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2: EX-10.2 Material Contract HTML 23K
3: EX-10.4 Material Contract HTML 49K
4: EX-10.5 Material Contract HTML 87K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
13: R1 Cover HTML 72K
14: R2 Consolidated Statements of Earnings (Unaudited) HTML 105K
15: R3 Consolidated Statements of Comprehensive Earnings HTML 60K
(Unaudited)
16: R4 Consolidated Balance Sheets (Unaudited) HTML 141K
17: R5 Consolidated Balance Sheets (Unaudited) HTML 36K
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18: R6 Consolidated Statement of Stockholders' Equity HTML 109K
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20: R8 Basis of Presentation (Notes) HTML 30K
21: R9 Recent Accounting Standards (Notes) HTML 32K
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23: R11 Impairment Charges HTML 27K
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27: R15 Restructuring and Related Activities (Notes) HTML 58K
28: R16 Borrowings (Notes) HTML 40K
29: R17 Other Comprehensive Earnings HTML 107K
30: R18 Income Taxes (Notes) HTML 28K
31: R19 Equity Incentive Program (Notes) HTML 86K
32: R20 Earnings per Share (Notes) HTML 42K
33: R21 Commitments and Contingent Liabilities (Notes) HTML 26K
34: R22 Segment Information (Notes) HTML 84K
35: R23 Pay vs Performance Disclosure HTML 33K
36: R24 Insider Trading Arrangements HTML 23K
37: R25 Recent Accounting Standards New Accounting HTML 22K
Pronouncements, Policy (Policies)
38: R26 Inventories (Tables) HTML 31K
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Sheet Location (Details)
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Gain (Loss) of Derivative Instruments Recognized
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(Exact name of registrant as specified in its charter)
iDelaware
i90-1002689
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1151 Maplewood Drive,iItasca,iIL
(Address of Principal Executive Offices)
i60143
(Zip Code)
i(630)i250-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
iCommon
stock, $0.01 par value per share
iKN
iNew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☑ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Common
stock - $ii0.01/ par value; ii400,000,000/
shares authorized; i97,240,535 and i90,257,146 shares issued and outstanding at September 30, 2023, respectively, and i96,431,604
and i91,078,376 shares issued and outstanding at December 31, 2022, respectively
Background - Knowles Corporation (NYSE:KN) is a market leader and global provider of advanced micro-acoustic microphones and balanced armature speakers, audio solutions, and high performance capacitors and radio frequency ("RF") products, serving the consumer electronics, medtech, defense, electric vehicle, industrial, and communications markets. The Company uses its leading position in SiSonicTM micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience across consumer applications. Knowles is also a leader in hearing health acoustics, high performance capacitors, and RF solutions for a diverse set
of markets. The Company's focus on the customer, combined with its unique technology, proprietary manufacturing techniques, and global operational expertise, enable the Company to deliver innovative solutions across multiple applications. References to "Knowles,""the Company,""we,""our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.
Financial Statement Presentation - The accompanying unaudited interim Consolidated Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”) for complete financial statements. These unaudited interim Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect
amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. Management uses historical experience and all available information to make these estimates. The unaudited interim Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods.
Share Repurchase Program - On February 24, 2020, the Company
announced that its Board of Directors had authorized a share repurchase program of up to $i100.0 million of the Company's common stock. On April 28, 2022, the Company announced that its Board of Directors had increased the authorization by up to $i150.0 million
in additional aggregate value. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors, and will be made in accordance with applicable securities laws in either the open market or in privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be suspended or discontinued at any time. The actual timing, number, and share price of shares repurchased will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal requirements. Any shares repurchased will be held as treasury
stock. During the nine months ended September 30, 2023 and 2022, the Company repurchased i1,630,161 shares and i2,339,045
shares of common stock, respectively, for a total of $i27.5 million and $i44.0 million, respectively.
Non-cash Investing Activities
- Purchases of property, plant, and equipment included in accounts payable at both September 30, 2023 and September 30, 2022 were $ii1.6/
million. These non-cash amounts are not reflected as "Capital expenditures" within Investing Activities on the Consolidated Statements of Cash Flows for the respective periods.
Operating lease liabilities arising from obtaining right-of-use assets for the nine months ended September 30, 2023 and 2022 were $i2.5 million and $i1.9
million, respectively.
The purchase price for the asset acquisition that occurred during the third quarter of 2023 includes $i1.7 million of contingent consideration. This non-cash amount is not reflected in “Acquisition of asset” within Investing Activities on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023. See also Note 7. Goodwill and Other Intangible Assets.
/
i
2.
Recent Accounting Standards
iThere are no recently issued or adopted accounting standards that impact the Consolidated Financial Statements of the Company as of September 30, 2023.
On November 1, 2023, the Company completed the acquisition of Cornell Dubilier. See Note 16. Subsequent Events.
On
May 3, 2021, the Company acquired all of the outstanding shares of common stock of Integrated Microwave Corporation ("IMC") for $i81.4 million. During the first quarter of 2022, the Company recorded a purchase price adjustment of $i0.7
million that was paid during the second quarter of 2022. The adjustment, which did not impact the Consolidated Statements of Earnings, resulted in an increase to goodwill of $i0.7 million. The acquired business provides RF filters to the defense, industrial, and communications markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the Precision Devices ("PD") segment.
/
i
4.
Impairment Charges
The Company tests goodwill for impairment at least annually as of October 1, or more frequently if there are events or circumstances indicating the carrying value of individual reporting units may exceed their respective fair values on a more likely than not basis. Recoverability of goodwill is measured at the reporting unit level. The Company’s three reporting units are Precision Devices ("PD"), MedTech & Specialty Audio ("MSA"), and Consumer MEMS Microphones ("CMM"). The impairment assessment compares the fair value of each reporting unit to its carrying value. Impairment is measured as the amount by which the carrying value of a reporting unit exceeds its fair value.
During
the second quarter of 2022, the Company identified a triggering event requiring an interim impairment assessment for the CMM reporting unit (previously referred to as Mobile Consumer Electronics or "MCE"), which resulted in a goodwill impairment charge of $i239.8 million. The triggering event occurred due to the identification of a rapid decline in current demand and a reduction in the expected future growth rate for global consumer electronics, which resulted in reductions to forecasted revenue and terminal growth rates and profit
margins. The goodwill impairment charge is presented within "Impairment charges" in "Operating expenses" on the Consolidated Statements of Earnings. The Company had not incurred any previous goodwill impairment charges.
Additionally, during the fourth quarter of 2022, the Company identified another triggering event requiring an impairment assessment of the CMM reporting unit, which resulted in a goodwill impairment charge of $i231.1 million.
This triggering event occurred due to the identification of further declines in forecasted demand for global consumer electronics, resulting in reductions to forecasted revenue and profit margins. In addition, the Company’s assumptions for weighted average cost of capital and income tax rates increased as a result of rising interest rates and not satisfying certain tax holiday conditions.
Fair value was estimated using a discounted cash flow model that included the Company’s market participant assumptions, forecasted future cash flows based on historical performance and future estimated results, determinations of appropriate discount rates, and other assumptions which were considered reasonable and inherent in the discounted
cash flow analysis. The fair value estimate was based on known or knowable information at the assessment date. Significant assumptions used in the model included forecasted revenue and terminal growth rates, profit margins, income taxes, and the Company's weighted average cost of capital. The fair value measurements for reporting units are based on significant unobservable inputs, and thus represent Level 3 inputs.
Fair value measurements require considerable judgment and are sensitive to changes in underlying assumptions. As a result, there can be no assurance that estimates and assumptions made for purposes of the impairment assessment will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting units include, but are not limited
to, lower than forecasted growth rates or profit margins and changes in the weighted average cost of capital. A reduction in the estimated fair value of the reporting units could trigger an impairment in the future. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.
Depreciation
expense totaled $i7.6 million and $i9.8 million for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022,
depreciation expense totaled $i25.0 million and $i32.5 million, respectively.
During the nine months ended September 30, 2023, the
Company entered into an agreement to sell certain of its machinery and equipment related to the CMM segment to a third party for total proceeds of $i11.4 million, which were received in their entirety in the second quarter of 2023. The Company transferred control of assets with a fair value of approximately $i5.5 million
and $i11.2 million to the buyer during the three and nine months ended September 30, 2023, resulting in a gain on sale of approximately $i5.3 million
and $i11.0 million, respectively. These gains on sale are reflected in the Consolidated Statements of Earnings as follows:
See
also Note 8. Restructuring and Related Activities.
The Company has deferred the remaining sale proceeds related to this agreement of approximately $i0.2 million until it completes the transfer of control of the remaining assets to the buyer. This liability is included in "Other accrued expenses" on the Consolidated Balance Sheet as of September 30, 2023.
/
i
7.
Goodwill and Other Intangible Assets
iThere were ino changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 2023./
The
Company completed an asset acquisition in the third quarter of 2023. In connection with this acquisition, the Company recognized customer relationships with a fair value of approximately $i2.0 million, reflecting cash paid of $i0.3
million and contingent consideration with an estimated fair value of $i1.7 million. These customer relationships have an estimated useful life of 7 years.
Amortization expense totaled $i3.0
million and $i3.1 million for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense was $i8.8
million and $i9.2 million, respectively. iAmortization expense for the next five years, based on current definite-lived intangible balances, is estimated to be as follows:
(in
millions)
Q4 2023
$
i3.0
2024
i11.9
2025
i11.5
2026
i5.6
2027
i5.6
2028
and thereafter
i8.7
Total
$
i46.3
i
8.
Restructuring and Related Activities
Restructuring and related activities are designed to better align the Company's operations with current market conditions through headcount reductions, targeted facility consolidations, and other measures to further optimize operations and align resources with growth opportunities.
The Company recorded restructuring charges of $ii1.3/ million
during the three and nine months ended September 30, 2023 for severance pay and benefits related to headcount reductions within the PD segment and $i1.4 million during the nine months ended September 30, 2023 for severance pay and benefits related to headcount reductions within the MEMS Microphones product line, which is included within the Consumer MEMS Microphones segment. The Company also recorded $i0.4 million
and $i0.7 million for Corporate charges for the three and nine months ended September 30, 2023, respectively. The Company recognized the majority of these costs within Operating expenses, resulting in total restructuring charges within Operating expenses of $i1.5
million and $i3.1 million for the three and nine months ended September 30, 2023, respectively.
During the three and nine months ended September 30, 2023, the Company recorded gains of $i0.1 million and $i1.0 million,
respectively, for the sale of certain machinery and equipment that was previously written off through restructuring charges within the Consumer MEMS Microphones segment. In addition, during the nine months ended September 30, 2023, the Company recorded a $i0.8 million reversal of restructuring charges within the Consumer MEMS Microphones segment related to a change in estimate. The Company
recognized these transactions within Gross profit, resulting in total restructuring expense within Gross Profit of $i0.1 million for the three months ended September 30, 2023, and credits of $i1.5 million for the nine months
ended September 30, 2023.
During the nine months ended September 30, 2022, the Company restructured its MEMS Microphones product line through two restructuring programs, which are included within the Consumer MEMS Microphones segment. These actions resulted in the settlement of supplier obligations, non-cash fixed asset write-offs, and severance pay. During the nine months ended September 30, 2022, the Company recorded restructuring charges of $i35.1 million
related to this action, including $i21.9 million for the settlement of supplier obligations, $i8.9 million in fixed asset write-offs, and $i4.3 million
in severance pay and benefits.
In addition, during the nine months ended September 30, 2022, the Company recorded restructuring charges of $i2.2 million for severance pay and benefits related to headcount reductions within the Intelligent Audio product line workforce, which is included within the Consumer MEMS Microphones segment, and $i0.6 million
for other costs.
During the three and nine months ended September 30, 2022the Company recorded total restructuring charges within Gross profit of $ii28.1/ million
primarily for the settlement of supplier obligations, non-cash fixed asset write-offs, and severance pay associated with the MEMS microphones product line. During the three and nine months ended September 30, 2022, the Company recorded total restructuring charges within Operating expenses of $i2.7 million and $i9.8
million, respectively, primarily for the settlement of supplier obligations and severance pay and benefits associated with the MEMS microphones product line and other actions for headcount reductions within the Intelligent Audio product line workforce.
i
The following table details restructuring charges incurred by reportable segment for the periods presented:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2023
2022
2023
2022
Precision Devices
$
i1.3
$
i—
$
i1.3
$
i—
Consumer
MEMS Microphones
(i0.1)
i30.7
(i0.4)
i37.3
Corporate
i0.4
i0.1
i0.7
i0.6
Total
$
i1.6
$
i30.8
$
i1.6
$
i37.9
/
i
The
following table details the Company’s severance and other restructuring accrual activity:
(1)
There are iiiino///
required principal payments due until maturity in February 2028.
On February 8, 2023, the Company entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") that amends and restates the prior Credit Agreement, dated September 4, 2020 (the “2020 Credit Facility”), and provides for a senior secured revolving credit facility with borrowings in an aggregate principal amount at any time outstanding not to exceed $i400.0 million
(the "Credit Facility"). The A&R Credit Agreement, among other things, extends the maturity date of the Credit Facility from January 2, 2024 to February 8, 2028, replaces the London Inter-Bank Offered Rate (“LIBOR”) with the Term Secured Overnight Financing Rate (“Term SOFR”) as a reference rate available for borrowings, amends the minimum Interest Coverage Ratio, and amends certain other financial covenants with which the Company must comply, as described below.
On September 25, 2023, the Company amended its A&R Credit Agreement to, among
other things, (a) permit the Company in connection with the acquisition of Cornell Dubilier, to incur senior priority seller financing indebtedness (the “Seller Note”) in an aggregate principal amount of approximately $i123.0 million secured by certain assets (including equity interests) acquired in connection with such acquisition and the capital stock of Knowles Intermediate PD Holdings, LLC (“Knowles PD Holdings”) (the “Acquisition Assets”), which shall mature two years after the effective date of such Seller Note
(the “Seller Note Maturity Date”), (b) extends the requirement to pledge the Acquisition Assets that would otherwise constitute collateral under the Credit Agreement to the date that is 90 days after the Seller Note Maturity Date, and (c) restricts, until the Seller Note Maturity Date, the amount of dispositions and investments from the Company and certain of its subsidiaries into Knowles PD Holdings and the acquired subsidiaries that constitute Acquisition Assets from exceeding $i80.0 million
in the aggregate. All other terms remain the same as the A&R Credit Agreement dated February 8, 2023.
Up to $i100.0 million of the Credit Facility will be available in Euro, Pounds Sterling, and other currencies requested by the Company and up to $i50.0
million of the Credit Facility will be made available in the form of letters of credit. Undrawn amounts under the Credit Facility accrue a commitment fee at a per annum rate of i0.225% to i0.350%, based on a leverage ratio grid.
At
any time during the term of the Credit Facility, the Company will be permitted to increase the commitments under the Credit Facility or to establish one or more incremental term loan facilities under the Credit Facility in an aggregate principal amount not to exceed the sum of $i200.0 million, plus additional amounts, so long as the senior secured leverage ratio does not exceed i2.00
to 1.00.
The A&R Credit Agreement includes requirements, to be tested quarterly, that the Company maintains (i) a minimum ratio of Consolidated EBITDA to consolidated cash interest expense of i3.00 to 1.00, (the "Interest Coverage Ratio"), (ii) a ratio of total indebtedness, minus netted cash in an aggregate amount not to exceed $50.0 million, to Consolidated EBITDA of i3.75
to 1.00 (the "Total Net Leverage Ratio"), and (iii) a maximum ratio of senior net secured indebtedness to Consolidated EBITDA of i3.25 to 1.00 (the "Senior Secured Net Leverage Ratio"). For these ratios, Consolidated EBITDA and consolidated interest expense are calculated using the most recent four consecutive fiscal quarters in a manner defined in the A&R Credit Agreement. At September 30, 2023, the Company was in compliance with these covenants
and it expects to remain in compliance with all of its debt covenants over the next twelve months.
The interest rates under the Credit Facility will be, at the Borrowers' option (1) (A) in the case of borrowings denominated in U.S. dollars Term SOFR, (B) in the case of borrowings denominated in Sterling, Daily Simple Sonia, or (C) for borrowings denominated in Euro, EURIBOR, in each case, plus the rates per annum determined from time to time based on the total net leverage ratio of the Company as of the end of and for the most recent period of four fiscal quarters for which financial statements have been delivered (the "Applicable Margin"); or (2) in the case of borrowings denominated in U.S. dollars, alternate base rate ("ABR") (as defined in the A&R Credit Agreement) plus the Applicable
Margin. The Applicable Margin for Term SOFR, Daily Simple Sonia, or EURIBOR could range from i1.50% to i2.50% while the Applicable Margin for ABR could range from i0.50%
to i1.50%.
The weighted-average interest rate on the Company's borrowings under the Credit Facility and the 2020 credit facility was i6.43% and i2.62%
for the nine months ended September 30, 2023 and 2022, respectively. The weighted-average commitment fee on the revolving line of credit was ii0.23/%
for the nine months ended September 30, 2023 and 2022.
Warrants
In the second quarter of 2016, the Company entered into warrant transactions, whereby the Company sold warrants to acquire shares of the Company's common stock at a strike price of $i21.1050
per share (the “Warrants”). The Company received aggregate proceeds of $i39.1 million from the sale of the Warrants. The Warrants were separate transactions entered into by the Company, and were not part of the Notes, and were accounted for as part of additional paid-in capital.
The Warrants expired during the first quarter of 2022, which resulted
in the Company delivering i0.2 million shares of its common stock held in treasury. Settlement of the Warrants resulted in a $i3.1 million
decrease in treasury stock, which was measured based on the acquisition cost of the delivered shares determined on a first-in, first-out (“FIFO”) basis, offset by an equivalent decrease in additional paid-in capital with no net impact to equity.
i
10. Other Comprehensive Earnings
iThe
amounts recognized in other comprehensive loss were as follows:
The
following tables summarize the changes in balances of each component of accumulated other comprehensive loss, net of tax during the nine months ended September 30, 2023 and 2022:
The
following tables summarize the amounts reclassified from accumulated other comprehensive loss to earnings:
Three Months Ended September 30,
(in millions)
Statement of Earnings Line
2023
2022
Pension and post-retirement benefit
plans:
Amortization or settlement of actuarial losses and prior service costs
Other (income) expense, net
$
i0.1
$
i0.2
Tax
Provision
for (benefit from) income taxes
(i0.1)
(i0.4)
Net
of tax
$
i—
$
(i0.2)
Cash
flow hedges:
Net losses reclassified into earnings
Cost of goods sold
$
i1.0
$
i2.0
Tax
Provision
for (benefit from) income taxes
(i0.2)
(i0.3)
Net
of tax
$
i0.8
$
i1.7
Nine
Months Ended September 30,
(in millions)
Statement of Earnings Line
2023
2022
Pension and post-retirement benefit plans:
Amortization or settlement of actuarial losses and prior service costs
Other (income) expense, net
$
i0.4
$
i0.5
Tax
Provision
for (benefit from) income taxes
i—
(i0.7)
Net
of tax
$
i0.4
$
(i0.2)
Cash
flow hedges:
Net losses reclassified into earnings
Cost of goods sold
$
i1.6
$
i2.7
Tax
Provision
for (benefit from) income taxes
(i0.3)
(i0.4)
Net
of tax
$
i1.3
$
i2.3
i
11.
Income Taxes
Income taxes for the interim periods presented have been included in the accompanying Consolidated Financial Statements on the basis of an estimated annual effective tax rate ("ETR"). The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings or loss, tax laws, and changes resulting from tax audits can affect the overall ETR, which impacts the level of income tax expense or benefit and net income or loss. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain and therefore, actual results could differ materially from projections.
The Company's ETR for the three and nine months ended September 30, 2023 was i22.8% (inclusive of discrete items totaling $i0.8
million of benefit) and i28.2% (inclusive of discrete items totaling $i0.1 million of benefit), respectively. The discrete items impacting the tax provision for the three and nine months ended September
30, 2023 were primarily attributable to stock-based compensation and the recognition of foreign tax credits resulting from the release of IRS Notice 2023-55. Absent the discrete items, the ETR for the three and nine months ended September 30, 2023 was i26.5% and i28.4%,
respectively. The Company's ETR for the three and nine months ended September 30, 2022 was i119.9% and (i5.9)%
(inclusive of discrete items totaling $i1.6 million of benefit), respectively. The discrete items impacting the tax provision for the three and nine months ended September 30, 2022 were primarily attributable to stock-based compensation. Absent the discrete items, the ETR for the three and nine months ended September 30, 2022 was i119.9%
and (i6.7)%, respectively.
The Company's ETR is favorably impacted by tax holidays granted to the Company. The benefit for these incentives for the three and nine months ended September 30, 2023 was approximately $i0.7
million and $i1.3 million, respectively, or $ii0.01/
on a basic per share basis for both periods. The impact for these incentives for the three and nine months ended September 30, 2022 was approximately $i4.0 million expense and $i0.9
million benefit, respectively, or $(i0.04) and $i0.01 on a basic (loss) earnings per share basis. The decrease in the tax holiday benefits is attributable to the
Company not satisfying all of the conditions of our tax holiday in Malaysia during the year ended December 31, 2022 due to the rapid decline in demand for global consumer electronics. As a result, our tax holiday benefit in Malaysia ended on December 31, 2022.
The Company believes it is reasonably possible that a U.S. valuation allowance of approximately $i11.6 million
related to foreign tax credits will be released within the next twelve months.
i
12. Equity Incentive Program
i
The
following table summarizes the stock-based compensation expense recognized by the Company for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
(in
millions)
2023
2022
2023
2022
Total pre-tax stock-based compensation expense
$
i6.9
$
i6.8
$
i21.8
$
i21.6
Tax
benefit
i—
i0.1
i3.2
i4.1
Total
stock-based compensation expense, net of tax
$
i6.9
$
i6.7
$
i18.6
$
i17.5
/
Stock
Options and SSARs
i
The expense related to stock options granted in the nine months ended September 30, 2022 was estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions shown in the table below. No stock options were granted during the nine months ended September 30, 2023.
The following table summarizes the Company's stock-settled stock appreciation right ("SSAR") and stock option activity
for the nine months ended September 30, 2023:
SSARs
Stock
Options
Number of Shares
Weighted-Average Exercise Price
Aggregate Intrinsic Value
Weighted-Average Remaining Contractual Term (Years)
Number of Shares
Weighted-Average Exercise Price
Aggregate Intrinsic Value
Weighted-Average Remaining Contractual Term (Years)
There
was ino unrecognized compensation expense related to SSARs at September 30, 2023. At September 30, 2023, unrecognized compensation expense related to stock options not yet exercisable of $i0.6
million is expected to be recognized over a weighted-average period of i1.1 years.
RSUs
i
The
following table summarizes the Company's restricted stock unit ("RSU") activity for the nine months ended September 30, 2023:
(1)
The number of RSUs vested includes shares that the Company withheld on behalf of employees to satisfy statutory tax withholding requirements.
/
At September 30, 2023, $i26.1
million of unrecognized compensation expense related to RSUs is expected to be recognized over a weighted-average period of i1.7 years.
PSUs
The Company grants performance share units (“PSUs”) to senior management. In each case, the awards
will cliff vest three years following the grant date. PSUs will be settled in shares of the Company's common stock. Depending on the Company's overall performance relative to the applicable measures, the size of the PSU awards are subject to adjustment, up or down, resulting in awards at the end of the performance period that can range from i0%
to i225% of target. The Company will ratably recognize the expense over the applicable service period for each grant of PSUs and adjust the expense for the expected achievement of performance conditions as appropriate. The fair value of PSUs is determined by using a Monte Carlo simulation. For the awards granted in February 2023, 2022, and 2021, the number of PSUs that may be earned and vest is based
on total shareholder return (“TSR”) relative to the component companies of the Russell 2000 Index over a three-year performance period.
(1)
The number of PSUs vested includes shares that the Company withheld on behalf of employees to satisfy statutory tax withholding requirements.
/
At September 30, 2023, $i12.0
million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted-average period of i1.4 years.
i
13.
Earnings per Share
iiBasic and diluted earnings per share were computed as follows:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions, except per share amounts)
2023
2022
2023
2022
Net earnings (loss)
$
i16.6
$
i2.7
$
i25.0
$
(i222.1)
Basic:
Net
earnings (loss) per share
$
i0.18
$
i0.03
$
i0.27
$
(i2.42)
Weighted-average
shares outstanding
i90.8
i91.4
i91.2
i91.9
Diluted:
Net
earnings (loss) per share
$
i0.18
$
i0.03
$
i0.27
$
(i2.42)
Weighted-average
shares outstanding
i91.4
i92.0
i91.9
i91.9
//
For
the three and nine months ended September 30, 2023, the weighted-average number of anti-dilutive potential common shares for stock-based awards excluded from the diluted earnings per share calculation above was i1.7 million and i2.4
million, respectively. For the three and nine months ended September 30, 2022, the weighted-average number of anti-dilutive potential common shares for stock-based awards excluded from the diluted earnings per share calculation above was i3.2 million and i3.0
million, respectively.
/
i
14. Commitments and Contingent Liabilities
From time to time, the Company is involved in various legal proceedings and claims
arising in the ordinary course of its business. The majority of these claims and proceedings relate to commercial, warranty, employment, and intellectual property matters. Although the ultimate outcome of any legal proceeding or claim cannot be predicted with certainty, based on present information, including management’s assessment of the merits of the particular claim, the Company believes that the disposition of these legal proceedings or claims, individually or in the aggregate, after taking into account recorded accruals and the availability and limits of insurance coverage, will not have a material adverse effect on its cash flow, results of operations, or financial condition.
The Company owns many patents and other intellectual property pertaining to its products, technology, and manufacturing processes. Some of the Company's patents have been and may continue to be infringed upon or challenged by others. In appropriate cases, the Company has taken and will take steps to protect and defend its patents and other intellectual property, including through
the use of legal proceedings in various jurisdictions around the world. Such steps have resulted in and may continue to result in retaliatory legal proceedings, including litigation or other legal proceedings in various jurisdictions and forums around the world alleging infringement by the Company of patents owned by others. The costs of investigations and legal proceedings relating to the enforcement and defense of the Company’s intellectual property may be substantial. Additionally, in multi-forum disputes, the Company may incur adverse judgments with regard to certain claims in certain jurisdictions and forums while still contesting other related claims against the same opposing party in other jurisdictions
and forums.
Intellectual Property Infringement Claims
The Company may, on a limited customer specific basis, provide contractual indemnities for certain losses that arise out of claims that its products infringe on the intellectual property of others. It is not possible to determine the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Historically, the Company has not made significant payments under such indemnity arrangements. The Company’s legal accruals
associated with these indemnity arrangements were not significant at September 30, 2023 and December 31, 2022.
i
15. Segment Information
The Company's ithree
reportable segments are Precision Devices, MedTech & Specialty Audio, and Consumer MEMS Microphones. Information regarding the Company’s reportable segments is as follows (certain prior year information has been reclassified to conform to the current year presentation):
The
following table details revenues by geographic location. Revenues are attributed to regions based on the location of the Company's direct customer, which in some instances is an intermediary and not necessarily the end user. The Company's businesses are based primarily in Asia, North America, and Europe.
On November 1, 2023, the Company acquired (i) all the issued and outstanding shares of Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier") for aggregate consideration of approximately $i263.0 million,
consisting of a $i140.0 million cash payment at closing and an interest-free seller note of approximately $i123.0 million, with $i50.0 million
maturing one year from closing of the acquisition and the remaining $i73.0 million maturing two years from closing of the acquisition, secured by certain assets (including equity interest) acquired in connection with the acquisition (the "Seller Note"). The Seller Note includes Knowles Capital Holdings, Inc. and Knowles Intermediate PD Holdings, LLC as borrowers, which jointly and severally agree to pay James P. Kaplan, as representative of the sellers of Cornell Dubilier. The acquisition purchase price is subject to working capital
and other contractual adjustments. The Company funded the cash portion of the consideration through a combination of borrowings on its existing revolving credit facility and cash on hand.
Cornell Dubilier is a manufacturer of film, electrolytic, and mica capacitors used in medtech, military, aerospace, and industrial electrification applications. The transaction will be accounted for as a business combination under Accounting Standards Codification 805 and the results of operations from the date of acquisition will be reflected within the Precision Devices segment. The Company is in the process of completing its appraisals of tangible and intangible assets relating to this acquisition, and the allocation of the purchase
price to the assets acquired and liabilities assumed will be completed once the appraisal process has been finalized. During the nine months ended September 30, 2023, the Company recognized acquisition-related costs of $i3.0 million, which are reflected within "Selling and administrative expenses" in the Consolidated Statement of Earnings.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our operations, results of operations, our continued business operations, and other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as “believe,”“expect,”“anticipate,”“project,”“estimate,”“budget,”“continue,”“could,”“intend,”“may,”“plan,”“potential,”“predict,”“seek,”“should,”“will,”“would,”“objective,”“forecast,”“goal,”“guidance,”“outlook,”“effort,”“target,” and similar expressions, among others, generally identify forward-looking statements, which speak only as of the date the statements were made. The statements in this Quarterly Report on Form 10-Q, including those statements related to our expectations regarding the acquisition of Cornell Dubilier and the evaluation of strategic alternatives for the CMM business, are based on currently available information and the current expectations, forecasts, and assumptions of our management concerning risks and uncertainties that could cause actual outcomes or results to differ materially from those outcomes or results that are projected, anticipated, or implied in these statements. Other risks and uncertainties include, but are not limited to:
o
unforeseen
changes in MEMS microphone demand from our largest customers, particularly our top five customers, who represent a significant portion of revenues for our Consumer MEMS Microphones segment;
o
our ongoing ability to execute our strategy to diversify our end markets and customers;
o
our ability to stem or overcome price erosion in our segments;
o
fluctuations in our stock's market price;
o
fluctuations in operating results and cash flows;
o
our
ability to prevent or identify quality issues in our products or to promptly remedy any such issues that are identified;
o
the timing of OEM product launches;
o
risks associated with increasing our inventories in advance of anticipated orders by customers;
o
global economic instability, including due to inflation, rising interest rates, negative impacts caused by pandemics and public health crises, or the impacts of geopolitical uncertainties;
o
the impact of changes to laws and regulations that affect the
Company’s ability to offer products or services to customers in different regions;
o
our ability to achieve reductions in our operating expenses;
o
the ability to qualify our products and facilities with customers;
o
our ability to obtain, enforce, defend, or monetize our intellectual property rights;
o
disruption caused by a cybersecurity incident, including a cyber attack, cyber breach, theft, or other unauthorized access;
o
difficulties
or delays in and/or the Company's inability to realize expected synergies from its acquisitions;
o
increases in the costs of critical raw materials and components;
o
availability of raw materials and components;
o
managing new product ramps and introductions for our customers;
o
our dependence on a limited number of large customers;
o
our
ability to maintain and expand our existing relationships with leading OEMs in order to maintain and increase our revenue;
o
increasing competition and new entrants in the market for our products;
o
our ability to develop new or enhanced products or technologies in a timely manner that achieve market acceptance;
o
our reliance on third parties to manufacture, assemble, and test our products and sub-components;
o
escalating international trade tensions, new or increased tariffs, and trade wars among countries;
o
financial
risks, including risks relating to currency fluctuations, credit risks, and fluctuations in the market value of the Company;
o
a sustained decline in our stock price and market capitalization may result in the impairment of certain intangible or long-lived assets;
o
market risk associated with fluctuations in commodity prices, particularly for various precious metals used in our manufacturing operation; and
o
changes in tax laws, changes in tax rates, and exposure to additional tax liabilities.
A
more complete description of these risks, uncertainties, and other factors can be found under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. We do not undertake to update or revise our forward-looking statements as a result of new information, future events, or otherwise, except as required by law.
Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof
Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a market leader and global provider of advanced micro-acoustic microphones and balanced armature speakers, audio solutions, and high performance capacitors and radio frequency ("RF") filtering products, serving the medtech, defense, consumer electronics, electric vehicle, industrial, and communications markets. Our focus on the customer, combined with unique technology, proprietary manufacturing techniques, and global
operational expertise, enables us to deliver innovative solutions across multiple applications. References to "Knowles," the "Company,""we,""our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.
During the fourth quarter of 2022, we determined each operating segment represents a single reportable segment; thus, we now report three segments. These segments were determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 280 - Segment Reporting and are comprised of (i) Precision Devices ("PD"), (ii) MedTech & Specialty Audio ("MSA"), and (iii) Consumer MEMS Microphones ("CMM"). The segments are aligned around similar product applications
serving our key end markets to enhance focus on end market growth strategies.
•PD Segment
Our PD segment specializes in the design and delivery of high performance capacitor products and RF solutions primarily serving the defense, medtech, industrial, communication, electric vehicle, and distribution markets. PD has sales, support, and engineering facilities in North America, Europe, and Asia as well as manufacturing facilities in North America and Asia.
•MSA Segment
Our MSA segment designs and manufactures microphones and balanced armature speakers used in applications that serve the hearing health and premium audio markets. MSA has sales, support, and engineering facilities
in North America, Europe, and Asia, as well as manufacturing facilities in Asia.
•CMM Segment
Our CMM segment designs and manufactures micro-electro-mechanical systems ("MEMS") microphones and audio solutions used in applications that primarily serve the ear, Internet of Things ("IoT"), computing, and smartphone markets. CMM has sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.
We sell our products directly to original equipment manufacturers ("OEMs") and to their contract manufacturers and suppliers and through distributors worldwide.
On
September 18, 2023, we announced that we are reviewing strategic alternatives for CMM. No assurance can be given that any transaction or other strategic outcomes will result from the review. We have not set a timetable for the conclusion of the strategic review and do not intend to comment on or provide updates regarding these matters unless and until we determine that further disclosure is appropriate or required.
Non-GAAP Financial Measures
In addition to the GAAP financial measures included in this item, we have presented certain non-GAAP financial measures. We use non-GAAP measures as supplements to our GAAP results of operations in evaluating certain aspects of our business, and our executive management team and Board of Directors focus on non-GAAP items
as key measures of our performance for business planning purposes. These measures assist us in comparing our performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in our opinion, do not reflect our core operating performance. We believe that our presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that we use internally for purposes of assessing our core operating performance. The Company does not consider these non-GAAP financial measures to be a substitute for the information provided by GAAP financial results. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, see the reconciliation included herein.
Adjusted earnings before interest and income taxes
$
36.8
$
28.2
Provision
for (benefit from) income taxes
$
4.9
$
(16.3)
Non-GAAP provision for income taxes
$
6.9
$
3.8
Net
earnings
$
16.6
$
2.7
Non-GAAP net earnings
$
29.3
$
23.3
Diluted
earnings per share
$
0.18
$
0.03
Non-GAAP diluted earnings per share
$
0.31
$
0.25
Revenues
Revenues
for the third quarter of 2023 were $175.1 million, compared with $178.2 million for the third quarter of 2022, a decrease of $3.1 million or 1.7%. PD revenues decreased $14.2 million, primarily due to lower demand from the industrial, communication, defense, medtech, and distribution markets as a result of continued demand weakness associated with excess channel inventory and timing of shipments into the defense market. MSA revenues increased $9.5 million, primarily due to higher shipping volumes into the hearing health and premium audio markets as demand has returned to normalized levels. CMM revenues increased $1.6 million, primarily due to higher demand in the computing and IoT markets, partially offset by lower average pricing on mature products.
Cost of Goods Sold
Cost
of goods sold ("COGS") for the third quarter of 2023 was $102.7 million, compared with $110.1 million for the third quarter of 2022, a decrease of $7.4 million or 6.7%. This decrease was primarily due to product cost reductions, benefits of prior year restructuring actions, favorable product mix, favorable foreign currency changes, partially offset by lower factory capacity utilization and higher shipping volumes.
As
a result of transitioning to our next generation of MEMS wafer manufacturing technology, we sold certain machinery and equipment related to the CMM segment in the third quarter of 2023 and recorded a gain of $5.2 million. For additional information, refer to Note 6. Property, Plant, and Equipment, net to our Consolidated Financial Statements.
Restructuring Charges
During the third quarter of 2023, we recorded restructuring charges of $1.3 million for severance pay and benefits related to headcount reductions within our PD segment and $0.4 million in other charges, all primarily in Operating expenses. We also recorded a $0.1 million gain on the sale of certain machinery and equipment that was previously written off through restructuring charges in Gross profit and the CMM Segment. For additional information,
refer to Note 8. Restructuring and Related Activities to our Consolidated Financial Statements.
During the third quarter of 2022, we committed to a restructuring program within our CMM segment designed to rightsize manufacturing capacity and operating expenses in the MEMS microphones product line. This action was taken in light of the decline in demand and the reduction in the expected future growth for global consumer electronics. In addition, this restructuring program furthers the Company's previously announced strategy to reduce exposure to commodity microphones and increase emphasis on high-value solutions. This action resulted in the settlement of supplier obligations, non-cash fixed asset write-offs, and severance pay. We recorded restructuring charges of $29.8 million related to this action. In
addition, we recorded restructuring charges of $1.0 million related to headcount reductions within the Intelligent Audio product line workforce, which is also included within the Audio segment. As a result, we recorded total restructuring charges of $28.1 million within Gross Profit and $2.7 million within Operating expenses. For additional information, refer to Note 8. Restructuring and Related Activities to our Consolidated Financial Statements.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the third quarter of 2023 was $77.5 million, compared with $40.0 million for the third quarter of 2022, an increase of $37.5 million or 93.8%. Gross profit margin (gross profit as a percentage of revenues) for the third quarter of 2023 was 44.3%, compared with 22.4% for the third quarter of 2022. The increases
were primarily due to lower restructuring charges, product cost reductions, the gain on sale of fixed assets, benefits of prior year restructuring, favorable product mix, and favorable foreign currency exchange rate changes, partially offset by lower average pricing on mature products shipped into the mobile market and lower factory capacity utilization.
Non-GAAP gross profit for the third quarter of 2023 was $78.1 million, compared with $68.6 million for the third quarter of 2022, an increase of $9.5 million or 13.8%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the third quarter of 2023 was 44.6%, compared with 38.5% for the third quarter of 2022. The increases in non-GAAP gross profit were primarily due to product cost reductions, the gain on sale of fixed assets, benefits of prior year restructuring, favorable product mix, and favorable foreign
currency exchange rate changes, partially offset by lower average pricing on mature products shipped into the mobile market and lower factory capacity utilization.
Research and Development Expenses
Research and development expenses for the third quarter of 2023 were $19.8 million, compared with $19.3 million for the third quarter of 2022, an increase of $0.5 million or 2.6%. Research and development expenses as a percentage of revenues for the third quarter of 2023 and 2022 were 11.3% and 10.8%, respectively. The increase in expenses was primarily driven by increased development activities in our MSA segment, partially offset by reduced spending in our CMM segment driven by the benefits of prior year restructuring actions as we continue to shift our focus and spending to our higher margin businesses. The
increase in expenses as a percentage of revenues was driven by our lower revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of 2023 were $34.6 million, compared with $32.6 million for the third quarter of 2022, an increase of $2.0 million or 6.1%. Selling and administrative expenses as a percentage of revenues for the third quarter of 2023 and 2022 were 19.8% and 18.3%, respectively. The increase in expenses was primarily driven by higher professional service fees. The increase in expenses as a percentage of revenues was driven by our increase in expenses and lower revenues.
Interest expense for the third quarter of 2023 and 2022 was $0.6 million, compared with $1.1 million for the third quarter of 2022, a decrease of $0.5 million. We had a lower outstanding revolving credit facility balance during the third quarter of 2023 compared to the third quarter of 2022, offset by higher interest rates. For additional information on borrowings and interest expense, refer to Note 9. Borrowings to our Consolidated Financial Statements.
Other Income, net
Other income for the third quarter of 2023 was $0.5 million, compared with income of $2.1 million for
the third quarter of 2022, a change of $1.6 million. The change is primarily due to less favorable foreign currency exchange rate changes.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The effective tax rate ("ETR") for the third quarter of 2023 and 2022 was 22.8% and 119.9%, respectively. The ETR for the third quarter of 2023 includes discrete items totaling $0.8 million of tax benefit primarily attributable to stock-based compensation and the recognition of foreign tax credits resulting from the release of IRS Notice 2023-55. Absent the discrete items, the ETR for the third quarter of 2023 and 2022 was 26.5% and 119.9%, respectively. The Company accrues taxes in various countries where it generates
income and applies a valuation allowance in other jurisdictions, which resulted in the provision (benefit) for the third quarter of 2023 and 2022, respectively. The change in the ETR was mainly due to the book goodwill impairment recorded in the second quarter of 2022, as well as the mix of earnings and losses by taxing jurisdictions and net discrete items.
The non-GAAP ETR for the third quarter of 2023 and 2022 was 19.1% and 14.0%, respectively. The non-GAAP ETR for the third quarter of 2023 was impacted by a net discrete expense totaling $0.1 million. Absent the discrete items, the non-GAAP ETR for the third quarter of 2023 and 2022 was 18.8% and 14.0%, respectively. The change in the non-GAAP ETR was primarily due to lower pre-tax earnings and the loss of our Malaysian tax holiday.
The ETR and non-GAAP
ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions where we generate taxable income or loss. As a result of the rapid decline in demand for global consumer electronics during 2022, we did not satisfy all of the conditions of our tax holiday in Malaysia. As such, we are not including this tax holiday benefit in our 2023 GAAP ETR and non-GAAP ETR. For additional information on tax holidays refer to Note 11. Income Taxes to our Consolidated Financial Statements.
Net Earnings
Net earnings for the third quarter of 2023 were $16.6 million, compared with $2.7 million for the third quarter of 2022, an increase of $13.9 million. As described above, the increase is primarily due to higher gross profit, partially offset by higher income tax expense.
Earnings
(Loss) and Adjusted Earnings Before Interest and Income Taxes
Earnings before interest and income taxes ("EBIT") for the third quarter of 2023 was $22.1 million, compared with a $12.5 million loss for the third quarter of 2022, an increase of $34.6 million. EBIT margin (EBIT as a percentage of revenues) for the third quarter of 2023 was 12.6%, compared with (7.0)% for the third quarter of 2022. The change is primarily due to higher gross profit.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") for the third quarter of 2023 was $36.8 million, compared with $28.2 million for the third quarter of 2022, an increase of $8.6 million. Adjusted EBIT margin (Adjusted EBIT as a percentage of revenues) for the third quarter of 2023 was 21.0%, compared with 15.8% for the third quarter
of 2022. The increases were primarily due to higher non-GAAP gross profit.
Diluted Earnings per Share and Non-GAAP Diluted Earnings per Share
Diluted earnings per share was $0.18 for the third quarter of 2023, compared with earnings per share of $0.03 for the third quarter of 2022, an increase of $0.15. As described above, the increase is primarily due to higher gross profit, partially offset by higher income tax expense.
Non-GAAP
diluted earnings per share was $0.31 for the third quarter of 2023, compared with $0.25 for the third quarter of 2022, an increase of $0.06. As described above, the increase was primarily due to higher non-GAAP gross profit partially offset by higher non-GAAP income tax expenses.
Adjusted earnings before interest and income taxes
$
72.6
$
105.2
Provision
for income taxes
$
9.8
$
12.4
Non-GAAP provision for income taxes
$
14.1
$
13.9
Net
earnings (loss)
$
25.0
$
(222.1)
Non-GAAP net earnings
$
56.3
$
88.6
Diluted
earnings (loss) per share
$
0.27
$
(2.42)
Non-GAAP diluted earnings per share
$
0.60
$
0.93
Revenues
Revenues
for the nine months ended September 30, 2023 were $492.4 million, compared with $567.6 million for the nine months ended September 30, 2022, a decrease of $75.2 million or 13.2%. PD revenues decreased $27.9 million, primarily due to lower demand from the industrial, communication, distribution, defense, and medtech markets as a result of continued demand weakness associated with excess channel inventory and timing of shipments into the defense market. CMM revenues decreased $41.8 million, primarily due to lower demand for MEMS microphones in the mobile and IoT markets. The decreases in these markets were primarily driven by weak global demand for consumer electronics and excess inventory in the supply chain. In addition to lower end market demand, shipping volumes were unfavorably impacted earlier this year by financial incentives
offered to customers resulting in higher shipping volumes in the fourth quarter of 2022. CMM revenues were also impacted by lower average pricing on mature products shipped into the mobile market. MSA revenues decreased $5.5 million, primarily due to lower shipping volumes into the hearing health market as customers reduced their inventory levels, partially offset by higher shipping volumes into the premium audio market. In addition to lower end market demand, shipping volumes were unfavorably impacted earlier this year by financial incentives offered to customers resulting in higher shipping volumes in the fourth quarter of 2022.
COGS for the nine months ended September 30, 2023 was $298.9 million, compared with $338.5 million for the nine months ended September 30, 2022, a decrease of $39.6 million or 11.7%. This decrease was primarily due to lower shipping volumes, product cost reductions, benefits of prior year restructuring actions, and favorable foreign currency exchange rate changes, partially offset by lower factory capacity utilization.
Gain on Sale of Fixed Assets
As a result of transitioning to our next generation of MEMS wafer manufacturing technology, we sold certain machinery and
equipment related to the CMM segment in the nine months ended September 30, 2023 and recorded a gain of $10.0 million. For additional information, refer to Note 6. Property, Plant, and Equipment, net to our Consolidated Financial Statements.
Restructuring Charges
During the nine months ended September 30, 2023, we recorded a $1.0 million gain on the sale of certain machinery and equipment that was previously written off through restructuring charges and a $0.8 million reversal of restructuring charges related to a change in estimate, all within Gross profit and the CMM Segment. We also recorded restructuring charges in Operating expenses of $1.4 million for severance pay and benefits related to headcount
reductions within our CMM segment, $1.3 million for severance pay and benefits related to headcount reductions within our PD segment, and $0.7 million for other costs. For additional information, refer to Note 8. Restructuring and Related Activities to our Consolidated Financial Statements.
During the nine months ended September 30, 2022, we committed to a restructuring program within our CMM segment designed to rightsize manufacturing capacity and operating expenses in the MEMS microphones product line, designed to rightsize manufacturing capacity and operating expenses in the MEMS microphones product line. These actions were taken in light of the current decline in demand and the reduction in the expected future growth for global consumer electronics. In addition, these restructuring programs further the
Company's previously announced strategy to reduce exposure to commodity microphones and increase emphasis on high-value solutions. These actions resulted in the settlement of supplier obligations, non-cash fixed asset write-offs, and severance pay. We recorded restructuring charges of $35.1 million related to these actions and $0.6 million for other costs. In addition, we recorded restructuring charges of $2.2 million related to headcount reductions within the Intelligent Audio product line workforce, which is also included within the CMM segment. As a result, we recorded total restructuring charges of $28.1 million within Gross Profit and $9.8 million within Operating expenses. For additional information, refer to Note 8. Restructuring and Related Activities to our Consolidated Financial Statements.
Gross Profit and Non-GAAP Gross Profit
Gross
profit for the nine months ended September 30, 2023 was $205.0 million, compared with $201.0 million for the nine months ended September 30, 2022, an increase of $4.0 million or 2.0%. Gross profit margin for the nine months ended September 30, 2023 was 41.6%, compared with 35.4% for the nine months ended September 30, 2022. The increase in gross profit was primarily due to lower restructuring charges, product cost reductions, benefits of prior year restructuring actions, the gain on sale of fixed assets, and favorable foreign currency exchange rate changes, partially offset by lower shipping volumes, factory capacity utilization, and lower average pricing on mature products shipped into the mobile market. The increase in gross profit margin was primarily due to lower restructuring
charges, product cost reductions, benefits of prior year restructuring actions, the gain on sale of fixed assets, and favorable foreign currency exchange rate changes, partially offset by lower factory capacity utilization and average pricing on mature products shipped into the mobile market.
Non-GAAP gross profit for the nine months ended September 30, 2023 was $205.2 million, compared with $230.5 million for the nine months ended September 30, 2022, a decrease of $25.3 million or 11.0%. Non-GAAP gross profit margin for the nine months ended September 30, 2023 was 41.7%, compared with 40.6% for the nine months ended September 30, 2022. The decrease in non-GAAP gross profit was primarily due
to lower shipping volumes, factory capacity utilization, and lower average pricing on mature products shipped into the mobile market, partially offset by product cost reductions, benefits of prior year restructuring actions, the gain on sale of fixed assets, and favorable foreign currency exchange rate changes. The increase in non-GAAP gross profit margin was primarily due to product cost reductions, benefits of prior year restructuring actions, the gain on sale of fixed assets, and favorable foreign currency exchange rate changes, partially offset by lower factory capacity utilization and lower average pricing on mature products shipped into the mobile market.
Research and development expenses for the nine months ended September 30, 2023 were $59.5 million, compared with $63.7 million for the nine months ended September 30, 2022, a decrease of $4.2 million or 6.6%. Research and development expenses as a percentage of revenues for the nine months ended September 30, 2023 and 2022 were 12.1% and 11.2%, respectively. The decrease in expenses was primarily driven by reduced spending in our CMM segment driven by the benefits of prior year restructuring actions, partially offset by increased development activities in our MSA and PD segments as we continue to shift our focus and spending to our higher margin businesses. The increase
in expenses as a percentage of revenues was driven by our lower revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the nine months ended September 30, 2023 were $104.9 million, compared with $95.6 million for the nine months ended September 30, 2022, an increase of $9.3 million or 9.7%. Selling and administrative expenses as a percentage of revenues for the nine months ended September 30, 2023 and 2022 were 21.3% and 16.8%, respectively. The increase in expenses was primarily driven by higher professional service fees. The increase in expenses as a percentage of revenues was
driven by our lower revenues and an increase in expenses.
Impairment Charges
No impairment charges were recorded during the nine months ended September 30, 2023. Impairment charges for the nine months ended September 30, 2022 were $239.8 million related to a goodwill impairment charge for the MCE reporting unit. For additional information related to these impairment charges, refer to Note 4. Impairment Charges to our Consolidated Financial Statements.
Interest Expense, net
Interest expense for the nine months ended September
30, 2023 and 2022 was $2.2 million, compared with $2.7 million for the nine months ended September 30, 2022, a decrease of $0.5 million. We had a lower outstanding revolving credit facility balance during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, offset by higher interest rates. For additional information on borrowings and interest expense, refer to Note 9. Borrowings to our Consolidated Financial Statements.
Other Expense (Income), net
Other expense for the nine months ended September 30, 2023 was $0.5
million, compared with income of $0.9 million for the nine months ended September 30, 2022, a change of $1.4 million. Expense in 2023 represents unfavorable foreign currency exchange rate impacts, partially offset by the unrealized gains in our investment balances. Income in 2022 represents favorable impacts from foreign currency exchange rate changes, partially offset by an adjustment to pre-spin-off pension obligations and the depreciation in our investment balances.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The ETR for the nine months ended September 30, 2023 and 2022 was 28.2% and (5.9)%, respectively. The ETR for the nine months
ended September 30, 2023 and 2022 includes discrete items totaling $0.1 million and $1.6 million of tax benefit, respectively. The discrete items impacting the tax provision for the nine months ended September 30, 2023 are primarily attributable to stock-based compensation and the recognition of foreign tax credits resulting from the release of IRS Notice 2023-55. The discrete items impacting the tax provision for the nine months ended September 30, 2022 are primarily attributable to stock-based compensation. Absent the discrete items, the ETR for the nine months ended September 30, 2023 and 2022 was 28.4% and (6.7)%, respectively. The
Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions, which resulted in the provision for both the nine months ended September 30, 2023 and 2022. The change in the ETR was mainly due to the book goodwill impairment recorded in the second quarter of 2022, as well as the mix of earnings and losses by taxing jurisdictions and net discrete items.
The non-GAAP ETR for the nine months ended September
30, 2023 and 2022 was 20.0% and 13.6%, respectively. The non-GAAP ETR includes discrete items totaling $1.0 million of tax expense for the nine months ended September 30, 2023 and a net discrete benefit totaling $0.4 million for the nine months ended September 30, 2022. Absent the discrete items, the non-GAAP ETR for the nine months ended September 30, 2023 and 2022 was 18.6% and 14.0%, respectively. The change in the non-GAAP ETR was primarily due to lower pre-tax earnings and the loss of our Malaysian tax holiday.
The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions where
we generate taxable income or loss. As a result of the rapid decline in demand for global consumer electronics during 2022, we did not satisfy all of the conditions of our tax holiday in Malaysia. As such, we are not including this tax holiday benefit in our 2023 GAAP ETR and non-GAAP ETR. For additional information on tax holidays refer to Note 11. Income Taxes to our Consolidated Financial Statements.
Net Earnings (Loss)
Net earnings for the nine months ended September 30, 2023 was $25.0 million, compared with a loss of $222.1 million for the nine months ended September 30, 2022, an increase of $247.1 million. As described above, the increase is primarily due to impairment charges in 2022 that did not recur
in 2023, higher gross profit, and lower income tax expense.
Earnings (Loss) and Adjusted Earnings Before Interest and Income Taxes
EBIT for the nine months ended September 30, 2023 was $37.0 million, compared with a loss of $207.0 million for the nine months ended September 30, 2022, an increase of $244.0 million. EBIT margin for the nine months ended September 30, 2023 was 7.5%, compared with (36.5)% for the nine months ended September 30, 2022. The change is primarily due to impairment charges recorded in 2022 that did not recur in 2023 and higher gross profit.
Adjusted
earnings before interest and income taxes for the nine months ended September 30, 2023 was $72.6 million, compared with $105.2 million for the nine months ended September 30, 2022, a decrease of $32.6 million. Adjusted EBIT margin for the nine months ended September 30, 2023 was 14.7%, compared with 18.5% for the nine months ended September 30, 2022. The decreases were primarily due to lower non-GAAP gross profit.
Diluted Earnings (Loss) per Share and Non-GAAP Diluted Earnings per Share
Diluted earnings per share was $0.27 for the nine months ended September 30,
2023, compared with a loss per share of $2.42 for the nine months ended September 30, 2022, an increase of $2.69. As described above, the change is primarily due to impairment charges recorded in 2022 that did not recur in 2023 and higher gross profit.
Non-GAAP diluted earnings per share was $0.60 for the nine months ended September 30, 2023, compared with $0.93 for the nine months ended September 30, 2022, a decrease of $0.33. As described above, the decrease was primarily due to lower non-GAAP gross profit.
(1) In addition to the GAAP financial measures included herein, Knowles has presented
certain non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable GAAP measures. Knowles believes that non-GAAP measures are useful as supplements to its GAAP results of operations to evaluate certain aspects of its operations and financial performance, and its management team primarily focuses on non-GAAP items in evaluating Knowles' performance for business planning purposes. Knowles also believes that these measures assist it with comparing its performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in Knowles' opinion, do not reflect its core operating performance. Knowles believes that its presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that Knowles uses internally for purposes of assessing its core operating performance.
(2) These
expenses are related to the acquisition of Cornell Dubilier by the Precision Devices segment.
(3) In 2023, Other expenses include non-recurring professional service fees related to an evaluation of a reorganization. In addition, Other expenses include the ongoing net lease cost (income) related to facilities not used in operations. In 2022, Other expenses represent an adjustment to pre-spin-off pension obligations of $3.4 million, which was recorded during the second quarter of 2022 in Other expense (income), net line on the Consolidated Statements of Earnings, and the ongoing net lease cost related to facilities not used in operations.
(4) Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments.
(5) The
non-GAAP reconciling adjustments are those adjustments made to reconcile Earnings (loss) before interest and income taxes to Adjusted earnings before interest and income taxes.
(6) The number of shares used in the diluted per share calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method.
The following is a summary of the results of operations of our three reportable segments: Precision Devices, Medtech & Specialty Audio, and Consumer MEMS Microphones.
See Note 15. Segment Information to the Consolidated Financial Statements for (i) a reconciliation of segment revenues to our consolidated revenues and (ii) a reconciliation of segment earnings before interest and income taxes to our consolidated earnings.
Precision
Devices
Three Months Ended September 30,
(in millions)
2023
Percent
of Revenues
2022
Percent of Revenues
Revenues
$
50.2
$
64.4
Earnings
before interest and income taxes
$
6.1
12.2%
$
16.2
25.2%
Stock-based compensation expense
0.8
0.6
Intangibles
amortization expense
1.5
1.5
Restructuring charges
1.3
—
Adjusted
earnings before interest and income taxes
$
9.7
19.3%
$
18.3
28.4%
Revenues
PD revenues were $50.2 million for the third quarter of 2023, compared with $64.4 million for the third quarter of 2022, a decrease of $14.2 million or 22.0%.
Revenues decreased primarily due to lower demand from the industrial, communication, defense, medtech, and distribution markets as a result of continued demand weakness associated with excess channel inventory and timing of shipments into the defense market.
Earnings and Adjusted Earnings Before Interest and Income Taxes
PD EBIT was $6.1 million for the third quarter of 2023, compared with $16.2 million for the third quarter of 2022, a decrease of $10.1 million. EBIT margin for the third quarter of 2023 was 12.2%, compared to 25.2% for the third quarter of 2022. The decreases were primarily due to lower revenues and lower gross profit margin, partially offset by lower operating expenses. The gross profit margin decrease was primarily driven lower factory capacity utilization.
PD
Adjusted EBIT was $9.7 million for the third quarter of 2023, compared with $18.3 million for the third quarter of 2022, a decrease of $8.6 million. Adjusted EBIT margin for the third quarter of 2023 was 19.3%, compared with 28.4% for the third quarter of 2022. The decreases were primarily due to lower revenues and lower non-GAAP gross profit margin. The non-GAAP gross profit margin decrease was primarily driven by lower factory capacity utilization.
Adjusted
earnings before interest and income taxes
$
23.1
40.9%
$
16.1
34.3%
Revenues
MSA
revenues were $56.5 million for the third quarter of 2023, compared with $47.0 million for the third quarter of 2022, an increase of $9.5 million or 20.2%. Revenues increased primarily due to higher shipping volumes into the hearing health and premium audio markets as demand has returned to normalized levels compared to the third quarter of 2022.
Earnings and Adjusted Earnings Before Interest and Income Taxes
MSA EBIT was $22.2 million for the third quarter of 2023, compared with $15.4 million for the third quarter of 2022, an increase of $6.8 million or 44.2%. EBIT margin for the third quarter of 2023 was 39.3%, compared with 32.8% for the third quarter of 2022. The increases were primarily due to higher revenues and gross profit margins, partially offset by higher operating expenses. The higher gross profit
margin was driven by product cost reductions, favorable foreign currency exchange rates, and product mix.
MSA Adjusted EBIT was $23.1 million for the third quarter of 2023, compared with $16.1 million for the third quarter of 2022, an increase of $7.0 million. Adjusted EBIT margin for the third quarter of 2023 was 40.9%, compared to 34.3% for the third quarter of 2022. The increases were primarily due to higher revenues and non-GAAP gross profit margins, partially offset by higher non-GAAP operating expenses. The higher non-GAAP gross profit margin was driven by product cost reductions, favorable foreign currency exchange rates, and product mix.
Adjusted earnings before interest and income taxes
$
13.1
19.2%
$
1.3
1.9%
(1) Other
represents the ongoing net lease cost related to facilities not used in operations.
Revenues
CMM revenues were $68.4 million for the third quarter of 2023, compared with $66.8 million for the third quarter of 2022, an increase of $1.6 million or 2.4%. Revenues increased primarily due to higher demand in the computing and IoT markets, partially offset by lower average pricing on mature products.
Earnings (Loss) and Adjusted Earnings Before Interest and Income Taxes
CMM EBIT was $11.1 million for the third quarter of 2023, compared with a loss of
$32.3 million for the third quarter of 2022, an increase of $43.4 million. The increase was primarily due to higher revenues, higher gross profit margins, and lower operating expenses. The higher gross profit margin was driven by lower restructuring charges, the gain on sale of fixed assets, product cost reductions, benefits of prior year restructuring actions, product mix, and increased factory capacity utilization, partially offset bylower average pricing on mature products shipped into the mobile market.
CMM Adjusted EBIT was $13.1 million for the third quarter of 2023, compared with $1.3 million for the third quarter of 2022, an increase of $11.8 million. Adjusted EBIT margin for the third quarter of 2023 was 19.2%, compared to 1.9% for the third quarter of 2022. The increases were primarily
due to higher revenues, higher non-GAAP gross profit margins, and lower non-GAAP operating expenses. The higher non-GAAP gross profit margin was driven by the gain on sale of fixed assets, product cost reductions, benefits of prior year restructuring actions, product mix, and increased factory capacity utilization, partially offset bylower average pricing on mature products shipped into the mobile market.
Adjusted earnings before interest and income taxes
$
30.0
19.8%
$
49.3
27.4%
(1)
2022 expenses represent an adjustment to pre-spin-off pension obligations.
Revenues
PD revenues were $151.7 million for the nine months ended September 30, 2023, compared with $179.6 million for the nine months ended September 30, 2022, a decrease of $27.9 million or 15.5%. Revenues decreased primarily due to lower demand from the industrial, communication, distribution, defense, and medtech markets, as a result of continued demand weakness associated with excess channel inventory and timing of shipments into the defense market.
Earnings
and Adjusted Earnings Before Interest and Income Taxes
PD EBIT was $21.6 million for the nine months ended September 30, 2023, compared with $39.5 million for the nine months ended September 30, 2022, a decrease of $17.9 million. EBIT margin for the nine months ended September 30, 2023 was 14.2%, compared to 22.0% for the nine months ended September 30, 2022. The decreases were primarily due to lower revenues, lower gross profit margin, and increased operating expenses, partially offset by the absence of adjustments to pre-spin-off pension obligations in 2023. The gross profit margin decrease was primarily driven by lower factory capacity utilization, partially offset by product cost reductions
and a decrease in precious metal costs.
PD Adjusted EBIT was $30.0 million for the nine months ended September 30, 2023, compared with $49.3 million for the nine months ended September 30, 2022, a decrease of $19.3 million. Adjusted EBIT margin for the nine months ended September 30, 2023 was 19.8%, compared with 27.4% for the nine months ended September 30, 2022. The decreases were primarily due to lower revenues and non-GAAP gross profit margin. The non-GAAP gross profit margin decrease was primarily driven by lower factory capacity utilization, partially offset by product cost reductions and a decrease in precious metal costs.
Adjusted
earnings before interest and income taxes
$
59.8
36.8%
$
62.3
37.1%
Revenues
MSA
revenues were $162.6 million for the nine months ended September 30, 2023, compared with $168.1 million for the nine months ended September 30, 2022, a decrease of $5.5 million or 3.3%. Revenues decreased primarily due to lower shipping volumes into the hearing health market as customers reduced their inventory levels, partially offset by higher shipping volumes into the premium audio market. In addition to lower end market demand, shipping volumes were unfavorably impacted earlier this year by financial incentives offered to customers resulting in higher shipping volumes in the fourth quarter of 2022.
Earnings and Adjusted Earnings Before Interest and Income Taxes
MSA EBIT was $57.2 million for the nine months
ended September 30, 2023, compared with $60.2 million for the nine months ended September 30, 2022, a decrease of $3.0 million or 5.0%. EBIT margin for the nine months ended September 30, 2023 was 35.2%, compared with 35.8% for the nine months ended September 30, 2022. The decreases were primarily due to lower revenues and higher operating expenses, partially offset by higher gross profit margin. The higher gross profit margin was driven by product cost reductions and favorable foreign currency exchange rates, partially offset by lower factory capacity utilization and product mix.
MSA Adjusted EBIT was $59.8 million for the nine months ended September
30, 2023, compared with $62.3 million for the nine months ended September 30, 2022, a decrease of $2.5 million. Adjusted EBIT margin for the nine months ended September 30, 2023 was 36.8%, compared to 37.1% for the nine months ended September 30, 2022. The decreases were primarily due to lower revenues and higher non-GAAP operating expenses, partially offset by higher non-GAAP gross profit margin. The higher non-GAAP gross profit margin was driven by product cost reductions and favorable foreign currency exchange rates, partially offset by lower factory capacity utilization and product mix.
Adjusted earnings before interest and income taxes
$
16.9
9.5%
$
15.9
7.2%
(1) Other
represents the ongoing net lease cost related to facilities not used in operations.
Revenues
CMM revenues were $178.1 million for the nine months ended September 30, 2023, compared with $219.9 million for the nine months ended September 30, 2022, a decrease of $41.8 million or 19.0%. Revenues decreased primarily due to lower demand for MEMS microphones in the mobile and IoT markets. The decreases in these markets were primarily driven by weak global demand for consumer electronics and excess inventory in the supply chain. In addition to lower end market demand, shipping volumes were unfavorably impacted earlier
this year by financial incentives offered to customers resulting in higher shipping volumes in the fourth quarter of 2022. CMM revenues were also impacted by lower average pricing on mature products shipped into the mobile market.
Earnings (Loss) and Adjusted Earnings Before Interest and Income Taxes
CMM EBIT was $9.2 million for the nine months ended September 30, 2023, compared with a loss of $271.1 million for the nine months ended September 30, 2022, an improvement of $280.3 million. The increase was primarily due to impairment charges in 2022 that did not recur in 2023, higher gross margins, and lower operating expenses, partially offset by lower revenues. The higher gross profit margin was driven by lower
restructuring charges, benefits of prior year restructuring actions, the gain on sale of fixed assets, product cost reductions, and favorable foreign currency exchange rates, partially offset by average pricing on mature products shipped into the mobile market and decreased factory capacity utilization.
CMM Adjusted EBIT was $16.9 million for the nine months ended September 30, 2023, compared with $15.9 million for the nine months ended September 30, 2022, an increase of $1.0 million. Adjusted EBIT margin for the nine months ended September 30, 2023 was 9.5%, compared to 7.2% for the nine months ended September 30, 2022. The
increases were primarily due to higher non-GAAP gross profit margins and lower non-GAAP operating expenses, partially offset by lower revenues. The higher gross profit margin was driven by benefits of prior year restructuring actions, the gain on sale of fixed assets, product cost reductions, and favorable foreign currency exchange rates, partially offset by average pricing on mature products shipped into the mobile market and decreased factory capacity utilization.
Historically, we have generated and expect to continue to generate positive cash flow from operations. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access to capital markets. We believe that our future cash flow from operations and access to capital markets will provide adequate resources to fund our working capital needs, capital expenditures, strategic investments, and share repurchases. We have secured a revolving line of credit in the United States from a syndicate of commercial banks to provide additional liquidity. Furthermore, if we were to require additional cash above and beyond our cash on the balance sheet, the free cash flow generated by the business, and availability under our revolving credit facility, we would most likely seek to raise long-term financing through the U.S.
debt or bank markets.
Due to the global nature of our operations, a significant portion of our cash is generated and typically held outside the United States. Our cash and cash equivalents totaled $75.1 million and $48.2 million at September 30, 2023 and December 31, 2022, respectively. Of these amounts, cash held by our non-U.S. operations totaled $67.0 million and $40.0 million as of September 30, 2023 and December 31, 2022, respectively. To the extent we repatriate these funds to the U.S., we may be required to pay U.S. state income taxes and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs.
Management will continue to reassess our need to repatriate the earnings of our foreign subsidiaries.
On February 8, 2023, we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") that amends and restates the prior Credit Agreement (the "2020 Credit Agreement"), which provides for a senior secured revolving credit facility with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. As of September 30, 2023, outstanding borrowings under the Credit Facility were $45.0 million. At any time during the term of the Credit Facility, we will be permitted to increase the commitments under the Credit Facility or to establish
one or more incremental term loan facilities under the New Credit Facility in an aggregate principal amount not to exceed $200.0 million for all such incremental facilities. Commitments under the Credit Facility will terminate, and loans outstanding thereunder will mature, on February 8, 2028. For additional information, refer to Note 9. Borrowings to our Consolidated Financial Statements.
On September 25, 2023, the Company amended its A&R Credit Agreement to, among other things, (a) permit the Company in connection with the acquisition of Cornell Dubilier, to incur senior priority seller financing indebtedness (the
“Seller Note”) in an aggregate principal amount of approximately $123.0 million secured by certain assets (including equity interests) acquired in connection with such acquisition and the capital stock of Knowles Intermediate PD Holdings, LLC (“Knowles PD Holdings”) (the “Acquisition Assets”), which shall mature two years after the effective date of such Seller Note (the “Seller Note Maturity Date”), (b) extends the requirement to pledge the Acquisition Assets that would otherwise constitute collateral under the Credit Agreement to the date that is 90 days after the Seller Note Maturity Date, and (c) restricts, until the Seller Note Maturity Date, the amount of dispositions and investments from the Company and certain of its subsidiaries into Knowles PD Holdings and
the acquired subsidiaries that constitute Acquisition Assets from exceeding $80.0 million the aggregate. All other terms remain the same as the A&R Credit Agreement dated February 8, 2023.
On February 24, 2020, we announced that our Board of Directors had authorized a share repurchase program of up to $100 million of our common stock. On April 28, 2022, we announced that our Board of Directors had increased the authorization by up to $150 million in additional aggregate value. The timing and amount of any shares repurchased will be determined by us based on our evaluation of market conditions and other factors, and will be made in accordance with
applicable securities laws in either the open market or in privately negotiated transactions. We are not obligated to purchase any shares under the program, and the program may be suspended or discontinued at any time. The actual timing, number, and share price of shares repurchased will depend on a number of factors, including the market price of our common stock, general market and economic conditions, and applicable legal requirements. Any shares repurchased will be held as treasury stock. During the nine months ended September 30, 2023 and 2022, we repurchased 1,630,161 shares and 2,339,045 shares of common stock, respectively, for a total of $27.5 million and $44.0 million, respectively.
Cash flows from operating, investing, and financing activities as reflected in our Consolidated Statements of Cash Flows are summarized in the following table:
Nine Months Ended September 30,
(in millions)
2023
2022
Net
cash flows provided by (used in):
Operating activities
$
62.3
$
39.5
Investing activities
0.3
(25.4)
Financing activities
(35.3)
(40.1)
Effect
of exchange rate changes on cash and cash equivalents
(0.4)
(1.4)
Net increase (decrease) in cash and cash equivalents
$
26.9
$
(27.4)
Operating Activities
Cash provided by operating activities adjusts net earnings for certain non-cash items, including impairment
charges, depreciation expense, amortization of intangible assets, stock-based compensation, changes in deferred income taxes, and the effects of changes in operating assets and liabilities. The increase in cash provided by operating activities in 2023 as compared to 2022 is primarily due to an improvement in working capital and lower incentive compensation payments in 2023, partially offset by payments for previously accrued expenses, including lease and restructuring liabilities. In addition, after adjusting for non-cash expense items, net earnings were lower due primarily to an increase in professional fees. The favorable changes in working capital in 2023 were primarily driven by an increase in accounts payable and a reduction in inventories.
Investing Activities
The cash provided
by investing activities during 2023 was primarily driven by proceeds from the sale of certain machinery and equipment. In addition, capital expenditures were lower in 2023 as compared to 2022. The cash used in investing activities during 2023 and 2022 was primarily driven by cash used for capital expenditures to support product innovation and cost savings.
In 2023, we expect capital expenditures to be in the range of 2% to 3% of revenues.
Financing Activities
Cash used in financing activities during 2023 was primarily related to the $27.5 million of repurchases of common stock, the $6.2 million payment of taxes related to net share settlement of equity awards, and the $1.9 million payment
of debt issuance costs, partially offset by proceeds of $1.6 million from the exercise of options. Cash used in financing activities during 2022 was primarily related to the $44.0 million of repurchases of common stock and the $6.3 million payment of taxes related to net share settlement of equity awards, partially offset by net borrowings of $8.0 million under our revolving credit facility and proceeds of $6.4 million from the exercise of options.
Contingent Obligations
We are involved in various legal proceedings, claims, and investigations arising in the ordinary course of business. Legal contingencies are discussed in Note 14. Commitments and Contingent Liabilities to our Consolidated Financial Statements.
Critical Accounting
Estimates
This discussion and analysis of results of operations and financial condition is based on our Consolidated Financial Statements, which have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses, and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates are revised periodically. Actual results could differ from these estimates.
The information concerning our critical accounting estimates can be found under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 9, 2023. There are no material changes in our previously reported critical accounting estimates.
Recent Accounting Standards
As included in Note 2. Recent Accounting Standards to our Consolidated Financial Statements, there are no recently issued or adopted accounting standards that have had or are expected to have a significant
impact on our revenue, earnings, or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the nine months ended September 30, 2023, there were no material changes to the information on market risk exposure disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2022. For a discussion of our exposure to market risk as of December 31, 2022, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief executive
officer ("CEO") and chief financial officer ("CFO"), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial
Reporting
There has been no change in our internal control over financial reporting that occurred during the third quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by intentionally falsified documentation, by collusion of two or more individuals within Knowles or third parties, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject
to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of contingencies related to legal proceedings, see Note 14. Commitments and Contingent Liabilities to our Consolidated Financial Statements, which is incorporated herein by reference.
Except
as otherwise noted above, there have been no material developments in legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On February 24, 2020, the Company announced that its Board of Directors had authorized a share repurchase program of up to $100.0 million of the Company's common stock. On April 28, 2022, the Company announced that its Board of Directors had increased the authorization by up to $150.0
million in additional aggregate value. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors, and will be made in accordance with applicable securities laws in either the open market or in privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be suspended or discontinued at any time. The actual timing, number, and share price of shares repurchased will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal requirements. Any shares repurchased will be held as
treasury stock.
Below is a summary of share repurchases for the three months ended September 30, 2023:
(in millions, except share and per share amounts)
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares That May Yet Be Purchased Under The Program
August 2023
896,723
$
16.73
896,723
$
117.7
Item
5. Other Information
Director and Officer Trading Plans and Arrangements
During the quarter ended September 30, 2023, no director or officer iadopted or iterminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
Closing
of Acquisition of Cornell Dubilier; Entry into Seller Note to Fund Portion of Purchase Price
On November 1, 2023, pursuant to a Purchase and Sale Agreement dated September 15, 2023 (the "Purchase Agreement"), by and between the Company, Knowles Capital Holdings, Inc., a wholly-owned subsidiary of the Company, Knowles Intermediate PD Holdings, LLC, a wholly-owned subsidiary of the Company, Cornell Dubilier Electronics, Inc. ("CDE"), CD Aero, LLC ("CDA"), Kaplan Electronics, Inc. ("Kaplan"), the parties listed as "Shareholders,"
James P. Kaplan, in his capacity as sellers' representative, and the parties listed as "Guarantors,"the Company closed on its acquisition of (i) all the issued and outstanding shares of Kaplan and (ii) certain assets of CDE and CDA (with (i) and (ii) being referred to collectively as "Cornell Dubilier") for aggregate consideration of approximately $263.0 million, consisting of a $140.0 million cash payment at closing and an interest-free seller note of approximately $123.0 million, with $50.0 million maturing one year from closing of the acquisition and the remaining $73.0 million maturing two years from closing of the acquisition, secured by certain assets (including equity interest) acquired in connection with the acquisition (the “Seller Note”). The purchase price is subject to working capital and other contractual adjustments.
The
Seller Note includes Knowles Capital Holdings, Inc. and Knowles Intermediate PD Holdings, LLC as borrowers, which jointly and severally agree to pay James P. Kaplan, as representative of the sellers of Cornell Dubilier, the principal amount of approximately $123.0 million as described above. The Seller Note is not interest bearing except at such time as an event of default has occurred, upon which and during the continuance of an event of default, all overdue principal will accrue interest at 2% per annum plus the SOFR-based rate otherwise applicable under the Company’s existing credit facility. The Seller Note is subject to customary conditions and events of default and the secured nature of the Seller Note is supported by a Security Agreement.
In connection with the closing of the acquisition on
November 1, 2023, the parties entered into an Amendment to the Purchase Agreement related to the resolution of certain export control items related to the business of Cornell Dubilier.
The foregoing description of the Amendment to the Purchase Agreement, the Seller Note, and the related Security Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Amendment to the Purchase Agreement, the Seller Note, and the Security Agreement, which are filed
herewith as Exhibits 10.2, 10.4, and 10.5, respectively.
The
following financial information from Knowles Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 formatted in Inline XBRL: (i) Consolidated Statements of Earnings (Unaudited) for the three and nine months ended September 30, 2023 and 2022, (ii) Consolidated Statements of Comprehensive Earnings (Unaudited) for the three and nine months ended September 30, 2023 and 2022, (iii) Consolidated Balance Sheets (Unaudited) as of September 30, 2023 and December 31, 2022, (iv) Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30,
2023 and 2022, (v) Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and 2022, and (vi) the Notes to the Consolidated Financial Statements (Unaudited) tagged as blocks of text and including detailed tags.
104
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL and contained in Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
