Oct 27, 2014
Executives
Mike Knapp - Investor Relations Jeff Niew - President & Chief Executive Officer John Anderson - Senior Vice President & Chief Financial Officer
Analysts
Bob Labick - CJS Securities Jaeson Schmidt - Lake Street Capital Tristan Gerra - Robert W. Baird Alex Gauna - JMP Securities Richard Sewell - Stephens Jeff Schreiner - Feltl and Company Robert Sassoon - R.F.
Lafferty
Operator
Ladies and gentlemen, thank you for standing by. Good afternoon.
Welcome to the Knowles Corporation Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
With that said, here with opening remarks is Knowles Vice President of Investor Relations, Mike Knapp. Please go ahead.
Mike Knapp
Thank you, Nicholas. Welcome to our third quarter 2014 earnings calls.
I am Michael Knapp, Vice President of Investor Relations. Presenting with me on the call today are Jeff Niew, our President and Chief Executive Officer; and John Anderson, our Senior Vice President and Chief Financial Officer.
Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from our current expectations.
The company urges investors to review the risks and uncertainties in the company's SEC filings, included but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2013, periodic reports filed from time-to-time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call and Knowles disclaims any duty to update such statements, except as required by law.
In addition, pursuant to Regulation G any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com, including a reconciliation to the most directly comparable GAAP measures. Except for revenue, all financial references on this call will be non-GAAP, unless otherwise indicated.
Also, we have made selected financial information available in webcast slide, which can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeff, who will provide some details on the third quarter results.
Jeff?
Jeff Niew
Thanks Mike. Thanks to all of you for joining us.
For Q3, we reported revenue of $301 million, gross margins of 31.4% and operating margins of 14%. Sequentially, we also showed 7% growth in revenue and approximate 200-basis point in gross margins and roughly 600-point improvement in operating margins.
I am pleased we are able to do this in spite of the impact of the MEMS microphone situation. I would like to start by addressing the microphone challenge we are currently experiencing.
Late in Q3, we identified a low-level or parts per million defect on one of our microphones for a specific platform at one customer. We have identified the root cause, implemented a corrective action for future production and proposed the screen to move defective parts from the existing inventory.
As of today, we are in the process of collecting data to ensure the corrective action is effective and the screen process is capable of moving all defective mikes. We are taking responsibility for the issue and we believe this is an isolated incident that will not impact other platforms, customers or the long-term performance of our business.
I also want to highlight that we do not expect the situation to influence our longstanding relationship with this customer. We are currently shipping mikes and speakers to them on many other platforms and remain engaged with them on many programs for their next generation devices.
We have provided this customer with high quality acoustic products for many years and expect to remain a critical acoustic partner to them for the years to come. Now moving on to our results, revenue in our Mobile Consumer segment was up 9.5%, sequentially, driven primarily by growth in China and positive trends at Samsung.
If we exclude the impact from the microphone situation, MCE revenue would have been in line with our prior guidance up 20%, sequentially. Revenue from MCE comprised 61% of total sales in Q3.
For the Chinese OEMs, sequential revenue growth in Q3 moderated from the prior quarter, but more than doubled from the period one year ago. MEMS microphone share gains from older ECM technology, multi-mike adoption and increased acceptance of our integrated audio solutions have been the primary drivers of growth and these OEMs.
As an example, Xiaomi recently became China's top-selling smartphone brand. They have taken place as one of the fastest growing technology companies in the world.
We saw our revenue from Xiaomi's surge by more 7x from a year ago period driven by increases across all acoustic products, including microphone, and integrated audio modules. We also recently began shipping our integrated audio solutions to a number of additional Chinese OEMs.
Today, we have secured more than five significant design wins with integrated audio solutions that had either started shipping or will begin shipping in the near-future. We were also pleased to see Samsung sales increase more than 20%, sequentially, in Q3, following a significant pullback in Q2.
Samsung's recent introduction of the Galaxy Note 4 smartphone highlighted the return to three microphones and their high-end platforms and their continued commitment to superior acoustic performance. We remain very well positioned at all of our mobile consumer customers across a multitude of platforms ranging from headsets to tablets to wearables to handsets.
We expect to benefit in the near-term from increasing acoustic content for device driven by higher performance acoustic solutions, multi-mike adoption and the move to integrated acoustic models. Longer-term, we remain very excited about the progress we made with our intelligent audio solutions and the ongoing dialogue with our customers regarding ultrasonics.
We will keep you posted as developments in these areas unfold. In the Specialty Components segment, Q3 sales were up 4%, sequentially, and represent about 39% of the company's revenue.
We saw record quarterly revenue in our hearing health market due to broad-based strength at our hearing aid customers. We continue to see strong uptake of our MEMS microphones in the hearing aid market with year-to-date shipments more than doubling from 2013.
Sale of Precision Devices remains stable, driven by continued strength in 4G infrastructure rollouts. We remain focused on improving margins within both of our segments through the optimization of our global manufacturing footprint.
The production shutdown at our Vienna facility produced the gross margin improvement that we anticipated in Q3 and we expect to see full year benefit from this restructuring in Q4. We are also continuing with the ramp of our Philippine's facility.
We currently have more than 2,700 employees in the facility and shipping production volumes to hearing health and mobile consumer customers. I am very pleased with the execution of our restructuring efforts and expansion into new facilities.
With that, I will turn it over to John to expand on our financial results and provide our guidance for the December quarter. John?
John Anderson
Thanks Jeff. As Jeff mentioned earlier, we reported third-quarter revenues of $301 million, in line with our preliminary results announced earlier this month.
Mobile Consumer Electronics revenues of $183 million were up 9.5%, sequentially, primarily driven by higher shipments to Asian customers. Specialty Components revenues of $118 million were up 3.5%, sequentially.
The increase was driven by broad-based demand among our hearing health customers. As we stated in our preliminary Q3 results October 9th, late in the third quarter production and shipments of one new version of our MEMS microphone was placed on hold due to a low level defect that was discovered during the ramp up of the microphone product.
This negatively impacted revenue in the quarter by more than $20 million as we produced and shipped fewer units than previously expected and reserved for returns on some products shipped within the quarter. The gross profit impact of this issue was more than $13 million in the quarter and includes the impact of lower revenue, unfavorable fixed overhead absorption in connection with the production stoppage and certain non-recurring costs.
Third quarter gross margin of 31.4% was below our projected range due to the production issue. Excluding the impact of this issue, gross margins would have been 33.7%, at the high-end of our previous guidance and up 450 basis points, sequentially.
The improvement was driven by the benefits of prior restructuring actions and improved operating leverage and higher volume. Operating expense in the third quarter was $55 million or 18.1% of revenues, down from Q2 levels with the sequential reduction driven by lower legal spending.
Relatedly, the ICC recently ruled that Gore-Tex infringed upon three of our MEMS microphone patents. We believe this ruling validates our strong patent portfolio.
Adjusted EBIT margin for the quarter was 14%, up 630 basis points, sequentially, with the margin improvement driven by both, higher gross profit margins and reduced operating expenses. Non-GAAP diluted EPS was $0.38 for the quarter and includes a $0.02 discreet tax expense, primarily related to the recoverability of certain foreign withholding taxes.
Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release and can also be found on our website at knowles.com. Now, I will turn to our balance sheet and cash flow.
Cash and cash equivalents totaled $34 million at the end of September. For the quarter, cash flow from operating activities was $24 million and includes payments related restructuring and production transfer cost of $19 million.
Capital spending in the quarter was $27 million and we expect full-year spending to be between $90 million and $100 million, unchanged from previous guidance. Our bank debt balance was unchanged during the quarter at $400 million and interest expense related to this debt was $2 million.
Now, let me turn to our fourth quarter guidance. We expect fourth quarter revenue of $280 million $300 million, which reflects lost revenue of $35 million to $40 million related to the effective microphone.
The mid-point of our revenue range conservatively assumes, we do not resume shipments in the quarter of the MEMS microphone that is currently on hold. We project non-GAAP gross margin to be approximately 32% to 34% with the mid-point up 160 basis point, sequentially, from Q3.
The improvement is driven by the realization of full benefits from our recently completed restructuring initiative in Vienna, partially offset the impact of unfavorable fixed overhead absorption associated with lower production volumes of affected MEMS microphones. The gross margin projections exclude potential exposure to finished goods inventory if the screened product is not accepted by the customer.
R&D spending in the quarter is expected to be approximately $22 million, up from Q3 driven by higher level of activity related to integrated and intelligent audio solutions. Selling and administrative expense is expected to be between $34 million and $35 million, consistent with Q3 levels.
We are projecting adjusted EBIT margin to be between 12% and 14% with a fourth quarter effective tax rate in the range of 18% to 20% and approximately 13% for the full-year. We expect non-GAAP diluted EPS for the fourth quarter to be within a range of $0.30 to $0.38 per share.
This assumes weighted average shares outstanding during the quarter to be $85.7 million on a fully diluted basis. The MEMS microphone production issue is expected to negatively impact non-GAAP diluted EPS by $0.25 to $0.30, driven by lower revenue, unfavorable fixed overhead absorption and certain non-recurring costs.
GAAP results are expected to include approximately $3 million in stock-based compensation, $10 million in amortization of intangibles, $5 to $9 million in production transfer related costs $2 million to $3 million in restructuring cost and the related tax effects of these items. For the quarter, we expect cash flow from operating activities to be between $35 million and $45 million with spending related to capital expenditures of approximately $25 million.
I will turn the call back over to Jeff for closing remarks and then we will move to the Q&A portion of the call. Jeff?
Jeff Niew
In summary, the microphone situation we are experiencing presents a challenge, but I believe it is an isolated matter that will not impact the long-term performance of our business. There many positive trends we are experiencing in both, our Mobile Consumer and Specialty Components businesses.
In Mobile Consumer, I mentioned the increase in content for device driven by higher performance solutions multi-mike adoption and the shipped integrated modules for improved performance. In Specialty Components, we are seeing the acceleration of MEMS mike adoption in hearing health devices as well as favorable trends with connected hearing aids.
In Precision Devices, we continued to deliver good results and are ahead of our expectations are being driven by communications infrastructure rollouts. The exciting new solutions we are developing, coupled with our focus on manufacturing footprint optimization gives me confidence that we will deliver improved results for our investors over the years to come.
Operator, we can now take questions.
Operator
Certainly, ladies and gentlemen (Operator Instructions) Our first question comes from the line of Bob Labick with CJS Securities. Your line is now open.
Please proceed with your question.
Bob Labick - CJS Securities
Good afternoon.
Jeff Niew
Good afternoon.
Bob Labick - CJS Securities
Hi. You mentioned, that you have implemented a new screen to try to get you this back to the certain platform, so I have a two-part question.
First, could you give us a timeline on what the expectations might be to get back on the platform if the screen is accepted? Then if not, are there other pads are also taking to get back on a platform if the screen is not accepted.
Jeff Niew
Yes. That's a good question.
First, let me just say we are extremely pleased that the customer has really been actively collaborating with us in this process in order to work through this issue. I think it has been a very, very positive experience for us if we could take more positive out of this.
The first thing, of course we are going to do was identify the root cause, which has been done. We understand the root cause.
We have inventory that we are working through the screen. We've agreed upon a screening process with the customer and we are in the process of validating on a higher volume basis that the screen actually works.
In addition to the screen on the existing inventory, we have a corrective action that that permanently solves this problem, where we will no longer need to screen. That corrective action has been proposed and implemented and we are in the process again of validating that the corrective action actually works in high-volume.
What I would just say is we haven't committed to an exact timeframe yet on when this will happen both, the screen as well as the corrective action being accepted by the customer, because it is not entirely within our control, we do expect it to happen and we are being conservative obviously in knowing when it is going to happen or saying when it is going to happen. That is reflected in our guidance range, but we are confident it will happen both on the screening and on the on the corrective action implementation.
Bob Labick - CJS Securities
Okay. Thank you.
Then just to follow that up, I think you outlined the impact in Q4. Could you give us a better sense if, even though you are confident that you will get back on it.
In the scenario that you didn't get back on, what would the impact be roughly on a 2015 basis?
Jeff Niew
Let me just restate what we kind of said for Q3 and Q4. The impact in Q3 was approximately $20 million, more than $20 million, but we did have some significant shipments also within the quarter.
We are projecting that it could be up to $40 million impact in Q4. If we think about how this platform usually works and how it is run, the first two quarters are the heaviest quarters in terms of volume.
Then the volume starts to, I won't say, decline but go to its normal product lifecycle before introduction of the next generation platform roughly the same time next year. What we would sit there and say is that we think that in a worst-case scenario which one we do not expect because we expect to be shipping screen mikes as well as parts with corrective action, we could see $60 million to $70 million impact in 2015.
I think that is probably as close as we can get to probably a number we can quantify.
Bob Labick - CJS Securities
Okay. Great.
Then, I think you mentioned this earlier, but just worth talking about. The next generation platform from this customer which would start presumably in second half of '15, does this low-level defect have any impact on your expectations for being on that platform?
Jeff Niew
Well, again, we do have confidentiality agreements in place with our customers and we really don't - habit of commenting about extra raised price, but what I would say is we are actively engaged in all the programs. I think, what is important to note here is that there are many programs as well as there is many products and this is impacting one product on one platform.
Bob Labick - CJS Securities
Okay. Great.
Thanks. Then just shifting gears for second and I will get back in queue after this, but according to some industry sources out there such as IHS, it appears there has been significant volatility in your MEMS microphone share over the past several years.
Can you talk about has the share shifted as much, that much? What could cause those shifts if it's true or
Jeff Niew
Yes. First of all, I would just make the comment that I think we have pretty accurate data of what is happening in the market based on a couple of things.
First of all, we are the leader in the market. We ship the most mikes.
The second thing I think is, we do collect royalties from a number of the people shipping in the market. To the extent we know exactly what they are shipping.
Second thing I would add is, we don't really speak to IHS about these numbers at all. To that extent, we have not seen.
I am just going to be straightforward here. We are losing share.
We lost share in Q3 and Q4, but we haven't seen that volatility in our share over that before this. To that extent, we kind of talked about it.
Prior to this, we were in the 65% to 70% range. If we had this business we expected, we could still be roughly in that range.
Bob Labick - CJS Securities
Great. I will get back in the queue.
Thank you very much.
Operator
Our next question comes from the line of Jaeson Schmidt with Lake Street Capital. Your line is now open.
Please proceed with your question.
Jaeson Schmidt - Lake Street Capital
Hey, guys. Thanks for taking my questions.
I am wondering if the tech situation changes your thoughts on being able to achieve your mid-term target model you laid out at your Analyst Day.
Jeff Niew
That's a very good question. Maybe I will start off and then John can kind of expand a little bit on it, but if you think about that there is four fundamental things that underpin the mid-term model.
It's units, content growth, market share and ASPs, and units obviously the end market I am referring to. Content growth is more on the acoustic side, then market share and ASPs.
The first two, when I say it's units and content growth remained unchanged. There hasn't been any change, but we are seeing in the market in terms of the units.
What we see is the content growth as we go forward. In fact, I would say content growth we may be coming a little bit more optimistic on content growth as we look farther out.
The latter two, I would just say have some risk but it's associates specifically with mikes, right, so we still have speaker business, which is significant business for us and as a number of you have noticed you keep asking the question are chance to take share of speakers. While we haven't committed to that, we are doing very well with the Chinese OEMs.
I guess, what I would say in summary, our mid-term target is the same, but it may take a little bit longer to get there. We haven't really quantified that yet, but it may take a little bit longer to get there.
John, if you have any?
John Anderson
Yes. I think, the only think to add, I think Jeff touched on the drivers of the revenue growth.
I think, in addition to that, for our gross profit margin the other drivers are executing our global footprint consolidation and continuing to move labor to best [cause] countries and on both of those fronts, we are on track or ahead of schedule. Again, I think, in summary, our mid-term model is the same, but the impact or the time it takes us to get there could be about a year or so.
Jaeson Schmidt - Lake Street Capital
Okay. Then if the screening process doesn't yield the results you want if you have to go with scenario number two, is there a long re-qualifying process for the socket.
Jeff Niew
I guess, we are not going to comment too much on the confidentiality, but clearly because we have the inventory that will be screened, it would be shorter versus we have to refill the pipeline with material once it has been called by the new material, but I would say that the difference between the two is not dramatically different.
Jaeson Schmidt - Lake Street Capital
Okay. Then wondering if you could talk about some of the puts and takes into your Q4 guidance, kind of what you are seeing in the Mobile Consumer business outside this defect obviously?
Jeff Niew
I think one area that we haven't touched on yet that we are seeing is some softening in the end market in China within our Consumer Mobile. Again, that's reflected in the guidance that we provided.
Outside of that, I don't think there has been any significant shifts from what we would have said three months ago about Q4.
Jaeson Schmidt - Lake Street Capital
Okay. Thanks.
I will jump back in queue.
Operator
Our next question comes from the line of Tristan Gerra with Robert W. Baird.
Your line is now open. Please proceed with your question.
Tristan Gerra - Robert W. Baird
Hi. Good afternoon.
Could you talk about the cash level you feel comfortable with and whether you plan on using the rest of your revolving loan also depending on the timing of when you think you can come back at this customer?
John Anderson
Yes, Tristan. I will address that.
The cash flow impact of the issue has been reflected in the guidance we provided for Q4. As we stated, we expect to generate $35 million to $45 million in cash from operations and the mid-point of this guidance assumes that we do not resume shipments on the affected microphone in the quarter.
Where we are unfavorably impacted on the cash flows, we would end the year with the higher finished goods inventory level at the impacted mikes. Again, that is factored into the cash flow guidance for Q4 that I provided.
Tristan Gerra - Robert W. Baird
Okay. Then could you give us a sense and obviously that will be disclosed in the filing.
The percentage of your inventory that is finished goods inventory currently?
John Anderson
On the impacted mike?
Tristan Gerra - Robert W. Baird
Total for your consumer division.
John Anderson
I don't have that right at the tip of my figure. Obviously, it will be in the Q, when it is filed, but I can come back to you offline on that as well.
Tristan Gerra - Robert W. Baird
Okay. Then last question.
You mentioned that issue was a customer and platform-specific. Could you talk a little bit about this particular product.
I mean, is this is a decent sign with decent specs and decent cost structure than products that you are selling elsewhere or is this something really customized for that particular customer? In other words, would you have plan on selling that same product to other customers with future iteration of smartphones?
Jeff Niew
Generally speaking, Tristan, we ship custom products to most of our large customers and this is really no exception. I would say that I don't have the exact number, but a large percent of our sales to our large customers is all based on custom product that is designed specifically for a specific platform or designed specifically for a specific product.
Our anticipation is that we don't see from generation-to-generation repeat where they have used the same microphones or speakers, or receivers across majority of our customers, they are always moving towards something that's better in performance that had better acoustic capability than the previous generation.
Tristan Gerra - Robert W. Baird
Okay. Great, Thank you very much.
Operator
Our next question comes from the line of Alex Gauna with JMP Securities. Your line is now open.
Please proceed with your question.
Alex Gauna - JMP Securities
Thanks for taking my question. Jeff, I know, you said that NDA is keeping from being able to comment too specifically, but I am just curious with regard to both, the screening process as well as the fixed, are you half the threshold in terms of even done enough hours of testing or produced a large enough sample set that it could be accepted?
If not, is there a certain number of weeks or hours or production level that you need to hit before you could such that we know when the first window of opportunity might be opened for you?
Jeff Niew
We are not going to comment on that today, Alex. The reason is, a fair amount of this is and I hate to say this is we collect a lot of data and some of it takes a fair amount of time to collect, but then we have to send it over and say okay, let's get together and talk about it.
Sometimes more questions come out of it, what about this, and we may get requested to pull more data or collect additional data, so that's why we kind of been non-committal at this point, because some of this is outside of our control. I can say again is we do feel comfortable that we have a path and that path is just a question of working through and there is a fair amount of work all the details of implementation.
Alex Gauna - JMP Securities
Okay. Then with regard to the internal screening that you are doing, can you give us an idea of maybe how many millions of mikes you have screened and that you believe are good to ship.
Is there any sense you can give us around that?
Jeff Niew
I would say, just a little bit more color around the screening, part of the screening is creating, I would say, a test capability that can do the screen at a high level, so that includes both, hardware and software development on our side in order to being able to do it in high volume, so what I would say is we haven't done that many mikes yet. That's part of the thing that we are working on is the your optimization of the hardware and software internally in our manufacturing facility to be able to do this in high volume.
What I can say is, we have done this on a low level. We have proven this out that it works.
Alex Gauna - JMP Securities
Then, I guess, with the intermediate-term implications of this is, this kind of screening something that now is going to have to exist going forward on all products that you shipped to the customer and maybe to others such that it's a immeasurable financial impact that you can quantify?
Jeff Niew
Our anticipation is the answer to that is no. Right now all the products that we make prior to this do not have this issue or need to be screened.
Our attention is that once the corrective action is in place on this product, if there's any derivatives in this product or any new designs that this will be taken into account, I would say probably what I would say is that on a lower volume basis, we will probably make sure we are characterizing on this issue - not just for this issue, but to expand our capabilities in terms of characterizing the part before it goes production.
Alex Gauna - JMP Securities
Okay. Thanks.
I will come back in the queue.
Jeff Niew
Sure.
Operator
Our next question comes from the line of Harsh Kumar with Stephens. Your line is now open.
Please proceed with your question.
Richard Sewell - Stephens
Hey, guys. Thanks for taking my question.
This is Richard for Harsh. Just wanted to stay on the impacted mike for a second, have you historically seen share on the phone kind of stay the same as it matures or have you been able to see share shifts as the phone matures.
Then also wanted to see if you wrote down all the inventory this quarter or if there is still some remaining inventory that you can write-down?
Jeff Niew
I will leave inventory in the second to John, but what I would say is the shares typically do shift quarter-to-quarter. I think there is a lot of things that go into impacting at all of our customers on the quarter-to-quarter shares.
I would say it's a function of negotiation on price and a number of other things, but also I would say as we get closer to the ramp of next-generation products, where the capacity sits for the current generation versus the older generation. There is a fair amount of shifts between quarter-to-quarter.
John Anderson
With respect to the inventory, we have recorded a reserve in Q3 that cover our inventory exposure based on the latest specs available. It is roughly 20% of the cost of the inventory.
If the screen units are not accepted, we would have additional reserved risk for the finished mikes.
Jeff Niew
As I mentioned, this has not been reflected in our fourth quarter guidance.
Richard Sewell - Stephens
Okay. Thank you for that color.
Then in terms of gross margins, you guided gross margins up. Can to kind of parcel out the impact of lower revenues, lower utilization versus benefits of the closure of the Vienna facility?
Jeff Niew
Yes. I am really not going to go into that level of detail.
I can tell you that we did start to begin to see the benefits of the restructuring in Q3. We will get the full benefit in Q4 and we have said publicly that the annualized benefit from Vienna is roughly $28 or $27 million a quarter.
Richard Sewell - Stephens
Finally, the last one I think you touched upon it, some push outs in terms of your margin targets. Are any of those at risk or do you think that the timing is just?
Jeff Niew
At this point, we view this as the time issue.
John Anderson
Yes. I mean, I just want to give a little more color on the quarter and the Q3 and Q4.
We think we talked about this before. Of course there is the revenue impact, but absorption in our factories is a big deal.
You know how many parts we produce. Since late in the third quarter, we haven't been producing at where we thought we would be in terms of the volume.
To that extent, that does have an impact on margins but we expect that we will back up and running once we are qualified.
Richard Sewell - Stephens
Thank you, guys. Good luck.
John Anderson
Just one thing to add to that, again, we disclosed that the Q4 potential revenue reduction of $35 million to $40 million, would have a potential EPS impact of $0.25 to $0.30. I think it's important to know though that within that fourth quarter impact, there are some one-off costs, higher screening costs, higher test and development cost, engineering cost.
In addition, our fixed overhead is really unchanged in the quarter. If there were a more permanent reduction, we would obviously take actions to right size our fixed overhead, so just some things to keep in mind when you look at the EPS impact in Q4 versus the revenue reduction.
Richard Sewell - Stephens
Thanks for the color.
Operator
Our next question comes from one of Jeff Schreiner with Feltl and Company. Your line is now open.
Please proceed with your question.
Jeff Schreiner - Feltl and Company
Yes. Gentlemen, thank you very much for taking the time to take my question.
I just wanted to come back to the commentary on the [ITC]. I wanted to get some more commentary from you guys in terms of the significance of the three patents that were involved with the ITC, but also try to understand the reverse of this lawsuit that there is also from my understanding Chinese proceedings going forward.
Have you discussed in the past any potential risk of you winning an ITC decision in the U.S. and then Chinese locking you out of China?
Jeff Niew
Yes. Let me just give a little color.
First of all, we are really not going to comment anything that's not public. I want to make that comment first.
If I would say this, we have been through this before and is not the first company that we have been [before] we have talked about the licensees that we have today. Some of our licensees are like AAC, Akustica, InvenSense, so AAC, obviously a Chinese company.
I would say that we feel pretty strongly about our IP. This is three patents, but I mean it's three patents of many and this is an area in the silicon mike space, where we will be aware.
We are the groundbreakers here, we are the ones who created the market that exist itself. We looked in the past, and while the past is no indication of the future, we feel comfortable with our IP position and that we should be able to go to work towards using that to monetize it.
There are always list of new things, but obviously we think the potential gains clearly outweigh the risks.
Jeff Schreiner - Feltl and Company
Okay. Just one other question if I may.
You talked about kind of units content gains, market share, ASPs kind of being the drivers for reaching your longer-term financial model. You talked already about kind of market share coming down a little bit.
You referenced that ASPs were - can you talk about roughly ASP either where they are now or kind of maybe on a year-over-year decline basis for the speaker and microphones.
Jeff Niew
We won't have that individually, but I guess we really hate to talk about ASPs in terms of a year-over-year, because it is very cyclical. I would just say it's - what we are seeing is over cycle I have been seeing that ASPs are roughly flat.
I would sit there and say is, with this market share loss there could be some shorter-term rest to this as we go to regain share. In order to get you, but I think the way I would look at it is if we get more units.
This is specifically on mikes. Now that speakers or receivers, you may see slightly all lower ASPs.
If we decide to just keep it a lower share, then the ASPs will probably be more flattish as we had said, but this is more short-term. We still see what we talked about before, which is the integrated audio is clearly coming into its zone with the Chinese OEMs, multi-mike adoption is coming into its zone with the Chinese OEMs, and we see opportunities for further content growth.
Through things like intelligent audio, which we are not going to talk too much about today, but we are getting more bullish quarter-by-quarter about the potential for integrated audio and we are even starting to talk about, what we call the kind of next-generation which is the use of ultrasonics to do various different things. All-in-all, I don't think we have had a dramatic change, but I would say there could be able to short-term risk in ASPs as we decide what type of share we want to land at on this specific platform.
Jeff Schreiner - Feltl and Company
Thank you very much for your time gentlemen.
Operator
Our next question is a follow-up from the line of Alex Gauna with JMP Securities. Please proceed.
Alex Gauna - JMP Securities
Yes. Jeff, I guess, related to that ASP question, $60 million to $70 million, I believe, I heard you say next year is what could be the overarching impact from this.
Does this assume ASP adjustments as a results of this factor? I am just kind of curious, at present, are you exposed to this platform in question at all or are you completely out of it pending the resolution of this issue?
Jeff Niew
Let me take that last question first. We are on hold on mikes, that is what we said, but speakers and receivers, we continue to ship so it is impacting part of the business not all of it.
Again, our goal is to get back on. As far as the $60 million to $70 million, it is not factoring in ASPs, because quite frankly we are not in a place yet to have that even in discussion yet.
What I just said is, there is potential risk here, but yet to be quantified what that risk is.
Alex Gauna - JMP Securities
Okay. In view, ASP aside that would be the maximum worst-case scenario lingering into next year is that accurate from this direct issue?
Jeff Niew
Correct.
Alex Gauna - JMP Securities
Okay. Then and I am curious also, is there a lever other than ASP to try to recover share here?
I would imagine your reputation is somewhat damaged by this. I mean, what can you do to restore confidence both at this customer and beyond it?
Jeff Niew
I would see it little differently. I actually think that you know there are some positives - that you can take some positives out of it, but there are some positives that can come up - come out of this.
I mean, you know that we have demonstrate how quickly we can react, how we can manage a difficult situation and the relationship with the customer I feel pretty good about considering the situation. I guess what I would sit there and say is, as we look at our big customers all of them, what we are seeing more and more is they are talking about the next generation products even sooner, whether it would be speakers, receivers, microphones, integrated audio, intelligent audio, we are seeing the timeline with uses the 12 month ahead before we start being brought in and said let's discuss next-generation.
Now we are seeing 18 months. In some cases, two years, where we are already starting to work on projects for products that are going to come in two years.
I know we want to focus purely on phones here, but there is a lot of other applications that are clearly exciting to us. Obviously they are not as big as the phone platforms, but clearly that that make this business very interesting and again you everything we talked about kind of at the Investor Day, audio is becoming more important.
That is still the case. We see that, that's where we are going.
Audio every day becomes more important and us being the full-line supplier also in terms of the components making the integrated audio, pioneering the intelligent audio area, we are one of a very few number of go-to guys.
Alex Gauna - JMP Securities
All right. Thank you.
One more if I could, I want to make sure I understand the $15 million for the resolution of customer claims versus the $13.9 million in your related inventory charges. What that $15 million, how is that differentiated from the inventory charges.
You are making your customer hold for other expenses there?
John Anderson
Alex, this is John. In the quarter, we sell a warranty claim with a customer that went back to 2011 and 2012, completely unrelated to this microphone issue that we talked about in the quarter.
Until Q3, we believe that we would be able to settle this through future purchase price reductions and future business. Unfortunately this is no longer the case so under GAAP, we had to record this as a current period charge.
Alex Gauna - JMP Securities
Okay. All right.
Thank you.
Operator
The next question comes from the line of Robert Sassoon with R.F. Lafferty.
Your line is now open. Please proceed with your question.
Robert Sassoon - R.F. Lafferty
Hello. Thank you for taking my call.
I just had a question on. I know that the production problem was product for a specific platform, but can talk about how many ramifications are for other customers in terms of perceptions of the product's quality that comes out.
Have you been in discussion with these - other customers to ensure them that this is just a one-off?
Jeff Niew
Yes. When we came across the issue, I mean, our thoughts were exactly the same, because again it's a very unique situation.
Every one of our products has been looked at and none of the other ones exhibit this at all, so there is absolutely zero risk to any other customer, any other platform and we talked to all of our major customers about this.
Robert Sassoon - R.F. Lafferty
Just to clarify, on the mid-term targets you said, you are keeping the actual goal the same, but it has been stretching out by - I think originally, when you set out these goals, it was by the end of 2016, that was the target but I think then you put it forward to at the end of 2015, are you effectively pushing it back to the end of 2016?
Jeff Niew
Yes. Let me just clarify that.
At our Investor Day Conference, we quite defined the mid-term targets as 2016.
Robert Sassoon - R.F. Lafferty
Right.
Jeff Niew
We did subsequently, as we talked about pulling forward our $40 million to $50 million annualized cost reductions and getting that $50 million a year earlier than anticipated, so end of '15. Now, what I am saying is those 16 kind of mid-term targets, those are potentially shifting out a year to '17.
Robert Sassoon - R.F. Lafferty
Okay. Those are the questions I had for today.
Jeff Niew
Yes. Thanks.
Operator
Thank you. Ladies and gentlemen, that concludes our Q&A portion for today.
I would like to turn the call back over to Mike Knapp, for closing remarks.
Mike Knapp
Great. Thanks very much for joining us today.
As always, we appreciate your interest in Knowles. We look forward to speaking with you on our next earnings call.
Thanks and good bye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude program.
You may all disconnect. Have a good day, everyone.