10-Q: Knowles Corporation Reports Q3 2024 Results, Announces Sale of Consumer MEMS Microphones Business

Knowles Corporation's Q3 2024 results show increased revenue driven by acquisitions, but a net loss due to a significant impairment charge related to the divestiture of its Consumer MEMS Microphones business.

Summary

• Knowles Corporation reported a net loss of $256.3 million for the nine months ended September 30, 2024, compared to a net income of $25.0 million for the same period in 2023.
• The company's revenue for the third quarter of 2024 was $142.5 million, a 31.8% increase compared to $108.1 million in the third quarter of 2023.
• The increase in revenue was primarily driven by the acquisition of Cornell Dubilier (CD), which contributed to a $28.6 million increase in the Precision Devices (PD) segment.
• The MedTech & Specialty Audio (MSA) segment saw a $5.8 million revenue increase due to higher shipping volumes of hearing health products.
• Knowles announced the sale of its Consumer MEMS Microphones (CMM) business to Syntiant Corp. for approximately $150 million, consisting of $70 million in cash and $80 million in Syntiant preferred stock.
• The company recorded a goodwill impairment charge of $262.5 million related to the CMM business, which is now classified as a discontinued operation.
• Gross profit for Q3 2024 was $62.9 million, up from $50.4 million in Q3 2023, but gross profit margin decreased from 46.6% to 44.1%.
• Operating expenses for Q3 2024 were $44.2 million, compared to $39.0 million in Q3 2023.
• The company's interest expense increased significantly to $3.9 million in Q3 2024 from $0.6 million in Q3 2023, primarily due to the Seller Note from the CD acquisition.
• Diluted earnings per share from continuing operations was $0.10 for Q3 2024, down from $0.17 in Q3 2023.
• The company repurchased 1,686,253 shares of common stock for $29.5 million during the nine months ended September 30, 2024.

Sentiment

Score: 4

Explanation: The document presents mixed results with strong revenue growth offset by a significant net loss due to the CMM divestiture. The strategic shift is positive long-term, but the immediate financial impact is negative.

Positives

• Knowles' revenue increased by 31.8% in Q3 2024, driven by the acquisition of Cornell Dubilier and growth in the MedTech & Specialty Audio segment.
• The MedTech & Specialty Audio segment saw a 10% increase in revenue due to higher shipping volumes of hearing health products.
• The company is divesting its CMM business, which is expected to streamline operations and focus on industrial technology.
• Non-GAAP diluted earnings per share increased to $0.26 in Q3 2024 from $0.20 in Q3 2023.
• Adjusted EBIT from continuing operations increased to $30.0 million in Q3 2024 from $24.6 million in Q3 2023.

Negatives

• Knowles reported a net loss of $256.3 million for the nine months ended September 30, 2024, primarily due to a $262.5 million goodwill impairment charge related to the CMM divestiture.
• Gross profit margin decreased from 46.6% to 44.1% in Q3 2024.
• Diluted earnings per share from continuing operations decreased to $0.10 in Q3 2024 from $0.17 in Q3 2023.
• Interest expense increased significantly to $3.9 million in Q3 2024 due to the Seller Note from the CD acquisition.
• The company's legacy PD business experienced lower demand from the industrial and communication markets.

Risks

• The divestiture of the CMM business involves risks and uncertainties, including potential delays or termination of the transaction.
• The company may incur additional impairment charges due to changes in the assumptions used to calculate fair value.
• Knowles faces risks associated with price erosion in its segments and increasing competition.
• The company is dependent on a limited number of large customers, which could impact revenue if these relationships are disrupted.
• Global economic instability, including inflation and rising interest rates, could negatively impact the company's performance.
• The company relies on third parties to manufacture, assemble, and test its products, which could lead to supply chain disruptions.
• Fluctuations in currency exchange rates and commodity prices could impact the company's financial results.

Future Outlook

The company expects to close the sale of the CMM business in the fourth quarter of 2024 and is focusing on its Precision Devices and MedTech & Specialty Audio segments. They anticipate some dis-synergies following the sale and may take actions to adjust their cost structure. Capital expenditures are expected to be in the range of 2.0% to 3.0% of revenues.

Management Comments

• Management and the Board of Directors periodically conduct strategic reviews of the Company's businesses.
• Management uses historical experience and all available information to make estimates.
• Management will continue to reassess our need to repatriate the earnings of our foreign subsidiaries.

Industry Context

The divestiture of the CMM business and focus on the PD and MSA segments aligns with a broader trend of companies streamlining operations to focus on core competencies and higher-margin businesses. The acquisition of Cornell Dubilier also reflects a strategic move to expand into high-growth markets like medtech, defense, and industrial electrification.

Comparison to Industry Standards

• The company's revenue growth of 31.8% in Q3 2024 is strong compared to some peers in the electronics manufacturing sector, but the net loss due to the impairment charge is a significant deviation from industry norms.
• The gross profit margin of 44.1% is lower than some competitors in the high-performance electronics space, indicating potential challenges in cost management or pricing.
• The increase in interest expense due to the Seller Note is a unique situation related to the Cornell Dubilier acquisition and may not be directly comparable to other companies.
• The strategic decision to divest the CMM business is a significant move that will likely reshape the company's competitive landscape and financial profile, making direct comparisons to historical performance less relevant.

Stakeholder Impact

• Shareholders will experience a significant net loss for the period, but may benefit from the strategic shift in the long term.
• Employees in the CMM business may be affected by the divestiture.
• Customers of the CMM business will transition to Syntiant Corp.
• Suppliers may need to adjust to the changes in Knowles' business focus.

Next Steps

• The company expects to close the sale of the CMM business in the fourth quarter of 2024.
• Knowles will focus on its Precision Devices and MedTech & Specialty Audio segments.
• The company may undertake actions to adjust its cost structure following the sale of the CMM business.

Key Dates

Keywords

Knowles Corporation, Consumer MEMS Microphones, Precision Devices, MedTech & Specialty Audio, Cornell Dubilier, divestiture, acquisition, financial results, impairment, revenue, earnings, gross profit, operating expenses, share repurchase