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Knowles (KN) Q2 Earnings Miss Estimates, Revenues Down Y/Y

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Knowles Corporation (KN - Free Report) reported unimpressive second-quarter 2020 results, with earnings and revenues declining year over year. Soft audio sales, supply-chain disruptions and end-market contraction with productivity headwinds stemming from the COVID-19 pandemic hurt the company’s quarterly performance.

Bottom Line

On a GAAP basis, loss from continuing operations came in at $19.5 million or a loss of 21 cents per share against net income of $5.9 million or 6 cents per share in the year-ago quarter. The year-over-year sharp decline was primarily caused by top-line contraction.

Quarterly non-GAAP net loss came in at $1.2 million or a loss of 1 cent per share against net income of $20.7 million or 22 cents per share in the prior-year quarter. The bottom line missed the Zacks Consensus Estimate by a penny.

Knowles Corporation Price, Consensus and EPS Surprise

Knowles Corporation Price, Consensus and EPS Surprise

Revenues

Quarterly revenues declined 25.8% to $152.2 million due to lackluster audio sales amid coronavirus-induced uncertainties, partially offset by robust sales of Precision Device solutions. However, the top line surpassed the Zacks Consensus Estimate of $145 million.

Segment-wise, Audio revenues declined 34.6% year over year to $104.5 million. This was mainly due to lower shipments of hearing health products and lower factory capacity utilization with softer end-market demand triggered by the global pandemic. Also, the segment’s gross margins witnessed a sequential fall of 530 bps due to a $3-million charge to write-off inventory with reduced investment in Intelligent Audio. Nevertheless, the company expects revenues in the Audio segment to increase more than 40% in the third quarter as market conditions gradually stabilize in Asia, Europe and the United States post COVID-19 crisis.

Revenues from Precision Devices increased 5.3% to $47.7 million, driven by robust demand for differentiated products across telecom and defense markets with higher shipments of MEMS microphones. However, it was partially offset by lower MedTech demand. The segment’s gross margins improved moderately owing to enhanced factory capacity utilization and labor productivity. The company expects the Precision Devices segment to witness a sequential fall of 10% due to lower shipments in the telecom market. Supported by a favorable product mix, the company also anticipates the segment to generate higher revenues from hearing health products in the upcoming quarter.

Other Details

Non-GAAP gross profit declined 37.1% to $49.1 million from $78.1 million for respective margin of 32.3% and 38.1%, respectively. The downtick was caused by lower capacity utilization and lower labor productivity due to the virus outbreak. Nevertheless, the company is committed to stabilize production facilities and abide by the government enacted workforce restrictions pertaining to the pandemic.

Cash Flow & Liquidity

With strong free cash flow of $19.7 million, Knowles generated $26.5 million of cash from operating activities during the quarter. As of Jun 30, the company had $168.3 million in cash and equivalents with $160.9 million of long-term debt.

Q3 Guidance Issued

Despite the current uncertainties associated with the COVID-19 turmoil, Knowles provided guidance for third-quarter 2020. The company expects revenues in the range of $185-$200 million, up 26% sequentially at the mid-point. Non-GAAP gross margins are anticipated in the range of 35-38%. Non-GAAP earnings are anticipated in the band of 17-23 cents per share. Notably, Knowles has undertaken several cost-saving initiatives with lower discretionary spending to support future market growth and mitigate the financial impacts of coronavirus pandemic to gain a robust liquidity position. The company is committed to deliver strong operating leverage and serve customer needs amid these trying times.

Zacks Rank & Stocks to Consider

Knowles currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader industry are Turtle Beach Corporation (HEAR - Free Report) , T-Mobile US, Inc. (TMUS - Free Report) and Calix, Inc. (CALX - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Turtle Beach’s bottom line surpassed the Zacks Consensus Estimate in the last four quarters. The company has a trailing four-quarter earnings surprise of 46.4%, on average.

T-Mobile’s bottom line surpassed the Zacks Consensus Estimate in the last four quarters. The company has a trailing four-quarter earnings surprise of 19.4%, on average.

Calix’s bottom line surpassed the Zacks Consensus Estimate in the last four quarters. The company has a trailing four-quarter earnings surprise of 59.7%, on average.

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