Market Overview

Knowles Reports Q2 2018 Financial Results and Provides Outlook for Q3 2018

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Q2 Revenues up 15 Percent Y/Y

Q2 Gross Margin & EPS Above High End of Guidance Range

Expect 9 Percent Revenue Growth in 2018

Knowles Corporation (NYSE:KN), a market leader and global provider of
advanced micro-acoustic, audio processing, and precision device
solutions, today announced results for the second quarter ended June 30,
2018.

"We delivered Q2 revenues at the high end of our guidance, with gross
margins and EPS above our expected range," said Jeffrey Niew, president
and CEO of Knowles. "Sales in our Audio segment were 10 percent higher
than the year ago period driven by strong MEMS microphone shipments. In
the Precision Devices segment, revenues hit record levels for the second
consecutive quarter due to strong demand for capacitors across most end
markets and an acquisition completed in the first quarter."

"As we enter the second half of the year, we are seeing positive
momentum in both of our business segments and expect 9 percent total
company revenue growth in 2018. Our microphone business continues to
grow in Mobile, Ear, and IoT. We also expect increasing sales of
intelligent audio solutions across all of our end markets. In addition,
I expect continued strength in capacitor demand, and our hearing health
business to remain stable throughout the rest of the year."

"As we transition from an acoustic component supplier to an audio
solutions provider, we are expanding our available market and enabling
macro audio trends, including processing at the edge of the network and
voice as a user interface. I continue to believe that our core
capabilities in acoustics, digital signal processing and algorithms are
unique and unrivaled, and we are ideally positioned to grow across all
of our end markets," continued Niew.

Financial Highlights

The following table highlights the Company's financial performance on
both a GAAP and supplemental non-GAAP basis for continuing operations*
(in millions, except per share data):

  Q2FY18   Q1FY18   Q2FY17   Sequential   Year Ago
                Change   Period Change
Revenues   $188.4   $178.5   $164.4   6%   15%
Gross profit $73.2 $65.3 $63.2 12% 16%
(as a % of revenues)   38.9%   36.6%   38.4%        
Non-GAAP gross profit $74.2 $66.7 $66.4 11% 12%
(as a % of revenues)   39.4%   37.4%   40.4%        
Diluted earnings (loss) per share**   $0.05   $0.00   $(0.35)   NM***   NM***
Non-GAAP diluted earnings per share   $0.18   $0.11   $0.11   64%   64%

* Continuing operations excludes the results of our speaker and receiver
product line which was sold on July 7, 2016 and our timing device
business which was sold on November 28, 2017.

** Current period results include $7.3 million in stock-based
compensation, $1.6 million from amortization of intangibles, $1.3
million in production transfer costs and restructuring charges, and $1.3
million of other expense.

*** Not meaningful

In addition to the GAAP results included in this press release, Knowles
has presented supplemental non-GAAP gross profit, earnings before
interest and income taxes, adjusted earnings before interest and income
taxes, non-GAAP diluted earnings per share, as well as other metrics on
a non-GAAP basis that exclude certain amounts that are included in the
most directly comparable GAAP measure to facilitate evaluation of
Knowles' operating performance. Non-GAAP results are not presented in
accordance with GAAP. Non-GAAP information should be considered a
supplement to, and not a substitute for, financial statements prepared
in accordance with GAAP. In addition, the non-GAAP financial measures
included in this press release do not have standard meanings and may
vary from similarly titled non-GAAP financial measures used by other
companies. Knowles believes that non-GAAP measures are useful as
supplements to its GAAP results of operations to evaluate certain
aspects of its operations and financial performance, and its management
team primarily focuses on non-GAAP items in evaluating Knowles'
performance for business planning purposes. Knowles also believes that
these measures assist it with comparing its performance between various
reporting periods on a consistent basis, as these measures remove from
operating results the impact of items that, in Knowles' opinion, do not
reflect its core operating performance including, for example,
stock-based compensation, certain intangibles amortization expense,
fixed asset impairment charges, restructuring, production transfer
costs, and other charges which management considers to be outside our
core operating results. Knowles believes that its presentation of these
non-GAAP financial measures is useful because it provides investors and
securities analysts with the same information that Knowles uses
internally for purposes of assessing its core operating performance. For
a reconciliation of these non-GAAP financial measures to the most
directly comparable GAAP financial measures, see the reconciliation
table accompanying this release.

Third Quarter 2018 Outlook

The following forward looking guidance for the quarter ending September
30, 2018 on a continuing operations basis is as follows:

  GAAP   Adjustments   Non-GAAP
Revenues $205 to $235 million - $205 to $235 million
Gross Profit Margin 37 to 40% 1% 38 to 41%
EPS $0.17 to $0.23 $0.10 $0.27 to $0.33

Q3 2018 GAAP results for continuing operations are expected to include
approximately $0.07 per share in stock-based compensation, $0.02 per
share in amortization of intangibles, and $0.01 per share in
amortization of debt discount. Expected Q3 2018 GAAP results exclude
potential restructuring items.

Webcast and Conference Call Information

Investors can listen to a live or replay webcast of the Company's
quarterly financial conference call at http://investor.knowles.com.
The live webcast will begin today at 3:30 p.m. Central time. The webcast
replay will be available after 7:00 p.m. Central time today.

Investors can also listen to the conference call at 3:30 p.m. Central
time today by calling (866) 393-4306 (United States) or (734) 385-2616
(International). The conference call replay will be available after 7:00
p.m. Central time today through 11:59 p.m. Central time on July 31, 2018
at (855) 859-2056 (United States) or (404) 537-3406 (International). The
access code is 9787364.

About Knowles

Knowles Corporation (NYSE:KN) is a market leader and global provider of
advanced micro-acoustic, audio processing, and precision device
solutions, serving the mobile consumer electronics, communications,
medical, military, aerospace, and industrial markets. Knowles uses its
leading position in MEMS (micro-electro-mechanical systems) microphones
and strong capabilities in audio processing technologies to optimize
audio systems and improve the user experience in mobile, ear, and IoT
applications. Knowles is also the leader in acoustic components used in
hearing aids and has a strong position in high-end capacitors. Knowles'
focus on the customer, combined with unique technology, proprietary
manufacturing techniques, rigorous testing, and global scale, enables it
to deliver innovative solutions that optimize the user experience.
Founded in 1946 and headquartered in Itasca, Illinois, Knowles is a
global organization with employees in 11 countries. For more
information, visit knowles.com.

Forward Looking Statements

This news release contains forward-looking statements within the meaning
of the safe harbor provisions of the United States Private Securities
Litigation Reform Act of 1995. The words "believe," "expect,"
"anticipate," "project," "estimate," "budget," "continue," "could,"
"intend," "may," "plan," "potential," "predict," "seek," "should,"
"will," "would," "objective," "forecast," "goal," "guidance," "outlook,"
"effort," "target," and similar expressions, among others, generally
identify forward-looking statements, which speak only as of the date the
statements were made. The statements in this news release are based on
current plans, expectations, forecasts, and assumptions involving risks
and uncertainties that could cause actual outcomes or results to differ
materially from those outcomes or results that are projected,
anticipated, or implied in these statements. These risks and
uncertainties include, but are not limited to: MEMS microphone demand
from our largest customers, in particular, two North American, a Korean,
and Chinese OEM customers; the success and rate of multi-microphone and
smart microphone adoption and market adoption of our "intelligent audio"
solutions; our ability to stem or overcome price erosion in our
segments; fluctuations in our stock's market price; fluctuations in
operating results and cash flows; our ability to prevent or identify
quality issues in our products or to promptly remedy any such issues
that are identified; the timing of OEM product launches; downward
pressure on the average selling prices for our products; risks
associated with increasing our inventories in advance of anticipated
orders by customers; macroeconomic conditions, both in the U.S. and
internationally; foreign currency exchange rate fluctuations; our
ability to achieve continued reductions in our operating expenses; our
ability to qualify our products and facilities with customers; our
ability to obtain, enforce, defend or monetize our intellectual property
rights; increases in the costs of critical raw materials and components;
availability of raw materials and components; managing new product ramps
and introductions for our customers; our dependence on a limited number
of large customers; our ability to maintain and expand our existing
relationships with leading OEMs in order to maintain and increase our
revenue; increasing competition and new entrants in the market for our
products; our ability to develop new or enhanced products or
technologies in a timely manner that achieve market acceptance; our
reliance on third parties to manufacture, assemble, and test our
products and sub-components; government trade restrictions and
import/export controls; changes in tax laws or our ability to utilize
our tax structure and any net operating losses and other factors that we
may not have currently identified or quantified; and other risks,
relevant factors, and uncertainties identified in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2017, subsequent
Reports on Forms 10-Q and 8-K and our other filings we make with the
U.S. Securities and Exchange Commission. Knowles disclaims any intention
or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise,
except as required by law.

 

INVESTOR SUPPLEMENT - SECOND QUARTER 2018

 
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except share and per share amounts)
(unaudited)
     
Quarter Ended
June 30, 2018 March 31, 2018 June 30, 2017
Revenues $ 188.4 $ 178.5 $ 164.4
Cost of goods sold 115.1 113.2 100.4
Impairment charges - - 1.4
Restructuring charges - cost of goods sold   0.1   -     (0.6 )
Gross profit 73.2 65.3 63.2
Research and development expenses 25.4 24.8 24.7
Selling and administrative expenses 37.1 35.8 33.9
Impairment charges - - 19.9
Restructuring charges   0.5   0.4     2.7  
Operating expenses   63.0   61.0     81.2  
Operating earnings (loss) 10.2 4.3 (18.0 )
Interest expense, net 4.1 4.0 5.1
Other expense (income), net   0.3   (0.1 )   1.1  
Earnings (loss) before income taxes and discontinued operations 5.8 0.4 (24.2 )
Provision for income taxes   1.4   0.8     6.7  
Earnings (loss) from continuing operations 4.4 (0.4 ) (30.9 )
Earnings from discontinued operations, net   0.2   0.1     1.2  
Net earnings (loss) $ 4.6 $ (0.3 ) $ (29.7 )
 
Earnings (loss) per share from continuing operations:
Basic $ 0.05 $ - $ (0.35 )
Diluted $ 0.05 $ - $ (0.35 )
 
Earnings per share from discontinued operations:
Basic $ - $ - $ 0.02
Diluted $ - $ - $ 0.02
 
Net earnings (loss) per share:
Basic $ 0.05 $ - $ (0.33 )
Diluted $ 0.05 $ - $ (0.33 )
 
Weighted-average common shares outstanding:
Basic 90,063,089 89,718,318 89,361,352
Diluted 90,731,760 89,718,318 89,361,352
 
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except share and per share amounts)
(unaudited)
   
Six Months Ended
June 30, 2018 June 30, 2017
Revenues $ 366.9 $ 332.7
Cost of goods sold 228.3 205.1
Impairment charges - 1.4
Restructuring charges - cost of goods sold   0.1   3.7  
Gross profit 138.5 122.5
Research and development expenses 50.2 48.7
Selling and administrative expenses 72.9 67.3
Impairment charges - 19.9
Restructuring charges   0.9   3.3  
Operating expenses   124.0   139.2  
Operating earnings (loss) 14.5 (16.7 )
Interest expense, net 8.1 10.3
Other expense, net   0.2   2.7  
Earnings (loss) before income taxes and discontinued operations 6.2 (29.7 )
Provision for income taxes   2.2   6.2  
Earnings (loss) from continuing operations 4.0 (35.9 )
Earnings from discontinued operations, net   0.3   3.0  
Net earnings (loss) $ 4.3 $ (32.9 )
 
Earnings (loss) per share from continuing operations:
Basic $ 0.04 $ (0.40 )
Diluted $ 0.04 $ (0.40 )
 
Earnings per share from discontinued operations:
Basic $ 0.01 $ 0.03
Diluted $ 0.01 $ 0.03
 
Net earnings (loss) per share:
Basic $ 0.05 $ (0.37 )
Diluted $ 0.05 $ (0.37 )
 
Weighted-average common shares outstanding:
Basic 89,893,557 89,168,499
Diluted 90,718,298 89,168,499
 
KNOWLES CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL
MEASURES
(1)
(in millions, except for share and per share amounts)
(unaudited)
               
Quarter Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
  2018       2018       2017     2017       2016  
Gross profit $ 73.2 $ 65.3 $ 63.2 $ 138.5 $ 122.5
Gross profit as % of revenues 38.9 % 36.6 % 38.4 % 37.7 % 36.8 %
Stock-based compensation expense 0.4 0.4 0.5 0.8 0.9
Impairment charges - - 1.4 - 1.4
Restructuring charges 0.1 - (0.6 ) 0.1 3.7
Production transfer costs (2) 0.5 0.8 1.9 1.3 3.1
Other (3)   -       0.2       -     0.2       -  
Non-GAAP gross profit $ 74.2     $ 66.7     $ 66.4   $ 140.9     $ 131.6  
Non-GAAP gross profit as % of revenues 39.4 % 37.4 % 40.4 % 38.4 % 39.6 %
 
Research and development expenses $ 25.4 $ 24.8 $ 24.7 $ 50.2 $ 48.7
Stock-based compensation expense (2.0 ) (2.0 ) (1.5 ) (4.0 ) (2.9 )
Production transfer costs (2)   (0.2 )     (0.2 )     -     (0.4 )     -  
Non-GAAP research and development expenses $ 23.2     $ 22.6     $ 23.2   $ 45.8     $ 45.8  
 
Selling and administrative expenses $ 37.1 $ 35.8 $ 33.9 $ 72.9 $ 67.3
Stock-based compensation expense (4.9 ) (4.6 ) (4.2 ) (9.5 ) (8.3 )
Intangibles amortization expense (1.6 ) (1.6 ) (1.9 ) (3.2 ) (4.6 )
Other (3)   -       (0.1 )     (0.2 )   (0.1 )     (0.2 )
Non-GAAP selling and administrative expenses $ 30.6     $ 29.5     $ 27.6   $ 60.1     $ 54.2  
 
Operating expenses $ 63.0 $ 61.0 $ 81.2 $ 124.0 $ 139.2
Stock-based compensation expense (6.9 ) (6.6 ) (5.7 ) (13.5 ) (11.2 )
Intangibles amortization expense (1.6 ) (1.6 ) (1.9 ) (3.2 ) (4.6 )
Impairment charges - - (19.9 ) - (19.9 )
Restructuring charges (0.5 ) (0.4 ) (2.7 ) (0.9 ) (3.3 )
Production transfer costs (2) (0.2 ) (0.2 ) - (0.4 ) -
Other (3)   -       (0.1 )     (0.2 )   (0.1 )     (0.2 )
Non-GAAP operating expenses $ 53.8     $ 52.1     $ 50.8   $ 105.9     $ 100.0  
 
Earnings (loss) from continuing operations $ 4.4 $ (0.4 ) $ (30.9 ) $ 4.0 $ (35.9 )
Interest expense, net 4.1 4.0 5.1 8.1 10.3
Provision for income taxes   1.4       0.8       6.7     2.2       6.2  
Earnings (loss) from continuing operations before interest and
income taxes
9.9 4.4 (19.1 ) 14.3 (19.4 )
Earnings (loss) from continuing operations before interest and
income taxes as % of revenues
5.3 % 2.5 % -11.6 % 3.9 % -5.8 %
Stock-based compensation expense 7.3 7.0 6.2 14.3 12.1
Intangibles amortization expense 1.6 1.6 1.9 3.2 4.6
Impairment charges - - 21.3 - 21.3
Restructuring charges 0.6 0.4 2.1 1.0 7.0
Production transfer costs (2) 0.7 1.0 1.9 1.7 3.1
Other (3)   1.3       0.3       0.2     1.6       0.2  
Adjusted earnings from continuing operations before interest and
income taxes
$ 21.4     $ 14.7     $ 14.5   $ 36.1     $ 28.9  
Adjusted earnings from continuing operations before interest and
income taxes as % of revenues
11.4 % 8.2 % 8.8 % 9.8 % 8.7 %
 
Interest expense, net $ 4.1 $ 4.0 $ 5.1 $ 8.1 $ 10.3
Interest expense, net non-GAAP reconciling adjustments (4)   1.6       1.5       1.4     3.1       2.8  
Non-GAAP interest expense $ 2.5     $ 2.5     $ 3.7   $ 5.0     $ 7.5  
 
Provision for income taxes $ 1.4 $ 0.8 $ 6.7 $ 2.2 $ 6.2
Income tax effects of non-GAAP reconciling adjustments   0.7       0.7       (6.5 )   1.4       (5.3 )
Non-GAAP provision for income taxes $ 2.1     $ 1.5     $ 0.2   $ 3.6     $ 0.9  
 
Earnings (loss) from continuing operations $ 4.4 $ (0.4 ) $ (30.9 ) $ 4.0 $ (35.9 )
Non-GAAP reconciling adjustments (5) 11.5 10.3 33.6 21.8 48.3
Interest expense, net non-GAAP reconciling adjustments (4) 1.6 1.5 1.4 3.1 2.8
Income tax effects of non-GAAP reconciling adjustments   0.7       0.7       (6.5 )   1.4       (5.3 )
Non-GAAP net earnings $ 16.8     $ 10.7     $ 10.6   $ 27.5     $ 20.5  
 
Diluted earnings (loss) per share from continuing operations $ 0.05 $ - $ (0.35 ) $ 0.04 $ (0.40 )
Earnings per share non-GAAP reconciling adjustment   0.13       0.11       0.46     0.26       0.62  
Non-GAAP diluted earnings per share $ 0.18     $ 0.11     $ 0.11   $ 0.30     $ 0.22  
 
Diluted average shares outstanding 90,731,760 89,718,318 89,361,352 90,718,298 89,168,499
Non-GAAP adjustment (6)   2,481,654       3,389,994       3,336,773     2,259,442       3,299,206  
Non-GAAP diluted average shares outstanding (6)   93,213,414       93,108,312       92,698,125     92,977,740       92,467,705  

Notes:

 
(1) In addition to the GAAP financial measures included herein,
Knowles has presented certain non-GAAP financial measures that
exclude certain amounts that are included in the most directly
comparable GAAP measures. Knowles believes that non-GAAP measures
are useful as supplements to its GAAP results of operations to
evaluate certain aspects of its operations and financial
performance, and its management team primarily focuses on non-GAAP
items in evaluating Knowles' performance for business planning
purposes. Knowles also believes that these measures assist it with
comparing its performance between various reporting periods on a
consistent basis, as these measures remove from operating results
the impact of items that, in Knowles' opinion, do not reflect its
core operating performance. Knowles believes that its presentation
of non-GAAP financial measures is useful because it provides
investors and securities analysts with the same information that
Knowles uses internally for purposes of assessing its core operating
performance.
 
(2) Production transfer costs represent duplicate costs incurred to
migrate manufacturing to facilities primarily in Asia. These amounts
are included in the corresponding Gross profit and Earnings (loss)
from continuing operations before interest and income taxes for each
period presented.
 
(3) In 2018, Other expenses in Gross profit and Operating expenses
represent expenses related to the Compex acquisition and the
remaining Other expenses represent an adjustment to pre-spin-off
pension obligations. In 2017, Other primarily represents expenses
related to the acquisition of certain assets of a capacitors
manufacturer.
 
(4) Under GAAP, certain convertible debt instruments that may be
settled in cash (or other assets) upon conversion are required to be
separately accounted for as liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the
issuer's nonconvertible debt borrowing rate. Accordingly, for GAAP
purposes we are required to recognize imputed interest expense on
the Company's $172.5 million of convertible senior notes due 2021
that were issued in a private placement in May 2016. The imputed
interest rate is 8.12% for the convertible notes due 2021, while the
actual coupon interest rate of the notes was 3.25%. The difference
between the imputed interest expense and the coupon interest expense
is excluded from management's assessment of the Company's operating
performance because management believes that this non-cash expense
is not indicative of its core, ongoing operating performance.
 
(5) The non-GAAP reconciling adjustments are those adjustments made
to reconcile Earnings (loss) from continuing operations before
interest and income taxes to Adjusted earnings from continuing
operations before interest and income taxes.
 
(6) The number of shares used in the diluted per share calculations
on a non-GAAP basis excludes the impact of stock-based compensation
expense expected to be incurred in future periods and not yet
recognized in the financial statements, which would otherwise be
assumed to be used to repurchase shares under the GAAP treasury
stock method.
 
   
KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except for share and per share amounts)
(unaudited)
 
June 30, 2018 December 31, 2017
Current assets:
Cash and cash equivalents $ 50.8 $ 111.7
Receivables, net of allowances of $0.5 and $0.7 130.1 137.7
Inventories, net 160.6 125.6
Prepaid and other current assets   23.3     19.9  
Total current assets   364.8     394.9  
Property, plant, and equipment, net 205.1 183.0
Goodwill 887.9 884.9
Intangible assets, net 60.0 53.5
Other assets and deferred charges 34.7 31.8
Assets of discontinued operations   0.2     1.7  
Total assets $ 1,552.7   $ 1,549.8  
 
Current liabilities:
Accounts payable $ 89.9 $ 85.6
Accrued compensation and employee benefits 30.0 31.2
Other accrued expenses 21.3 28.2
Federal and other taxes on income   1.2     6.6  
Total current liabilities   142.4     151.6  
Long-term debt 196.1 192.6
Other liabilities 69.7 67.9
Liabilities of discontinued operations 1.9 5.6
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value; 10,000,000 shares authorized;
none issued
- -
Common stock - $0.01 par value; 400,000,000 shares authorized;
90,098,973 and 89,491,471 shares issued and outstanding at June 30,
2018 and December 31, 2017, respectively
0.9 0.9
Additional paid-in capital 1,533.6 1,523.1
Accumulated deficit (287.6 ) (291.9 )
Accumulated other comprehensive loss   (104.3 )   (100.0 )
Total stockholders' equity   1,142.6     1,132.1  
Total liabilities and stockholders' equity $ 1,552.7   $ 1,549.8  
 

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