Edited by Alexander H. Yazdani
Overview of Ops. & Rev. By varying factors
Knowles designs the acoustics in a number of mobile devices, medical devices for large clients like Apple and Samsung.
Customers, Sales and Distribution - We serve customers in the mobile consumer electronics, medical technology, defense/aerospace, telecommunication infrastructure and other industrial markets. Our customers include some of the largest operators in these markets. In addition, many of our OEM customers outsource their manufacturing to Electronic Manufacturing Services (“EMS”) companies. Other customers include global mobile phone and hearing aid manufacturers and many of the largest global EMS companies, particularly in China. For the year ended December 31, 2014, Apple, Inc. and Samsung Group accounted for approximately 20% and 12%, respectively, of our total revenue. For the year ended December 31, 2013, Apple, Inc. and Samsung Group accounted for approximately 25% and 15%, respectively, of our total revenue. For the year ended December 31, 2012, Apple, Inc. accounted for 18% of our total revenue. No other customer accounted for more than 10% of total revenues during these periods.Knowles supplies, for instance, two of the three high-performance MEMS microphones in Apple’s iPhone 5s, as well as one of three in the iPhone 5. The product sale are made directly to original equipment manufacturers and to their contract manufacturers and suppliers and to a lesser extent through distributors around the world.
- Mobile consumer electronics - Includes analog and digital microphones, MEMS microphones, surface mounted device microphones, receivers, speakers, integrated modules, multi-functional devices, ultrasonic sensors and integrated audio sub-systems. MCE designs and manufactures innovative acoustic products, including microphones, speakers, receivers and integrated modules used in several applications that serve the handset, tablet and other consumer electronic markets. Locations include the corporate office in Itasca, Illinois; sales, support and engineering facilities in North America, Europe and Asia; and manufacturing facilities in Asia.
- Specialty Components - Includes transducers, oscillators, capacitors and filters. SC specializes in the design and manufacture of specialized electronic components used in medical and life science applications, as well as high-performance solutions and components used in communications infrastructure and a wide variety of other markets. SC’s transducer products are used principally in hearing aid applications within the commercial audiology markets, while its oscillator products predominantly serve the telecom infrastructure market and its capacitor products are used in applications including radio, radar, satellite, power supplies, transceivers and medical implants serving the defense, aerospace, telecommunication and life sciences markets. Operating facilities and sales, support and engineering facilities are located in North America, Europe and Asia.
- Alcatel One Touch
- Microsoft Mobile Oy (previously Nokia Oyj)
- NEC Casio (G'zOne)
- Personal Communications Devices (PCD)
- Medical and life sciences products (i.e., transducers, hearing aids, capacitors). Product sales are largely driven by aging demographics, healthcare spending, the rise of a middle class in emerging markets and government subsidies.
- Aerospace and defense communications (i.e., capacitors, filters, oscillators). Aerospace and defense spending and automation (largest end market), telecom regional coverage and bandwidth expansion and growing industrial power supply requirements are a few of the end market trends driving the product sales in this sector.
- Telecom infrastructure (i.e., capacitors, filters, oscillators). Sales are typically levered to the expansion of large telecom companies, looking to increase wireless signal in new or existing territories, although these products are also sold to aerospace and defense companies (i.e., airplane radio frequencies).
- MCE- AAC Technologies, Goertek, ST Micro and Invensense;
- SC- Sonion, Rakon, Kyocera, and Epson Electronics.
- Recent issues with product distribution for largest client
- MCE revenues were negatively impacted by a hold on production and shipments of one new version of our MEMS microphone for a specific platform at one key OEM customer due to a low level defect
- Recovery from low production volume from Blackberry & Samsung due to shift in market share
- Over the past several years, Nokia, Blackberry and Samsung have lost significant market share to other United States and Asian-based OEMs who have released smartphones that have been more readily accepted due to, among other factors, perceived feature sets and price points. We expect the OEM market to continue to be dynamic over time, characterized by rapid market share shifts driven by new product introductions, price points and feature sets.
- The effective tax rates for 2014, 2013 and 2012 were 57.9%, (4.2)% and (0.2)%, respectively. The resulting tax
- Knowles Conducts research worldwide to discover and develop new acoustic and related products around the world and refine our existing products. Our research is primarily conducted internally. We employ approximately 400 employees worldwide in research and development. Our research and development efforts continue to expand the technology platforms that support our customers’ product and business development. By applying interrelated technologies to the design processes, we strive to enhance and accelerate our customers’ initial concepts and design work, as well as provide for cost-effective component customization, manufacturing and subassembly. Research and development expenses are classified within Operating expenses. We spent $83.0 million, $82.6 million and $77.3 million on research and development, or 7.3%, 6.8% and 6.9% as a percentage of revenue, for the years ended December 31, 2014, 2013 and 2012, respectively.
- Fast product development cycles and high volume manufacturing capabilities are crucial mechanisms that the company utilizes to stay competitive. To do this, Knowles invests in research and development and has increased increased its R&D spending by over 50%, to nearly 7% of the top line over the past three years.
Against a competitive peer, AAC Technology Holdings, on an EV/Rev basis, AAC trades at roughly 6.5x on EV/Rev and adjusting the multiple against PCB prime rate(~5.35%) and the FED Reserve prime (3.35%) would require us to rerate the multiple for Knowles to 10-11x revenue. Remaining conservative Knowles revenue of $1.14 billion would give us a current valuation a little over $90(Too much speculation on Wall Street shouting for FED rate hikes though I doubt a rate hike will occur in 2015 better to err on the side of conservatism). What is not being factor in is the wearable technology market and the growth of the specialty components division due to growth in hearing aids and other medical use for the aging baby boomer population which has yet to take full stride.
- announced cash distribution of excess capital three years out
- more likely: a combination of share buybacks and an acquisition strategy similar to the Valeant acquisition model 1-2 years out.
- Knowles is highly exposed to loss-of-customer risk.
- Continued product deficiencies
- Macro currency pricing potentially affecting near term 2015 earnings