32][33] Note 4. Acquisitions The company acquired the ASIC Design Business for $57.9 million and allocated the purchase price primarily to developed technology and goodwill - Acquired the ASIC Design Business from ams AG for $57.9 million on December 20, 2019, which includes intellectual property and an assembled workforce and is part of the Audio segment[37] ASIC Design Business Purchase Price Allocation | (in millions) | Amount | | :--- | :--- | | Developed technology | $33.3 | | In-process research and development | $3.7 | | Goodwill | $18.8 | | Total purchase price | $57.9 | Note 8. Restructuring and Related Activities Restructuring charges in Q1 2020 totaled $5.3 million, primarily for workforce rationalization in the Audio segment - Q1 2020 restructuring charges of $5.3 million were primarily for actions to rationalize the Audio segment workforce, including fixed asset write-offs[56] Restructuring Charges by Segment | (in millions) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Audio | $4.1 | $1.8 | | Precision Devices | — | $0.3 | | Corporate | $1.2 | $0.2 | | Total | $5.3 | $2.3 | Note 9. Borrowings Total debt increased to $258.8 million following a $100.0 million draw on the revolving credit facility, with all covenants in compliance Borrowings Summary | (in millions) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | 3.25% convertible senior notes | $158.8 | $156.8 | | Revolving credit facility | $100.0 | — | | Total long-term debt | $258.8 | $156.8 | - As of March 31, 2020, the company was in compliance with its debt covenants, which include interest coverage and leverage ratios[76] Note 11. Income Taxes The Q1 2020 effective tax rate was a 20.8% provision, favorably impacted by tax holidays in Malaysia - The effective tax rate from continuing operations was a 20.8% provision for Q1 2020, compared to a 2,600.0% provision in Q1 2019, with the high 2019 rate driven by a near break-even loss[83] - Tax holidays in Malaysia provided a benefit of approximately $1.3 million ($0.01 per share) in Q1 2020 and are effective through December 31, 2021[84] Note 12. Equity Incentive Program Stock-based compensation expense decreased to $3.5 million in Q1 2020, with $39.9 million in total unrecognized expense remaining - Total stock-based compensation expense was $3.5 million for Q1 2020, compared to $6.7 million for Q1 2019[85] - As of March 31, 2020, unrecognized compensation expense related to unvested RSUs and PSUs was $32.1 million and $7.8 million, respectively[90][96] Note 15. Segment Information The Audio segment's revenue declined while the Precision Devices segment grew, with Asia remaining the largest geographic market Revenues by Segment (Q1 2020 vs Q1 2019) | (in millions) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Audio | $120.1 | $139.1 | | Precision Devices | $43.0 | $40.7 | | Total revenues | $163.1 | $179.8 | Earnings (Loss) from Continuing Operations before Interest and Income Taxes by Segment | (in millions) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Audio | $(6.1) | $11.8 | | Precision Devices | $7.1 | $7.5 | | Total segments | $1.0 | $19.3 | Revenues by Geographic Location (Q1 2020 vs Q1 2019) | (in millions) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Asia | $109.7 | $121.1 | | United States | $29.3 | $32.2 | | Europe | $22.4 | $23.8 | | Total | $163.1 | $179.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2020 revenue decreased 9.3% year-over-year due to COVID-19's impact on the Audio segment, prompting cost-saving and liquidity measures COVID-19 Impact The pandemic disrupted operations and demand, leading to mitigation efforts and an expectation of lower full-year 2020 financial results - The company has taken several actions to mitigate the negative impacts of COVID-19, including suspending employee travel, implementing remote work, suspending the share repurchase program, and reducing employee salaries and board compensation[113] - While the full impact is uncertain, the company currently expects that full-year revenues, net income, and cash flow for 2020 will be lower than in 2019[114] Results of Operations (Q1 2020 vs Q1 2019) Revenues fell 9.3% to $163.1 million and gross margin declined to 34.5%, resulting in a $12.8 million loss from continuing operations - Revenues decreased by 9.3% YoY to $163.1 million, primarily due to the impacts of the COVID-19 pandemic causing lower demand for hearing health products and MEMS microphones in the Audio segment, particularly in China[120] - Gross profit margin decreased to 34.5% from 38.1% YoY, due to lower Audio revenue volumes, lower pricing on mature products, and disruptions from the COVID-19 pandemic that negatively impacted plant productivity and capacity utilization[124] - Non-GAAP diluted EPS from continuing operations was $0.03, down from $0.13 in Q1 2019, mainly driven by lower Adjusted EBIT[138] Segment Results of Operations The Audio segment's revenue and profit fell sharply due to COVID-19, while the Precision Devices segment saw revenue growth but slightly lower income - Audio Segment: Revenue decreased 13.7% YoY to $120.1 million due to COVID-19 impacts on demand and lower pricing; Adjusted EBIT margin fell to 3.3% from 13.2% due to lower demand, manufacturing disruptions, and higher legal expenses[146][148] - Precision Devices Segment: Revenue increased 5.7% YoY to $43.0 million, driven by higher shipments to defense, automotive, and medtech markets; Adjusted EBIT margin decreased to 18.6% from 23.8% due to higher product costs and factory overhead to support expansion[151][153] Liquidity and Capital Resources Cash increased to $147.8 million, bolstered by a $100.0 million credit facility draw, while operating cash flow improved due to working capital changes - Cash and cash equivalents increased to $147.8 million as of March 31, 2020, from $78.4 million at year-end 2019, with $58.7 million held by non-U.S. operations[160] - In Q1 2020, financing activities provided $78.9 million in cash, primarily from a $100.0 million borrowing under the revolving credit facility, partially offset by a $15.0 million share repurchase[166] - Cash used in operating activities improved to $1.5 million in Q1 2020 from $11.2 million in Q1 2019, mainly due to favorable changes in receivables and accrued compensation[163] Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the company's market risk exposure during the first quarter of 2020 - There were no material changes to the information on market risk exposure during Q1 2020[175] Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020 - Management, including the CEO and CFO, concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[176] - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2020[177] PART II — OTHER INFORMATION Legal Proceedings No material developments occurred in the company's legal proceedings during the quarter - For details on legal proceedings, the report refers to Note 14; there have been no material developments in legal proceedings during the quarter[179][180] Risk Factors Risk factors are updated to include the adverse impacts of the COVID-19 pandemic on demand, operations, and liquidity - The company's financial condition and results are expected to be adversely impacted by the COVID-19 pandemic[182] - Specific pandemic-related risks include lower product demand, business restrictions from government mandates, potential supply chain disruptions, increased costs for safety measures, and heightened liquidity risks[183] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $15.0 million of shares before suspending its $100 million repurchase program due to the pandemic - The company announced a $100 million share repurchase program on February 24, 2020, and has temporarily suspended it due to the COVID-19 pandemic[184] Share Repurchases (Q1 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | February 2020 | 91,500 | $16.39 | $98.5M | | March 2020 | 904,609 | $14.92 | $85.0M | | Total | 996,109 | $15.06 | $85.0M | Exhibits Filed exhibits include amended executive compensation plans and required CEO and CFO certifications - Filed exhibits include amended and restated executive compensation and incentive plans, and CEO/CFO certifications[187]