Knowles(KN) - 2022 Q4 - Annual Report

Part I Business Knowles is a global provider of advanced micro-acoustic components and solutions for medtech, defense, consumer, and EV markets - Knowles is a market leader in advanced micro-acoustic microphones, balanced armature speakers, audio solutions, high-performance capacitors, and RF filtering products[14] - The company operates through three reportable segments established in Q4 2022: Precision Devices (PD), Medtech & Specialty Audio (MSA), and Consumer MEMS Microphones (CMM)[19] Business Segments and Key Markets | Segment | Products | Key Markets | | :--- | :--- | :--- | | PD | High-performance capacitors, RF solutions | Defense, medtech, electric vehicle, industrial | | MSA | Balanced armature speakers, microphones | Hearing health, premium audio | | CMM | MEMS microphones, audio solutions | Ear, IoT, computing, smartphones | - Revenue from Major Customer (Apple Inc.) Revenue from Major Customer (Apple Inc.) | Year | Percentage of Total Revenue | | :--- | :--- | | 2022 | 15% | | 2021 | 16% | | 2020 | 23% | - As of December 31, 2022, Knowles had approximately 7,000 employees, with 82% located in Asia and 71% identifying as female globally[38] Risk Factors The company faces diverse risks including customer concentration, supply chain dependencies, geopolitical instability, and goodwill impairment - The CMM segment is highly dependent on a few OEM customers. In 2022, its top five customers accounted for approximately 63% of its revenues, with Apple Inc. representing about 40% of CMM's revenues and 15% of consolidated company revenues[57] - Sales of MEMS microphones accounted for approximately 46% of consolidated revenues in fiscal 2022. Weak demand in 2022 was driven by a downturn in consumer electronics, COVID-19 shutdowns in China, and excess inventory[58] - The company relies on highly specialized and sometimes sole-sourced suppliers, such as ASIC and MEMS foundry partners, creating a risk of supply disruption[59] - A significant goodwill balance of $730.5 million as of December 31, 2022, is subject to impairment risk. In 2022, the company recorded goodwill impairment charges of $470.9 million for the CMM segment[72] - The majority of manufacturing operations are in Asia, exposing the company to risks such as labor unrest, natural disasters, political instability, and trade restrictions, particularly with China[77][80] - The credit agreement contains financial covenants, including minimum interest coverage and maximum leverage ratios, which if breached, could result in default[97] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[105] Properties The company's corporate headquarters is in Itasca, Illinois. Its material manufacturing and administrative facilities are primarily located in Suzhou, China; Cebu, the Philippines; and Penang, Malaysia, supporting all three business segments. Additional significant facilities are located in Cazenovia, New York Material Properties | Location | Principal Function(s) | Segment(s) Served | Square Footage (thousands) | | :--- | :--- | :--- | :--- | | Suzhou, China | Manufacturing and administrative | PD, MSA, CMM | 495 | | Cebu, the Philippines | Manufacturing and administrative | MSA | 215 | | Penang, Malaysia | Manufacturing and administrative | MSA, CMM | 187 | | Cazenovia, New York | Manufacturing, R&D, sales, admin | PD | 133 | | Itasca, Illinois | Corp HQ, R&D, sales, admin | MSA, CMM | 95 | Legal Proceedings For discussion of contingencies related to legal proceedings, the company refers to Note 15 of its Consolidated Financial Statements - Information on legal proceedings is detailed in Note 15. Commitments and Contingent Liabilities[107] Mine Safety Disclosures This item is not applicable to the company - Not applicable[108] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Knowles' common stock trades on NYSE; no immediate dividends planned, with $145.2 million remaining for share repurchases - The company does not currently pay cash dividends and does not anticipate paying them in the immediate future[118] - A share repurchase program was authorized for up to $100 million in February 2020 and increased by an additional $150 million in April 2022[121] - As of December 31, 2022, the remaining amount authorized for share repurchases was $145.2 million. No shares were repurchased in the three months ended December 31, 2022[122] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue declined 11.9% to $764.7 million due to CMM downturn and $470.9 million goodwill impairment, leading to a $430.1 million net loss Key Financial Results (2022 vs. 2021) | Metric (in millions, except per share) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Revenues | $764.7 | $868.1 | -11.9% | | Gross Profit | $276.3 | $359.5 | -23.1% | | (Loss) Earnings from Continuing Operations | $(430.1) | $150.2 | -486.2% | | Diluted (Loss) Earnings Per Share | $(4.69) | $1.59 | - $6.28 | - The revenue decrease was primarily driven by a $143.8 million decline in the CMM segment due to lower demand for MEMS microphones in mobile, computing, and IoT markets, stemming from weak global demand for consumer electronics and COVID-19 shutdowns in China[142] - The company recorded a goodwill impairment charge of $470.9 million for the CMM reporting unit in 2022, which was the primary driver of the significant net loss[151] - Restructuring charges of $41.8 million were recorded in 2022, with $32.2 million impacting Gross Profit and $9.6 million in Operating Expenses, mainly related to rightsizing the CMM segment[145] Results of Operations In 2022, the company reported a $430.1 million net loss due to an 11.9% revenue decline to $764.7 million and a $470.9 million goodwill impairment Revenue by Segment (2022 vs 2021) | Segment | 2022 Revenue (M) | 2021 Revenue (M) | Change (M) | | :--- | :--- | :--- | :--- | | CMM | $291.9 | $435.7 | $(143.8) | | MSA | $229.9 | $231.3 | $(1.4) | | PD | $242.9 | $201.1 | $41.8 | - Gross profit margin decreased to 36.1% in 2022 from 41.4% in 2021, primarily due to restructuring charges, lower factory utilization in the CMM segment, and lower pricing on mature products[147] - A goodwill impairment charge of $470.9 million was recorded in 2022 related to the CMM reporting unit. No such charge was recorded in 2021[151] - The effective tax rate was (2.8)% in 2022, a significant change from (43.6)% in 2021. The change was primarily due to the nondeductible goodwill impairment in 2022 versus a large valuation allowance release in 2021[153] Segment Results of Operations In 2022, PD and MSA segments performed well, while CMM revenue plummeted 33.0% to $291.9 million, resulting in a $504.5 million EBIT loss due to impairment Segment EBIT (2022 vs 2021) | Segment (in millions) | 2022 EBIT | 2021 EBIT | | :--- | :--- | :--- | | Precision Devices (PD) | $56.1 | $43.7 | | MedTech & Specialty Audio (MSA) | $84.6 | $77.0 | | Consumer MEMS Microphones (CMM) | $(504.5) | $60.0 | - PD segment revenue growth was driven by demand from defense, medtech, communications, and industrial markets, along with the acquisition of IMC[168] - MSA segment EBIT margin improved from 33.3% to 36.8% due to higher gross profit margin and reduced legal expenses[177] - CMM segment's EBIT loss was primarily caused by a $470.9 million goodwill impairment, lower revenues, and $41.2 million in restructuring charges[182][185] Liquidity and Capital Resources The company generated $86.3 million in operating cash flow in 2022, with $54.2 million in free cash flow, ending the year with $48.2 million cash Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from Operating activities | $86.3 | $182.1 | | Net cash used in Investing activities | $(32.7) | $(129.6) | | Net cash used in Financing activities | $(73.2) | $(131.4) | Free Cash Flow (in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Cash flow from operating activities | $86.3 | $182.1 | | Less: Capital expenditures | $(32.1) | $(48.6) | | Free cash flow | $54.2 | $133.5 | - As of December 31, 2022, cash and cash equivalents totaled $48.2 million, with $40.0 million held by non-U.S. operations[191] - In 2022, the company repurchased 2.3 million shares of common stock for $44.0 million[192] Critical Accounting Estimates Goodwill impairment is a critical estimate, with $470.9 million in CMM charges in 2022, and its $270.1 million carrying value remains highly sensitive - Goodwill impairment is a critical estimate. The company recorded $470.9 million in goodwill impairment charges for the CMM reporting unit in 2022 due to a decline in demand for global consumer electronics[212] - As of December 31, 2022, the carrying value of the CMM reporting unit's goodwill ($270.1 million) approximates its fair value, indicating a high risk of future impairment if performance or market conditions worsen[215] CMM Reporting Unit Fair Value Sensitivity | Change in Assumption | Approximate Impairment Charge (in millions) | | :--- | :--- | | 1% increase in WACC | $41.9 | | 1% reduction in revenue growth | $40.2 | | 1% reduction in EBITDA margin | $29.2 | - The fair value of the PD and MSA reporting units exceeded their carrying values by at least 230%, indicating a low risk of impairment for these segments[217] Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the 'Risk Management' section from Item 7, discussing exposure to market risks including foreign currency, customer concentration, commodity prices, and interest rates - The information required by this item is incorporated by reference from the 'Risk Management' section in Item 7 of the report[221] Financial Statements and Supplementary Data This section presents audited 2022 financial statements, reflecting a $430.1 million net loss due to a $470.9 million goodwill impairment, a Critical Audit Matter - The independent auditor, PricewaterhouseCoopers LLP, identified the Goodwill Impairment Assessment for the Consumer MEMS Microphones (CMM) Reporting Unit as a Critical Audit Matter due to the significant management judgment and high degree of auditor subjectivity involved[235][237] Consolidated Statements of Earnings Highlights (Year Ended Dec 31, 2022) | Line Item (in millions) | Amount | | :--- | :--- | | Revenues | $764.7 | | Gross Profit | $276.3 | | Impairment Charges | $470.9 | | Operating (Loss) | $(414.8) | | Net (Loss) | $(430.1) | Consolidated Balance Sheets Highlights (As of Dec 31, 2022) | Line Item (in millions) | Amount | | :--- | :--- | | Total Assets | $1,183.9 | | Goodwill | $471.0 | | Total Liabilities | $191.0 | | Total Stockholders' Equity | $992.9 | Note 4. Impairment Charges In 2022, $470.9 million in goodwill impairment charges were recorded for the CMM unit, triggered by declining consumer electronics demand and rising interest rates - Goodwill impairment charges for the CMM reporting unit totaled $470.9 million for the year ended December 31, 2022[292][293] - The impairments were triggered by a rapid decline in current demand and a reduction in the expected future growth rate for global consumer electronics, as well as rising interest rates[292][293] Note 10. Restructuring and Related Activities In 2022, $41.8 million in restructuring charges were incurred within the CMM segment to right-size MEMS microphone manufacturing and rationalize Intelligent Audio 2022 Restructuring Charges by Segment (in millions) | Segment | Charge | | :--- | :--- | | Consumer MEMS Microphones | $41.2 | | Corporate | $0.6 | | Total | $41.8 | - The restructuring of the MEMS microphones product line resulted in charges of $39.0 million, including $21.1 million for supplier obligation settlements and $13.5 million in fixed asset write-offs[312] Note 12. Borrowings The company's primary debt is a $400.0 million revolving credit facility with $45.0 million outstanding, extended to 2028 post-year-end - As of Dec 31, 2022, the company had $45.0 million outstanding on its $400.0 million revolving credit facility[333] - The 3.25% convertible senior notes ($172.5 million principal) matured on November 1, 2021, and were settled in cash and stock[341][342] - Subsequent to year-end, on February 8, 2023, the company entered into an Amended and Restated Credit Agreement, extending the maturity of its credit facility to February 8, 2028[410] Note 18. Segment Information In 2022, CMM was the largest segment by revenue at $291.9 million, Asia the largest market at $471.3 million, and Apple Inc. accounted for 15% of total revenues Revenues by Geographic Location (2022) | Region | Revenue (in millions) | | :--- | :--- | | Asia | $471.3 | | United States | $174.3 | | Europe | $104.4 | | Other | $14.7 | | Total | $764.7 | - Apple Inc. accounted for 15% of total revenues in 2022, down from 16% in 2021 and 23% in 2020[407] - Total assets for the CMM segment decreased from $1,091.9 million in 2021 to $547.3 million in 2022, primarily due to goodwill impairment[406] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, concurred by auditor - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[421] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, an assessment audited and confirmed by PricewaterhouseCoopers LLP[422][423] Part III Directors, Executive Officers, and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance from the 2023 Proxy Statement and Part I - Information regarding directors and corporate governance is incorporated by reference from the 2023 Proxy Statement[429] - Information regarding executive officers is included in Part I of this Form 10-K[430] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2023 Proxy Statement - Details on executive compensation will be included in the 2023 Proxy Statement and are incorporated by reference[434] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership from the 2023 Proxy Statement and details equity compensation plans, with 5.6 million securities to be issued and 9.0 million available Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders | 5,641,098 | $16.86 | 9,010,351 | | Not approved by stockholders | — | — | — | | Total | 5,641,098 | $16.86 | 9,010,351 | Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Details on certain relationships, related transactions, and director independence will be included in the 2023 Proxy Statement and are incorporated by reference[437] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement, under the proposal for the ratification of the independent registered public accounting firm - Details on principal accountant fees and services will be included in the 2023 Proxy Statement and are incorporated by reference[438] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including financial statements, Schedule II, and comprehensive exhibits - The financial statements and Schedule II (Valuation and Qualifying Accounts) are filed as part of this report and located under Item 8[440] - A list of exhibits is provided, including the Restated Certificate of Incorporation, By-Laws, descriptions of securities, various compensation plans, credit agreements, and required certifications[440][441] Form 10-K Summary The company reports that there is no Form 10-K summary - None[442]