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Why Is Knowles (KN) Up 6.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Knowles (KN - Free Report) . Shares have added about 6.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Knowles due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Knowles Q1 Earnings Beat Estimates, Revenues Down Y/Y

Knowles reported lackluster first-quarter 2020 results, with earnings and revenues declining year over year. Soft Audio sales and higher operating expenses coupled with lower capacity utilization in China stemming from the COVID-19 pandemic marred its performance.

Net Loss

On a GAAP basis, loss from continuing operations came in at $12.8 million or a loss of 14 cents per share compared with $2.7 million or a loss of 3 cents per share in the year-ago quarter. The year-over-year decline was primarily caused by lower revenues and higher operating expenses.

Quarterly non-GAAP net earnings were $3.2 million or 3 cents per share compared with $11.8 million or 13 cents per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by a penny.

Revenues

Quarterly revenues declined 9.3% to $163.1 million, in line with the company’s updated accounting guidance. The year-over-year decline was mainly caused by lackluster audio sales, partially offset by robust sales of Precision Device solutions. However, the top line met the Zacks Consensus Estimate.

Segment-wise, Audio revenues declined 13.7% year over year to $120.1 million. This was due to weaker demand for hearing health products in Europe and United States coupled with tepid sales in IoT, Ear and Mobile markets. Markedly, United States and Europe, which accounts for nearly 85% of the global hearing aid market, witnessed significant slowdown in orders due to the pandemic. Moreover, the company expects the Audio segment to witness substantial decline in revenues in second-quarter 2020 due to softer demand of hearing health solutions.

Revenues from Precision Devices increased 5.7% from the first quarter of 2020 to $43 million, driven by robust demand for differentiated products across medtech, defense and electric vehicle end markets. With an optimistic view, the company expects the Precision Devices segment to witness significant operational improvements coupled with a sequential growth of more than 5% in the second quarter.

Other Details

Non-GAAP gross profit declined to $58.2 million from $69.9 million for respective margin of 35.7% and 38.9%, respectively. The downtick was caused by lower capacity utilization in China manufacturing facility and lower labor productivity due to the COVID-19 pandemic. Nevertheless, the company is committed to stabilize production facilities in China but anticipates lower factory utilization in certain Asian countries in the second quarter due to government enacted workforce restrictions pertaining to COVID-19 pandemic.

Cash Flow & Liquidity

Knowles utilized $2 million of cash from operating activities during the quarter. In the first quarter, the company witnessed its seasonal low due to reduced cash generation. As of Mar 31, 2020, the company had $147.8 million in cash and equivalents with $258.8 million of long-term debt. Knowles repurchased nearly 1 million shares at an average price of $15.06 in the first quarter.

Moving Ahead

Due to the current uncertainties pertaining to the COVID-19 upheaval, Knowles has not provided a definitive outlook for the second quarter of 2020. However, the company is undertaking several cost-saving initiatives to support future market growth and mitigate the financial impacts of coronavirus pandemic to gain a robust liquidity position in the near term.

The company is leaving no stone unturned to reduce operating expenses related to the Intelligent Audio business segment. In the last month, Knowles implemented a temporary 10% pay reduction for all salaried employees and a 15% reduction for CEO and board members. With effective cost-reduction measures, the company expects to save more than $20 million in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -175% due to these changes.

VGM Scores

At this time, Knowles has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Knowles has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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