From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of its business, including those relatedbusiness. The majority of these claims and proceedings relate to commercial, warranty, employment, and intellectual property which maymatters. Although the ultimate outcome of any legal proceeding or claim cannot be owned by itpredicted with certainty, based on present information, including management’s assessment of the merits of the particular claim, the Company believes that, apart from the action set forth below, the disposition of these legal proceedings or others. 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 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, 20172021 and December 31, 2016.2020.
|
| | | | | | | |
| Total Assets |
(in millions) | September 30, 2017 | | December 31, 2016 |
Audio | $ | 1,370.9 |
| | $ | 1,349.1 |
|
Precision Devices | 180.1 |
| | 162.9 |
|
Corporate / eliminations | 2.9 |
| | 2.1 |
|
Discontinued operations | — |
| | 0.9 |
|
Total | $ | 1,553.9 |
| | $ | 1,515.0 |
|
16. Recent Accounting Standards
Recently Issued Accounting Standards
In August 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-12 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of hedge accounting guidance.The standard is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The standard requires adoption on a modified retrospective basis for hedging relationships existing as of the adoption date and on a prospective basis for the amended presentation and disclosure requirements. Early adoption is permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting and plans to adopt this standard on January 1, 2019.
In May 2017, the FASB issued ASU 2017-09 that provides guidance about when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. This standard is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard requires adoption on a prospective basis for awards modified on or after the adoption date. Early adoption is permitted. The Company does not expect the adoption of this standard to have a significant impact on its Consolidated Financial Statements. The Company plans to adopt this standard on January 1, 2018.
|
| | | | | | | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
In March 2017, the FASB issued ASU 2017-07 primarily to improve the presentation of net periodic pension and post-retirement benefit cost. The new guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of earnings separately from the service cost component and outside of any subtotal of operating income. This standard is effective for public business entities for annual periods or any interim periods beginning after December 15, 2017. The standard requires adoption on a retrospective basis for the presentation of net benefit cost components. Early adoption is permitted. The Company does not expect the new guidance to have a significant impact on its Consolidated Financial Statements and plans to adopt this standard on January 1, 2018.
In January 2017, the FASB issued ASU 2017-01, which requires a reporting entity to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or liabilities. This standard is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted under specific circumstances and prospective application of the guidance is required. The standard will not have a significant impact upon adoption on January 1, 2018.
In August 2016, the FASB issued ASU 2016-15 with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new guidance requires evaluation of cash receipts and payments on the basis of the nature of the underlying cash flows and provides clarity for categorization for specific transactions. This standard is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard requires adoption on a retrospective basis. Early adoption is permitted. The standard will not have a significant impact upon adoption on January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, which requires a lessee to recognize a lease liability and asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The standard requires a modified retrospective transition method for all entities. This ASU also provides clarification surrounding the presentation of the effects of the leases in the statement of earnings and statement of cash flows. This standard is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting and plans to adopt this standard on January 1, 2019.
In January 2016, the FASB issued ASU 2016-01, which requires a company to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This standard is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard requires adoption on a modified retrospective basis. Early adoption is permitted. The standard will not have a significant impact upon adoption on January 1, 2018.
In May 2014, the FASB issued ASU 2014-09 and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principal of the guidance is to provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The standard is effective for annual and interim periods beginning after December 15, 2017, which will require the Company to adopt these provisions in the first quarter of fiscal year 2018. This update permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. ASU 2016-12, issued in May 2016, removes the requirement to disclose the effect of the accounting change in the period of adoption, but still requires the Company to disclose the effect of the changes on any prior periods retrospectively adjusted. The status of the Company’s implementation process is summarized below:
The Company employed a cross-functional approach in assessing the potential impacts of the standard.
The Company determined the key factors from the five-step model for recognizing revenue under the new standard that may be applicable to the business units that comprise the Company’s reportable segments.
Review of the Company’s contract portfolio, which focused on contracts with significant customers, was completed prior to the filing date of this Quarterly Report on Form 10-Q.
Evaluations of contract provisions and a comparison of historical accounting policies to the requirements of the new standard are in process.
|
| (unaudited) | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Asia | $ | 163.4 | | | $ | 151.7 | | | $ | 452.0 | | | $ | 368.3 | |
United States | 42.2 | | | 28.8 | | | 109.3 | | | 86.8 | |
Europe | 24.6 | | | 23.1 | | | 65.4 | | | 59.8 | |
Other Americas | 1.6 | | | 1.3 | | | 3.9 | | | 2.8 | |
Other | 1.2 | | | 0.9 | | | 3.2 | | | 3.4 | |
Total | $ | 233.0 | | | $ | 205.8 | | | $ | 633.8 | | | $ | 521.1 | |
Receivables, net from contracts with customers were $120.3 million and $123.8 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, our total remaining performance obligations are immaterial.
17. Subsequent Events
On November 1, 2021, the Company is alsowill deliver $172.5 million in the processcash and approximately 0.4 million shares of evaluating new disclosure requirements, as well as identifying and implementing appropriate changesits common stock to settle its business processes and controls to support recognition and disclosureobligations under the new guidance.
The Company will adopt this new guidance on January 1, 2018 usingNotes. Under the modified retrospective method, which will result in a cumulative effect adjustment as of the date of adoption. Our work to date indicates thatNote Hedges, the Company expects to recognize revenue at a point in time,receive approximately 0.4 million shares of its common stock, which will result in revenue recognition timing that is materially consistent with our historical practiceapproximates the number of recognizing revenue when title and risk of loss passshares to be delivered under the customer. We are currently in the process of determining the expected quantitative impact that the adoption of the new standard will haveNotes. See Note 10. Borrowings for additional information on our Consolidated Financial Statements.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04, which simplifies an entity's measurement of goodwill for impairment testing purposes by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This standard is effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this guidance prospectively on January 1, 2017. The Company's adoption of this standard did not have a significant impact on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This standard is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. The Company adopted this guidance on a modified retrospective basis effective January 1, 2017. The Company's adoption of this standard did not have a significant impact on its Consolidated Financial Statements. Refer to Note 1. Basis of Presentation for further details.
In March 2016, the FASB issued ASU 2016-09. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. This standard is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance effective January 1, 2017. The Company's adoption of this standard did not have a significant impact on its Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, a final standard that simplifies the subsequent measurement of inventory by replacing the lower of cost or market test under current U.S. GAAP. Under the previous guidance, the subsequent measurement of inventory was measured at the lower of cost or market, where “market” may have multiple possible outcomes. The new guidance requires subsequent measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell (completion, disposal, and transportation). This standard is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance prospectively effective January 1, 2017. The Company's adoption of this standard did not have a significant impact on its Consolidated Financial Statements.
Certain amounts in prior years have been reclassified to conform to the current year presentation as a result of recently adopted accounting standards as described in Note 1. Basis of Presentation.
17. Subsequent Events
Debt Refinancing
On October 11, 2017, Knowles entered into a Revolving Credit Facility Agreement (the "New Credit Facility"). The New Credit Facility provides for a five-year senior secured revolving credit facility providing for borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. Up to $100.0 million of the New Credit Facility will be available in Euro, Sterling, and other currencies requested by the Company and agreed to by each Lender and up to $50.0 million of the New Credit Facility will be made available in the form of letters of credit denominated in other approved currencies.
these instruments.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The New Credit Facility serves as refinancing of indebtedness under and terminates the Company's Amended and Restated Credit Agreement dated as of January 27, 2014, as amended and restated as of December 31, 2014 and supplemented from time to time.
At any time during the term of the New Credit Facility, the Company will be permitted to increase the commitments under the New 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 New Credit Facility will terminate, and loans outstanding thereunder will mature, on October 11, 2022; provided, that if all the Company’s 3.25% Convertible Senior Notes Due November 1, 2021 shall not have been repaid, refinanced and/or converted to common stock of the Company by April 30, 2021, then the commitments under the New Credit Facility will terminate, and the loans outstanding thereunder will mature, on such earlier date.
The interest rates under the New Credit Facility will be, at the Borrowers’ option (1) LIBOR (or, in the case of borrowings under the New Credit Facility denominated in Euro, EURIBOR) plus the rates per annum determined from time to time based on the total 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 US Dollars, alternate base rate (“ABR”) (as defined in the Credit Agreement) plus the Applicable Margin; provided, however, that any swingline borrowings shall bear interest at the rate applicable to ABR borrowings or, prior to the purchase of participations in such borrowings by the Lenders, at such other rate as shall be agreed between the Company and JPMorgan as the swingline lender.
Sale of the Timing Device Business
On October 26, 2017, the Company entered into an agreement to sell its timing device (oscillator) business, part of the Precision Devices segment, to Microsemi Corporation for $130.0 million, subject to purchase price adjustments for working capital. This transaction is subject to regulatory approval and customary closing conditions. We expect the transaction to close in the fourth quarter of 2017 and that it will be slightly dilutive to future earnings. As a result, the Company expects to reclassify the assets, liabilities, and results of operations of the product line to discontinued operations in the fourth quarter of 2017.
As of September 30, 2017, the timing device business had total assets and liabilities of $84.4 million and $23.0 million, respectively. For the nine months ended September 30, 2017, the timing device business had revenues of $77.0 million.
Forward-Looking Statements
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 during the COVID-19 pandemic, 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 are used to identify these forward-looking statements. These statements are not guarantees of future performancebased on currently available information and involve risks, uncertainties,the current expectations, forecasts, and assumptions of our management concerning risks and uncertainties that are difficultcould cause actual outcomes or results to predict. Actual outcomes and results may differ materially from what is expressedthose outcomes or forecastresults that are projected, anticipated, or implied in these forward-looking statements. Risks,statements, including risks related to the COVID-19 pandemic and governmental responses to it, including but not limited to, the impact on our supply chain, power disruptions, customer demand, and costs associated with our operations. Other risks and uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:
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| | | | |
o | The rate of multi-microphone and smart microphone adoption and market adoption of our "intelligent audio" solutions across our mobile, ear, and IoT markets; |
o | the pace and success of achieving the cost savings from our announced restructurings and acquisitions; |
o | our ability to slow and offset price erosionunforeseen changes in certain of our microphone products; |
o | delays in customer product introductions and other related customer challenges that may occur; |
o | MEMS microphone demand from our largest customers, in particular, two large North American, OEM customers, a Korean, OEM customer, and Chinese OEMs;original equipment manufacturer ("OEM") customers; |
o | factory capacity utilizationour ongoing ability to execute our strategy to diversify our end markets and customers; |
o | our ability to stem or overcome price erosion in our Audio segment;segments; |
o | the pace and success of achieving the cost savings from our announced restructurings, acquisitions, and operating expense reduction efforts; |
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 | customer purchasing behaviorrisks associated with increasing our inventories in lightadvance of current and anticipated mobile phone launches;orders by customers; |
o | downward pressure on the average selling prices for our products;global economic instability; |
o | macroeconomic conditions, boththe impact of changes to laws and regulations that affect the Company’s ability to offer products or services to customers in the United States and internationally;different regions; |
o | foreign currency exchange rate fluctuations;risks associated with shareholder activism, including proxy contests; |
o | our ability to achieve continued reductions in our operating expenses and maintain and improve quality and delivery for our customers;expenses; |
o | ourthe ability to qualify our products and facilities with customers; |
o | risks and costs inherent in litigation; |
o | our ability to obtain, enforce, defend, or monetize our intellectual property rights; |
o | difficulties or delays in and/or the Company's inability to realize expected cost synergies from its acquisitions; |
o | increases in the costs of critical raw materials and components; |
o | availability of raw materials and components; |
o | the success and rate of multi-microphone adoption and our “intelligent audio” solutions; |
o | managing rapid declines in customer demand for certain of our products or solutions, delays in customer product introductions, and other related customer challenges; |
o | our ability to successfully consummate acquisitions and divestitures, and our ability to integrate acquisitions following consummation; |
o | our obligations and risks under various transaction agreements that were executed as part of our spin-off from our former parent company; |
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 and to establish relationships with new OEMs in order to maintain and increase our revenue; |
o | business and competitive factors generally affecting the advanced micro-acoustic solutions and specialty components industry, our customers, and our business; |
o | fluctuations in demand by our telecom and other customers and telecom end markets; |
o | our ability to enter new end user product markets; |
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; and |
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 | market risk associated with fluctuations in commodity prices, particularly for various precious metals used in our manufacturing operation; and |
o | changes in tax laws, or the loss of ourchanges in tax holidays.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, 2016.2020, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. 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 supplierprovider of advanced micro-acoustic microphones and speakers, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medical, military, aerospace,medtech, defense, electric vehicle, and industrial markets. We use our leading position in SiSonic™ micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in smartphones, tablets,mobile, ear, and wearables.Internet of Things ("IoT") applications. We are also thea leader in acousticsacoustic components, used in hearing aidshigh-end capacitors, and haveradio frequency ("RF") solutions for a strong position in high-end oscillators (timing devices) and capacitors.diverse set of markets. Our focus on the customer, combined with our unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enables us to deliver innovative solutions that optimize the user experience. References to "Knowles," the "Company," "we," "our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.
In January 2017, the Company changed its internal reporting to facilitate delivering growth in its core business. Given the changes in the allocation of resources and in its internal reporting structure, the Company now reports two segments, Audio and Precision Devices ("PD"). As a result of this change, transducer products used in hearing health and premium headset applications were moved from the historical Specialty Components segment into the new Audio segment, which includes the historical Mobile Consumer Electronics segment. The oscillator and capacitor products formerly in the Specialty Components segment are now included in the PD segment.
We are organized into two reportable segments based on how management analyzes performance, allocates capital, and makes strategic and operational decisions. These segments were determined in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 280 - Segment Reporting and are comprised of (i) Audio and (ii) PD.Precision Devices ("PD"). The segments are aligned around similar product applications serving our key end markets, to enhance focus on end market growth strategies.
•Audio Segment
Our Audio group designs and manufactures innovative audio products, including acoustics like microphones, and balanced armature speakers, signal processing technologies, and software and algorithmsaudio processors used in applications that serve the mobile, ear,hearing health, True Wireless Stereo ("TWS"), IoT, and Internet of Things (IoT)computing markets. Its transducer products are used principally in hearing aid applications within the commercial audiology market. Locations include the corporate office in Itasca, Illinois; sales, support, and engineering facilities in North America, Europe, and Asia; andAsia, as well as manufacturing facilities in Asia.
•PD Segment
Our PD group specializes in the design and manufacturedelivery of specialized electronic components used in medicalhigh performance capacitor products and life science applications, as well as high-performanceRF solutions and components used in communications infrastructure and a wide variety of other markets. Its oscillator products predominantly serve the telecom infrastructure market and itsfor technically demanding applications. Our high performance capacitor products are used in applications including radio, radar, satellite,such as power supplies transceivers, and medical implants, servingwhich sell to a diverse set of customers for mission critical applications across the communications, medtech, defense, aerospace, telecommunication,electric vehicle, and life sciencesindustrial markets. Our RF solutions solve a broad range of frequency filtering challenges for our military customers, who use them in their satellite communication and radar systems, as well as our telecommunications infrastructure customers deploying mmWave 5G equipment. Locations include the corporate office in Itasca, Illinois; and sales, support, engineering, and manufacturing facilities in North America, Europe, and Asia.
We sell our products directly to original equipment manufacturers ("OEMs") and to their contract manufacturers and suppliers and to a lesser extent through distributors worldwide.
On October 26, 2017, We have recently been experiencing demand in excess of available capacity. During the Company entered into an agreementthird quarter of 2021, we continued to sell its timing device (oscillator) business, partexperience shortages of raw materials used in producing MEMS microphones and capacitor products due to supply chain constraints associated with the Precision Devices segment, to Microsemi Corporation for $130.0 million, subject to purchase price adjustments for working capital. This transaction is subject to regulatory approval and customary closing conditions. We expect the transaction to closeCOVID-19 pandemic. In addition, we anticipate power curtailments in China will impact production during the fourth quarter of 20172021. The duration and that it will be slightly dilutive to future earnings. As a result, the Company expects to reclassify the assets, liabilities, and results of operationsfull extent of the product line to discontinued operations in the fourth quarterimpact of 2017. For additional information, refer to Note 17. Subsequent Events tothese disruptions is uncertain and depends upon many factors outside of our Consolidated Financial Statements.control.
IMC Acquisition
On January 11, 2017,May 3, 2021, we completed an acquisitionacquired all of certain assetsthe outstanding shares of a capacitors manufacturercommon stock of Integrated Microwave Corporation ("IMC") for cash consideration of $4.0 million, of which $2.5 million was paid during$80.7 million. The acquired business provides RF filters to the first quarter of 2017, with the remaining $1.5 million to be paid in quarterly installments from 2018 through the first quarter of 2019, less any purchase price adjustments ("Capacitors Acquisition"). Thisdefense, industrial, and communications markets. The acquisition's operations are included in the PD segment.
On July 7, 2016, we completed the sale of our speaker and receiver product line ("Speaker and Receiver Product Line") for $45.0 million in cash, less purchase price adjustments, for a net amount received of $40.6 million. For additional information, refer to Note 2. Disposed and Discontinued Operations4. Acquisition to our Consolidated Financial Statements.
COVID-19 Update
TableDuring 2020 and continuing into 2021, COVID-19, the most recently discovered coronavirus, spread throughout areas of Contentsthe world where we operate. In March 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. While some of these measures have been lightened or removed as global distribution of vaccines continues to progress, the COVID-19 pandemic has resulted in global business disruption, which has impacted our business operations, results of operations, customer demand, and the productivity of our facilities, particularly in China, Malaysia, and the Philippines.
The situation related to COVID-19 continues to be complex and rapidly evolving. We cannot reasonably estimate the duration of the pandemic or fully ascertain its impact to our future results. As the COVID-19 pandemic evolves, we will continue to actively monitor developments and business conditions and may take further actions that alter business operations as may be required by applicable authorities or that we determine are in the best interests of our employees, customers, suppliers, stockholders, and communities. It is not clear what potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
Results
Additional information regarding the risks that we face as a result of Operationsthe COVID-19 pandemic can be found under the heading “Risk Factors” in our Annual Report on Form 10-K for the Three Months Ended Septemberyear ended December 31, 2020, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 Compared2021. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, and in our subsequent filings with the Three Months Ended September 30, 2016Securities and Exchange Commission.
Non-GAAP Financial Measures
In addition to the GAAP financial measures included herein,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.
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| | | | | | | | |
| | Three Months Ended September 30, |
(in millions, except per share amounts) | | 2017 | | 2016 |
Revenues | | $ | 221.7 |
| | $ | 243.1 |
|
| | | | |
Gross profit | | $ | 82.5 |
| | $ | 94.9 |
|
Non-GAAP gross profit | | $ | 84.9 |
| | $ | 95.7 |
|
| | | | |
Earnings from continuing operations before interest and income taxes | | $ | 20.9 |
| | $ | 26.5 |
|
Adjusted earnings from continuing operations before interest and income taxes | | $ | 31.7 |
| | $ | 39.9 |
|
| | | | |
Provision for income taxes | | $ | 0.4 |
| | $ | — |
|
Non-GAAP provision for income taxes | | $ | 2.1 |
| | $ | 1.6 |
|
| | | | |
Earnings from continuing operations | | $ | 15.4 |
| | $ | 20.9 |
|
Non-GAAP net earnings | | $ | 26.0 |
| | $ | 34.1 |
|
| | | | |
Earnings per share from continuing operations - diluted | | $ | 0.17 |
| | $ | 0.24 |
|
Non-GAAP diluted earnings per share | | $ | 0.28 |
| | $ | 0.37 |
|
Results of Operations for the Three Months Ended September 30, 2021 compared with the Three Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
(in millions, except per share amounts) | | 2021 | | | | 2020 | | | | |
Revenues | | $ | 233.0 | | | | | $ | 205.8 | | | | | |
| | | | | | | | | | |
Gross profit | | $ | 96.9 | | | | | $ | 75.2 | | | | | |
Non-GAAP gross profit | | $ | 97.5 | | | | | $ | 75.6 | | | | | |
| | | | | | | | | | |
Earnings from continuing operations before interest and income taxes | | $ | 36.5 | | | | | $ | 12.6 | | | | | |
| | | | | | | | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 52.6 | | | | | $ | 28.8 | | | | | |
| | | | | | | | | | |
Provision for income taxes | | $ | 4.6 | | | | | $ | 2.3 | | | | | |
Non-GAAP provision for income taxes | | $ | 7.5 | | | | | $ | 3.7 | | | | | |
| | | | | | | | | | |
Earnings from continuing operations | | $ | 27.7 | | | | | $ | 5.6 | | | | | |
Non-GAAP net earnings from continuing operations | | $ | 43.0 | | | | | $ | 22.3 | | | | | |
| | | | | | | | | | |
Earnings per share from continuing operations - diluted | | $ | 0.29 | | | | | $ | 0.06 | | | | | |
Non-GAAP diluted earnings per share from continuing operations | | $ | 0.45 | | | | | $ | 0.24 | | | | | |
Revenues
Revenues for the third quarter of 20172021 were $221.7$233.0 million, compared with $243.1$205.8 million for the third quarter of 2016, a decrease2020, an increase of $21.4$27.2 million or 8.8%13.2%. Audio revenues decreased $25.6increased $12.9 million, due to lower shipments of MEMS microphones to one of our North American customers as a result of the later than prior year ramp of new handsets, weakness at key Chinese handset OEMs, and lower average selling prices in MEMS microphones and hearing health transducers. In addition, shipments of hearing health transducers decreased from prior year as we have been more disciplined with our pricing. These decreases were partially offset by higher shipments of MEMS microphones to the IoT market. PD revenues increased $4.2 millionprimarily due to higher capacitorshipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by hearing health shipments primarily forabove pre-pandemic levels and increased MEMS microphones shipments into the defense, medical,IoT and automotivemobile markets, as well as increased revenues related to our Capacitors Acquisition in January 2017, partially offset by lower pricing.demand from TWS markets. PD revenues increased $14.3 million, primarily due to our acquisition of IMC and higher demand from the medtech, industrial, defense, and electric vehicle markets, partially offset by decreased demand in the communications market. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.
Cost of Goods Sold
Cost of goods sold ("COGS") for the third quarter of 20172021 was $138.7$136.1 million, compared with $148.2$130.6 million for the third quarter of 2016, a decrease2020, an increase of $9.5$5.5 million or 6.4%4.2%. This decreaseincrease was primarily due to decreased shipmentsthe result of MEMS microphones, favorable impacts from productivity initiatives, and foreign currency exchange rate changes, higher shipping volumes, partially offset by lower fixed overhead absorptionproduct cost reductions and an increase in production transfer costs.higher factory capacity utilization.
Restructuring Charges
During the third quarter of 2017, we recorded total2021, there were no restructuring charges of $1.1 million. The restructuring charges consist primarily of actions associated with rationalizing the research and development workforce and the residual expenses related to the continued transfer of our hearing health manufacturing to a lower-cost Asian manufacturing facility. Charges of $0.2 million were classified in COGS and charges of $0.9 million were classified asrecorded within Gross profit or Operating expenses.
During the third quarter of 2016,2020, we recorded total restructuring charges of $2.1$0.1 million within Operating expenses, primarily for actions associated with rationalizing the selling and administrativePD segment workforce. Charges of $2.1 million were classified as Operating expenses.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the third quarter of 20172021 was $82.5$96.9 million, compared with $94.9$75.2 million for the third quarter of 2016, a decrease2020, an increase of $12.4$21.7 million or 13.1%28.9%. Gross profit margin (gross profit as a percentage of revenues) for the third quarter of 20172021 was 37.2%41.6%, compared with 39.0%36.5% for the third quarter of 2016.2020. The gross profit and margin decreasesincreases were primarily due to lower average selling prices, decreased shipments of MEMS microphones, lower fixed overhead absorption,higher shipping volumes, product cost reductions, higher factory capacity utilization, positive mix, and an increase in production transfer costs,net favorable inventory reserve adjustments, partially offset by favorable impacts fromhigher precious metals cost. Our 2021 plant productivity initiatives and foreign currency exchange rate changes.has improved due to our factories returning to pre-pandemic production levels.
Non-GAAP gross profit for the third quarter of 20172021 was $84.9$97.5 million, compared with $95.7$75.6 million for the third quarter of 2016, a decrease2020, an increase of $10.8$21.9 million or 11.3%29.0%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the third quarter of 20172021 was 38.3%41.8%, compared with 39.4%36.7% for the third quarter of 2016.2020. The non-GAAP gross profit and margin decreasesincreases were primarily due to lower average selling prices, decreased shipments of MEMS microphones,higher shipping volumes, product cost reductions, higher factory capacity utilization, positive mix, and lower fixed overhead absorption,net favorable inventory reserve adjustments, partially offset by favorable impacts fromhigher precious metals cost. Our 2021 plant productivity initiatives and foreign currency exchange rate changes.has improved due to our factories returning to pre-pandemic production levels.
Research and Development Expenses
Research and development expenses for the third quarter of 20172021 were $23.9$22.3 million, compared with $23.3$21.9 million for the third quarter of 2016,2020, an increase of $0.6$0.4 million or 2.6%1.8%. Research and development expenses as a percentage of revenues for the third quarter of 20172021 and 20162020 were 10.8%9.6% and 9.6%10.6%, respectively. The increase in research and development expenses was primarily driven by compensation increases.our acquisition of IMC. The decrease in expenses as a percentage of revenues was due to the increase in our revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of 20172021 were $36.8$36.0 million, compared with $43.0$32.0 million for the third quarter of 2016, a decrease2020, an increase of $6.2$4.0 million or 14.4%12.5%. Selling and administrative expenses as a percentage of revenues for the third quarter of 20172021 and 20162020 were 16.6%15.5%. The increase in expenses was primarily driven by stock-based compensation, incentive compensation, and 17.7%, respectively.our acquisition of IMC. For additional information on stock-based compensation, refer to Note 13. Equity Incentive Program to our Consolidated Financial Statements. The decreaseincrease in selling and administrative expenses was primarily drivenpartially offset by lower intangible amortizationlegal expenses. Legal expenses andwere lower due to reduced activity related to the benefitsprotection of our cost reduction initiatives.intellectual property. Our expenses as a percentage of revenues remained consistent with prior year as higher revenues offset our increased expenses.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income TaxesImpairment Charges
Earnings from continuing operations before interest and income taxesImpairment charges for the third quarter of 2017 was $20.92021 were $4.0 million, compared with $26.5to $7.6 million for the third quarter of 2016, a decrease of $5.6 million. The decrease was primarily due2020. These charges relate to lower gross profit, partially offset by lower selling and administrative expenses.facilities in our Intelligent Audio product line. For additional information related to these impairment charges, refer to Note 5. Impairments to our Consolidated Financial Statements.
Adjusted earnings from continuing operations before interest and income taxes ("Adjusted EBIT") for the third quarter of 2017 was $31.7 million, compared with $39.9 million for the third quarter of 2016, a decrease of $8.2 million. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the third quarter of 2017 was 14.3%, compared with 16.4% for the third quarter of 2016. These decreases were primarily due to lower gross profit, partially offset by lower non-GAAP selling and administrative expenses resulting from benefits of our cost reduction initiatives.
Interest Expense, net
Interest expense for the third quarter of 20172021 was $5.1$4.2 million, compared with $5.6to $4.7 million for the third quarter of 2016,2020, a decrease of $0.5 million. The decrease in interest expense is primarily due to lower outstanding borrowings, partially offset by higher interest rates.debt discount amortization. For additional information on borrowings and interest expense, refer to Note 9.10. Borrowings to our Consolidated Financial Statements.
Other (Income) Expense, net
Other income for the third quarter of 2021 was $1.9 million, compared with expense of $1.0 million for the third quarter of 2020, a change of $2.9 million. The change is primarily due to the impacts from foreign currency exchange rate changes.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The effective tax rate ("ETR") from continuing operations for the third quarter of 20172021 was a 2.5%14.2% provision, compared with nila 29.1% provision for the third quarter of 2016.2020. The ETR from continuing operations for the third quarter of 20172021 was impacted by a net discrete provision totaling $0.4 million. The ETR from continuing operations for the third quarter of 2020 was impacted by a net discrete benefit totaling $3.5$1.2 million, comparedprimarily related to a net discrete benefit totaling $4.4 million forresulting from an increase to the third quarter of 2016.recognized deferred tax assets in our U.S. and Malaysian subsidiaries. Absent the discrete items, the ETR from continuing operations for the third quarter of 20172021 and 20162020 was a 24.7%13.0% provision and a 21.1%44.3% provision, respectively. The Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions (primarily the U.S.), which resulted in the provision for both the third quarter of 2021 and 2020. The change in the ETR excluding the discrete items, was due to the mix of earnings and losses by taxing jurisdictions.jurisdictions and net discrete items.
The non-GAAP ETR from continuing operations for the third quarter of 20172021 was a 7.5%14.9% provision, compared with a 4.5%14.2% provision for the third quarter of 2016.2020. The non-GAAP ETR from continuing operations for the third quarter of 2017 was2021 and 2020 were impacted by a net discrete items totaling $0.4 million of expense and $0.9 million of benefit, totaling $1.5 million, primarily related to prior year provision to return adjustments of $1.3 million recognized during the period.respectively. Absent the discrete items, the non-GAAP ETR from continuing operations for the third quarter of 20172021 and 20162020 was a 12.8%14.1% provision and a 3.6%17.7% provision, respectively. The change in the non-GAAP ETR was due to the mix of earnings and losses by taxing jurisdictions.jurisdictions and net discrete items.
The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in whichwhere we generate taxable income or loss, the favorable impact of our significant tax holidays in Malaysia, and judgments as to the realizability of our deferred tax assets. A significant portion of our pre-tax income is subject to a lower tax rate as a result of our Malaysian tax holidays, subject to our annual satisfaction of certain conditions we expect to continue to satisfy. Unless extended or renegotiated, oursatisfy through the holiday period. Our existing significant tax holiday in Malaysia will expire on December 31, 2021. We are pursuing an extension for our current tax holiday and evaluating other strategies to mitigate the impact of the expiring tax holiday. If we are unable to extend the current tax holiday or negotiate acceptable new terms, our ETR may be significantly adversely impacted. For additional information on these tax holidays, refer to Note 11.12. Income Taxes to our Consolidated Financial Statements.
Earnings (loss) from Discontinued Operations, net
Earnings from discontinuedContinuing Operations
Earnings from continuing operations for the third quarter of 2021 was $0.3$27.7 million, compared with earnings of $5.6 million for the third quarter of 2017,2020, an increase of $22.1 million. As described above, the increase is primarily due to increased revenues, higher gross profit margin, lower impairment charges, and reduced legal spending, partially offset by higher income tax expense, stock-based compensation, and incentive compensation.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes ("EBIT") from continuing operations for the third quarter of 2021 was $36.5 million, compared with a loss of $28.5$12.6 million for the third quarter of 2016.2020, an increase of $23.9 million. The changeincrease in discontinued operationsEBIT was primarily drivendue to increased revenues, higher gross profit margin, lower impairment charges, and reduced legal spending, partially offset by higher stock-based compensation and incentive compensation.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the salethird quarter of our Speaker2021 was $52.6 million, compared with $28.8 million for the third quarter of 2020, an increase of $23.8 million. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the third quarter of 2021 was 22.6%, compared with 14.0% for the third quarter of 2020. The increases in Adjusted EBIT and Receiver Product Line on July 7, 2016.Adjusted EBIT margin were primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by higher incentive compensation.
Diluted Earnings per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share from Continuing Operations
Diluted earnings per share from continuing operations was $0.17$0.29 for the third quarter of 2017,2021, compared with $0.24earnings of $0.06 per share for the third quarter of 2016. The decrease in diluted earnings per share was mainly driven2020, an increase of $0.23. As described above, the increase is primarily due to increased revenues, higher gross profit margin, lower impairment charges, and reduced legal spending, partially offset by lower EBIT.higher tax expense, stock-based compensation, and incentive compensation.
Non-GAAP diluted earnings per share from continuing operations was $0.28$0.45 for the third quarter of 2017,2021, compared with $0.37earnings of $0.24 for the third quarter of 2016. The decrease in Non-GAAP diluted earnings per share was mainly driven2020, an increase of $0.21. As described above, the increase is primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by lower Adjusted EBIT.higher non-GAAP income tax expense and incentive compensation.
Results of Operations for the Nine Months Ended September 30, 2017 Compared2021 compared with the Nine Months Ended September 30, 20162020
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions, except per share amounts) | | 2021 | | | | 2020 |
Revenues | | $ | 633.8 | | | | | $ | 521.1 | |
| | | | | | |
Gross profit | | $ | 258.6 | | | | | $ | 179.2 | |
Non-GAAP gross profit | | $ | 260.7 | | | | | $ | 182.9 | |
| | | | | | |
Earnings (loss) from continuing operations before interest and income taxes | | $ | 78.6 | | | | | $ | (8.6) | |
| | | | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 122.7 | | | | | $ | 34.9 | |
| | | | | | |
Provision for income taxes | | $ | 8.7 | | | | | $ | 5.6 | |
Non-GAAP provision for income taxes | | $ | 15.5 | | | | | $ | 3.6 | |
| | | | | | |
Earnings (loss) from continuing operations | | $ | 57.6 | | | | | $ | (26.7) | |
Non-GAAP net earnings from continuing operations | | $ | 100.9 | | | | | $ | 24.3 | |
| | | | | | |
Earnings (loss) per share from continuing operations - diluted | | $ | 0.61 | | | | | $ | (0.29) | |
Non-GAAP diluted earnings per share from continuing operations | | $ | 1.05 | | | | | $ | 0.26 | |
|
| | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions, except per share amounts) | | 2017 | | | 2016 |
Revenues | | $ | 605.6 |
| | | $ | 618.7 |
|
| | | | | |
Gross profit | | $ | 221.8 |
| | | $ | 234.6 |
|
Non-GAAP gross profit | | $ | 233.6 |
| | | $ | 240.6 |
|
| | | | | |
Earnings from continuing operations before interest and income taxes | | $ | 3.3 |
| | | $ | 20.5 |
|
Adjusted earnings from continuing operations before interest and income taxes | | $ | 63.9 |
| | | $ | 66.0 |
|
| | | | | |
Provision for income taxes | | $ | 7.5 |
| | | $ | 3.8 |
|
Non-GAAP provision for income taxes | | $ | 3.5 |
| | | $ | 0.6 |
|
| | | | | |
(Loss) earnings from continuing operations | | $ | (19.6 | ) | | | $ | 1.6 |
|
Non-GAAP net earnings | | $ | 49.3 |
| | | $ | 53.3 |
|
| | | | | |
(Loss) earnings per share from continuing operations - diluted | | $ | (0.22 | ) | | | $ | 0.02 |
|
Non-GAAP diluted earnings per share | | $ | 0.53 |
| | | $ | 0.59 |
|
Revenues
Revenues for the nine months ended September 30, 20172021 were $605.6$633.8 million, compared with $618.7$521.1 million for the nine months ended September 30, 2016, a decrease2020, an increase of $13.1$112.7 million or 2.1%21.6%. Audio revenues decreased $21.5 million primarily due to lower average selling prices in MEMS microphones and hearing health transducers. In addition, shipments of hearing health transducers decreased from prior year as we have been more disciplined with our pricing, partially offset by higher shipments of MEMS microphones to the IoT market. PD revenues increased $8.4$101.2 million, primarily due to higher capacitorshipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by MEMS microphones in the IoT and timing device product shipments primarily forcomputing markets. The IoT and computing markets are above pre-pandemic levels, with the defense, medical,computing market benefiting from the work-from-home and automotive markets, as well asremote-learning trends. Hearing health demand has returned to pre-pandemic levels. The increased revenues related to our Capacitors Acquisition in January 2017,demand is partially offset by lower pricing.average pricing on mature products. PD revenues increased $11.5 million, primarily due to our acquisition of IMC and higher demand from the industrial, medtech, and electric vehicle markets, partially offset by decreased demand in the communications and defense markets. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.
Cost of Goods Sold
COGS for the nine months ended September 30, 20172021 was $378.2$375.2 million, compared with $382.7$339.6 million for the nine months ended September 30, 2016, a decrease2020, an increase of $4.5$35.6 million or 1.2%10.5%. This decreaseincrease was primarily due to favorable impacts from productivity initiativesthe result of higher shipping volumes and unfavorable foreign currency exchange rate changes, partially offset by increased shipmentsproduct cost reductions, higher factory capacity utilization, and favorable mix.
Impairment charges
Restructuring Charges
During the nine months ended September 30, 2017, we2021, there were no restructuring charges recorded total impairmentwithin Gross profit. We recorded restructuring charges of $21.6$0.3 million comprised primarily of $21.3 million of impairment charges related to a specific product line within the Audio segment. We concluded that the projected cash flows from this product line were not sufficient to recover the carrying value of the associated long-lived assets. Total impairment charges of $1.7 million were classified as COGS and $19.9 million were classified as Operating expenses. For additional information on impairment of long-lived assets, refer to Note 3. Impairments to our Consolidated Financial Statements.
Restructuring Charges
During the nine months ended September 30, 2017,2020, we restructured our Intelligent Audio product line, which is included within our Audio segment. This resulted in a reduction in workforce and the refocusing of certain research and development activities. As a result, we recorded total restructuring charges of $8.3$1.5 million net of a $0.9 million reversal of previouslywithin Gross profit, primarily for fixed asset write-off costs directly associated with the product line. In addition, we recorded restructuring charges. The reversal resulted from subsequent developments that impacted the previously estimated amounts. The restructuring charges consistof $6.8 million within Operating expenses, primarily of actions associated withfor rationalizing the research and development workforce and contract termination costs associated with the continued transfer of our hearing health manufacturing into a lower-cost Asian manufacturing facility. Charges of $3.9 million were classified as COGS and charges of $4.4 million were classified as Operating expenses.product line.
DuringIn addition, during the nine months ended September 30, 2016,2020, we recorded restructuring charges of $10.7$0.8 million comprisedwithin Gross profit, primarily for actions to rationalize the remainder of the Audio segment workforce, as a direct result of the lower demand we experienced from the COVID-19 pandemic for our remaining Audio products. We also recorded restructuring actions associated with the integrationcharges of our acquisition of Audience, Inc. The remaining charges$3.7 million within Operating expenses, primarily relate tofor actions associated with rationalizing the selling and administrative workforce and the residual expenses for the continued transfer of our capacitors business into lower-cost Asian manufacturing facilities. Charges of $1.4 million were classified as COGS and charges of $9.3 million were classified as Operating expenses.remaining Audio workforce.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the nine months ended September 30, 20172021 was $221.8$258.6 million, compared with $234.6$179.2 million for the nine months ended September 30, 2016, a decrease2020, an increase of $12.8$79.4 million or 5.5%44.3%. Gross profit margin (gross profit as a percentage of revenues) for the nine months ended September 30, 20172021 was 36.6%40.8%, compared with 37.9%34.4% for the nine months ended September 30, 2016.2020. The gross profit and margin decreasedincreases were primarily due to lower average selling prices, lower fixed overhead absorption, higher restructuring charges,shipping volumes, product cost reductions, higher factory capacity utilization, positive mix, and production transfer cost activity,net favorable inventory reserve adjustments, partially offset by favorable impacts from productivity initiatives,lower average pricing on mature products, unfavorable foreign currency exchange rate changes, and increased shipments of MEMS microphoneshigher precious metals cost. Our 2021 plant productivity has improved due to the IoT market.our factories returning to pre-pandemic production levels.
Non-GAAP gross profit for the nine months ended September 30, 20172021 was $233.6$260.7 million, compared with $240.6$182.9 million for the nine months ended September 30, 2016, a decrease2020, an increase of $7.0$77.8 million or 2.9%42.5%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the nine months ended September 30, 20172021 and 2020 was 38.6%41.1% and 35.1%, compared with 38.9% for the nine months ended September 30, 2016.respectively. The non-GAAP gross profit and margin decreasedincreases were primarily due to lower average selling priceshigher shipping volumes, product cost reductions, higher factory capacity utilization, positive mix, and lower fixed overhead absorption,net favorable inventory reserve adjustments, partially offset by favorable impacts from productivity initiatives,lower average pricing on mature products, unfavorable foreign currency exchange rate changes, and increased shipments of MEMS microphoneshigher precious metals cost. Our 2021 plant productivity has improved due to the IoT market.our factories returning to pre-pandemic production levels.
Research and Development Expenses
Research and development expenses for the nine months ended September 30, 20172021 and 2020 were $76.8 million, compared with $75.2 million for the nine months ended September 30, 2016, an increase of $1.6 million or 2.1%.$70.2 million. Research and development expenses as a percentage of revenues for the nine months ended September 30, 20172021 and 2016 was 12.7%2020 were 11.1% and 12.2%13.5%, respectively. Our expenses have remained consistent, however we have increased development activities in our precision devices, MEMS microphones, and hearing health product lines, which were offset by a reduction in development activities in our Intelligent Audio product line. The decrease in expenses as a percentage of revenues was primarily due to the increase in research and development expenses was driven by compensation increases.our revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the nine months ended September 30, 20172021 were $113.6$108.9 million, compared with $131.3$99.3 million for the nine months ended September 30, 2016, a decrease2020, an increase of $17.7$9.6 million or 13.5%9.7%. Selling and administrative expenses as a percentage of revenues for the nine months ended September 30, 20172021 and 20162020 were 18.8%17.2% and 21.2%19.1%, respectively. The decreaseincrease in expenses was primarily driven by stock-based compensation, incentive compensation, and our acquisition of IMC. Due to the impacts of the COVID-19 pandemic, stock-based compensation in 2021 increased due to certain modifications made to previously granted performance share units, while stock-based compensation in 2020 was lowered due to a change in estimated attainment of certain performance targets. For additional information on stock-based compensation, refer to Note 13. Equity Incentive Program to our Consolidated Financial Statements. The increase in selling and administrative expenses andwas partially offset by lower legal expenses, which were lower due to reduced activity related to the protection of our intellectual property. The decrease in expenses as a percentage of revenues was primarily driven by lower intangible amortization costs and benefitsdue to the increase in our revenues.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings from continuing operations before interest and income taxesImpairment Charges
Impairment charges for the nine months ended September 30, 2017 was $3.32020 were $4.0 million, compared with $20.5to $7.6 million for the nine months ended September 30, 2016, a decrease of $17.2 million. The decrease2020. These charges relate to facilities in earnings was primarily dueour Intelligent Audio product line. For additional information related to lower gross profit, higherthese impairment charges, in Operating expense, and foreign currency exchange impacts, partially offset by lower intangible amortization costs and benefits ofrefer to Note 5. Impairments to our operating cost reduction initiatives.Consolidated Financial Statements.
Adjusted EBIT for the nine months ended September 30, 2017 was $63.9 million, compared with $66.0 million for the nine months ended September 30, 2016, a decrease of $2.1 million. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the nine months ended September 30, 2017 was 10.6%, compared with 10.7% for the nine months ended September 30, 2016. This decrease was primarily due to a decrease in non-GAAP gross profit and foreign currency exchange impacts, partially offset by lower non-GAAP operating expenses, driven by operating cost reduction initiatives.
Interest Expense, net
Interest expense for the nine months ended September 30, 20172021 was $15.4$12.3 million, compared with $15.1$12.5 million for the nine months ended September 30, 2016, an increase2020, a decrease of $0.3$0.2 million. The increase in interest expensedecrease is primarily due to non-cash interest expense related to the Company's issuance of $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021 in a private placement in May 2016 ("the Notes") and higher interest rates,lower outstanding borrowings, partially offset by lower outstanding borrowings.higher debt discount amortization. For additional information on borrowings and interest expense, refer to Note 9.10. Borrowings to our Consolidated Financial Statements.
Other (Income) Expense, net
Other income for the nine months ended September 30, 2021 was $3.4 million, compared with expense of $0.2 million for the nine months ended September 30, 2020, a change of $3.6 million. The change is primarily due to the impacts from foreign currency exchange rate changes and the appreciation in our investment balances.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The ETR from continuing operations for the nine months ended September 30, 20172021 was a 62.0%13.1% provision, compared with a 70.4%26.5% provision for the nine months ended September 30, 2016.2020. The ETR from continuing operations for the the nine months ended September 30, 2017 and 20162021 was impacted by a net discrete benefit totaling $1.4$0.9 million. The ETR from continuing operations for the nine months ended September 30, 2020 was impacted by a net discrete benefit totaling $1.2 million, primarily related to a benefit resulting from an increase to the recognized deferred tax assets in our U.S. and $3.4 million, respectively.Malaysian subsidiaries. Absent the discrete items, the ETR from continuing operations for nine months ended September 30, 2017 was a 73.6% provision, compared to an 133.3% provision for the nine months ended September 30, 2016.2021 and 2020 was a 14.5% provision and a 32.2% provision, respectively. The Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions (primarily the U.S.), which resulted in the provision for both the nine months ended September 30, 2021 and 2020. The change in the ETR excluding the discrete items, was due to the mix of earnings and losses by taxing jurisdictions.jurisdictions and net discrete items.
The non-GAAP ETR from continuing operations for the nine months ended September 30, 20172021 was a 6.6%13.3% provision, compared with a 1.1%12.9% provision for the nine months ended September 30, 2016.2020. The non-GAAP ETR from continuing operations for the nine months ended September 30, 20172021 was impacted by a net discrete benefit totaling $3.2$0.6 million. The non-GAAP ETR from continuing operations for the nine months ended September 30, 2020 was impacted by a net discrete benefit totaling $1.4 million, primarily comprised of a $1.3 million benefit for prior year provision to return adjustments recognized during the third quarter of 2017 and a $1.7 million benefit related to thea change in the Company's uncertainindefinite reinvestment assertion related to a portion of undistributed earnings of our Malaysian and Luxembourg subsidiaries and a benefit resulting from an increase to our Malaysian subsidiary's deferred tax positions.assets. Absent the discrete items, the non-GAAP ETR from continuing operations for the nine months ended September 30, 20172021 was a 12.7%13.8% provision, compared to a 0.4% benefit17.9% provision for the nine months ended September 30, 2016.2020. The change in the non-GAAP ETR was due to the mix of earnings and losses by taxing jurisdictions.jurisdictions and net discrete items.
The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in whichwhere we generate taxable income or loss, the favorable impact of our significant tax holidays in Malaysia, and judgments as to the realizability of our deferred tax assets. A significant portion of our pre-tax income is subject to a lower tax rate as a result of our Malaysian tax holidays, subject to our annual satisfaction of certain conditions we expect to continue to satisfy. Unless extended or renegotiated, oursatisfy through the holiday period. Our existing significant tax holiday in Malaysia will expire on December 31, 2021. We are pursuing an extension for our current tax holiday and evaluating other strategies to mitigate the impact of the expiring tax holiday. If we are unable to extend the current tax holiday or negotiate acceptable new terms, our ETR may be significantly adversely impacted. For additional information on these tax holidays, refer to Note 11.12. Income Taxes to our Consolidated Financial Statements.
Earnings (loss)(Loss) from DiscontinuedContinuing Operations net
Earnings from discontinuedcontinuing operations was $2.4for the nine months ended September 30, 2021 were $57.6 million, compared with a loss of $26.7 million for the nine months ended September 30, 2017,2020, an increase of $84.3 million. As described above, the increase is primarily due to higher revenues, higher gross profit margin, lower restructuring charges, reduced legal spending, and lower impairment charges, partially offset by higher stock-based compensation, incentive compensation, and income tax expense.
Earnings (Loss) and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes from continuing operations for the nine months ended September 30, 2021 were $78.6 million, compared with a loss of $63.2$8.6 million for the nine months ended September 30, 2016.2020, an increase of $87.2 million. The changeincrease in EBIT is primarily due to higher revenues, higher gross profit margin, lower restructuring charges, reduced legal spending, and lower impairment charges, partially offset by higher stock-based compensation and incentive compensation.
Adjusted EBIT from continuing operations for the nine months ended September 30, 2021 was $122.7 million, compared with $34.9 million for the nine months ended September 30, 2020, an increase of $87.8 million. Adjusted EBIT margin for the nine months ended September 30, 2021 was 19.4%, compared with 6.7% for the nine months ended September 30, 2020. The increases in Adjusted EBIT and Adjusted EBIT margin were primarily due to higher revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by higher incentive compensation.
Earnings from Discontinued Operations, net
Earnings from discontinued operations was primarily driven by the sale of our Speaker and Receiver Product Line on July 7, 2016. In addition, the $2.4$0.2 million in earnings in the nine months ended September 30, 2017 was primarily2021, compared with $3.7 million for the nine months ended September 30, 2020. We recorded a resulttax benefit during the second quarter of recording income2021 related to the Speaker and Receiver Product Line. We recorded a tax benefits.benefit for a refund received during the first quarter of 2020 related to the Timing Device Business.
Diluted (loss) earningsEarnings (Loss) per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share from Continuing Operations
Diluted lossearnings per share from continuing operations was $0.22$0.61 for the nine months ended September 30, 2017,2021, compared with earnings per sharea loss of $0.02$0.29 for the nine months ended September 30, 2016. The change in diluted (loss) earnings per share was mainly driven2020, an increase of $0.90. As described above, the increase is primarily due to increased revenues, higher gross profit margin, lower restructuring charges, reduced legal spending, and lower impairment charges, partially offset by lower EBIT.higher stock-based compensation, incentive compensation, and income tax expense.
Non-GAAP diluted earnings per share from continuing operations was $1.05 for the nine months ended September 30, 2017 was $0.53,2021, compared with $0.59$0.26 for the nine months ended September 30, 2016. The decrease in2020, an increase of $0.79. As described above, the increase is primarily due to increased revenues, higher non-GAAP diluted earnings per share was mainly drivengross profit margin, and reduced legal spending, partially offset by lower Adjusted EBIT.higher incentive compensation.
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except share and per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
Gross profit | | $ | 96.9 | | | $ | 75.2 | | | $ | 258.6 | | | $ | 179.2 | |
Stock-based compensation expense | | 0.3 | | | 0.4 | | | 1.1 | | | 1.3 | |
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Restructuring charges | | — | | | — | | | — | | | 2.3 | |
Production transfer costs (2) | | — | | | — | | | — | | | 0.1 | |
Other (3) | | 0.3 | | | — | | | 1.0 | | | — | |
Non-GAAP gross profit | | $ | 97.5 | | | $ | 75.6 | | | $ | 260.7 | | | $ | 182.9 | |
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Earnings (loss) from continuing operations | | $ | 27.7 | | | $ | 5.6 | | | $ | 57.6 | | | $ | (26.7) | |
Interest expense, net | | 4.2 | | | 4.7 | | | 12.3 | | | 12.5 | |
Provision for income taxes | | 4.6 | | | 2.3 | | | 8.7 | | | 5.6 | |
Earnings (loss) from continuing operations before interest and income taxes | | 36.5 | | | 12.6 | | | 78.6 | | | (8.6) | |
Stock-based compensation expense | | 7.1 | | | 4.8 | | | 25.6 | | | 12.4 | |
Intangibles amortization expense | | 4.3 | | | 3.3 | | | 11.5 | | | 9.8 | |
Impairment charges | | 4.0 | | | 7.6 | | | 4.0 | | | 7.6 | |
Restructuring charges | | — | | | 0.1 | | | 0.3 | | | 12.8 | |
Production transfer costs (2) | | — | | | — | | | — | | | 0.1 | |
Other (3) | | 0.7 | | | 0.4 | | | 2.7 | | | 0.8 | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 52.6 | | | $ | 28.8 | | | $ | 122.7 | | | $ | 34.9 | |
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Interest expense, net | | $ | 4.2 | | | $ | 4.7 | | | $ | 12.3 | | | $ | 12.5 | |
Interest expense, net non-GAAP reconciling adjustments (4) | | 2.1 | | | 1.9 | | | 6.0 | | | 5.5 | |
Non-GAAP interest expense | | $ | 2.1 | | | $ | 2.8 | | | $ | 6.3 | | | $ | 7.0 | |
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Provision for income taxes | | $ | 4.6 | | | $ | 2.3 | | | $ | 8.7 | | | $ | 5.6 | |
Income tax effects of non-GAAP reconciling adjustments (5) | | 2.9 | | | 1.4 | | | 6.8 | | | (2.0) | |
Non-GAAP provision for income taxes | | $ | 7.5 | | | $ | 3.7 | | | $ | 15.5 | | | $ | 3.6 | |
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Earnings (loss) from continuing operations | | $ | 27.7 | | | $ | 5.6 | | | $ | 57.6 | | | $ | (26.7) | |
Non-GAAP reconciling adjustments (6) | | 16.1 | | | 16.2 | | | 44.1 | | | 43.5 | |
Interest expense, net non-GAAP reconciling adjustments (4) | | 2.1 | | | 1.9 | | | 6.0 | | | 5.5 | |
Income tax effects of non-GAAP reconciling adjustments (5) | | 2.9 | | | 1.4 | | | 6.8 | | | (2.0) | |
Non-GAAP net earnings from continuing operations | | $ | 43.0 | | | $ | 22.3 | | | $ | 100.9 | | | $ | 24.3 | |
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Diluted earnings (loss) per share from continuing operations | | $ | 0.29 | | | $ | 0.06 | | | $ | 0.61 | | | $ | (0.29) | |
Earnings per share non-GAAP reconciling adjustment | | 0.16 | | | 0.18 | | | 0.44 | | | 0.55 | |
Non-GAAP diluted earnings per share from continuing operations | | $ | 0.45 | | | $ | 0.24 | | | $ | 1.05 | | | $ | 0.26 | |
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Diluted average shares outstanding | | 94,143,034 | | | 92,473,318 | | | 94,780,940 | | | 91,707,702 | |
Non-GAAP adjustment (7) | | 1,226,016 | | | 1,574,586 | | | 868,783 | | | 2,728,712 | |
Non-GAAP diluted average shares outstanding (7) | | 95,369,050 | | | 94,047,904 | | | 95,649,723 | | | 94,436,414 | |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except share and per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 |
Gross profit | | $ | 82.5 |
| | $ | 94.9 |
| | $ | 221.8 |
| | $ | 234.6 |
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Stock-based compensation expense | | 0.4 |
| | 0.4 |
| | 1.3 |
| | 1.4 |
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Impairment charges | | 0.3 |
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| | 1.7 |
| | 0.3 |
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Restructuring charges | | 0.2 |
| | — |
| | 3.9 |
| | 1.4 |
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Production transfer costs (2) | | 1.5 |
| | 0.4 |
| | 4.9 |
| | 2.9 |
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Non-GAAP gross profit | | $ | 84.9 |
| | $ | 95.7 |
| | $ | 233.6 |
| | $ | 240.6 |
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Earnings (loss) from continuing operations | | $ | 15.4 |
| | $ | 20.9 |
| | $ | (19.6 | ) | | $ | 1.6 |
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Interest expense, net | | 5.1 |
| | 5.6 |
| | 15.4 |
| | 15.1 |
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Provision for income taxes | | 0.4 |
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| | 7.5 |
| | 3.8 |
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Earnings from continuing operations before interest and income taxes | | 20.9 |
| | 26.5 |
| | 3.3 |
| | 20.5 |
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Stock-based compensation expense | | 6.2 |
| | 5.2 |
| | 18.6 |
| | 16.2 |
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Intangibles amortization expense | | 1.7 |
| | 5.6 |
| | 7.0 |
| | 16.8 |
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Impairment charges | | 0.3 |
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| | 21.6 |
| | 0.5 |
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Restructuring charges | | 1.1 |
| | 2.1 |
| | 8.3 |
| | 10.7 |
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Production transfer costs (2) | | 1.5 |
| | 0.4 |
| | 4.9 |
| | 2.9 |
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Other loss (gain)(3) | | — |
| | 0.1 |
| | 0.2 |
| | (1.6 | ) |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 31.7 |
| | $ | 39.9 |
| | $ | 63.9 |
| | $ | 66.0 |
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Interest expense, net | | $ | 5.1 |
| | $ | 5.6 |
| | $ | 15.4 |
| | $ | 15.1 |
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Interest expense, net non-GAAP reconciling adjustments(4) | | 1.5 |
| | 1.4 |
| | 4.3 |
| | 3.0 |
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Non-GAAP interest expense | | $ | 3.6 |
| | $ | 4.2 |
| | $ | 11.1 |
| | $ | 12.1 |
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Provision for income taxes | | $ | 0.4 |
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| | $ | 7.5 |
| | $ | 3.8 |
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Income tax effects of non-GAAP reconciling adjustments | | 1.7 |
| | 1.6 |
| | (4.0 | ) | | (3.2 | ) |
Non-GAAP provision for income taxes | | $ | 2.1 |
| | $ | 1.6 |
| | $ | 3.5 |
| | $ | 0.6 |
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Earnings (loss) from continuing operations | | $ | 15.4 |
| | $ | 20.9 |
| | $ | (19.6 | ) | | $ | 1.6 |
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Non-GAAP reconciling adjustments (5) | | 10.8 |
| | 13.4 |
| | 60.6 |
| | 45.5 |
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Interest expense, net non-GAAP reconciling adjustments (4) | | 1.5 |
| | 1.4 |
| | 4.3 |
| | 3.0 |
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Income tax effects of non-GAAP reconciling adjustments | | 1.7 |
| | 1.6 |
| | (4.0 | ) | | (3.2 | ) |
Non-GAAP net earnings | | $ | 26.0 |
| | $ | 34.1 |
| | $ | 49.3 |
| | $ | 53.3 |
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Diluted earnings (loss) per share from continuing operations | | $ | 0.17 |
| | $ | 0.24 |
| | $ | (0.22 | ) | | $ | 0.02 |
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Earnings per share non-GAAP reconciling adjustment | | 0.11 |
| | 0.13 |
| | 0.75 |
| | 0.57 |
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Non-GAAP diluted earnings per share | | $ | 0.28 |
| | $ | 0.37 |
| | $ | 0.53 |
| | $ | 0.59 |
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Diluted average shares outstanding | | 90,373,112 |
| | 89,317,806 |
| | 89,270,103 |
| | 88,997,050 |
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Non-GAAP adjustment (6) | | 2,053,916 |
| | 1,939,319 |
| | 3,173,549 |
| | 1,764,683 |
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Non-GAAP diluted average shares outstanding (6) | | 92,427,028 |
| | 91,257,125 |
| | 92,443,652 |
| | 90,761,733 |
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(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 in evaluatingto 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. The Company does not consider these non-GAAP financial measures to be a substitute for the information provided by GAAP financial results.
(2) Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities primarily in Asia. These amounts are included in the corresponding Gross profit and Earnings (loss) from continuing operations before interest and income taxes for each period presented.
(3) In 2017,2021, Other loss (gain) primarily representsexpenses represent the ongoing net lease cost (income) related to facilities not used in operations and expenses related to the acquisition of certain assets of a capacitor manufacturer.IMC by the PD segment. In 2016,2020, Other loss (gain) primarily represents a gain onexpenses represent the sale of investmentongoing net lease cost (income) related to a non-controlling interestfacilities not used in a MEMs timing device company, partially offset byoperations and expenses related to the Audience Inc. acquisition.shareholder activism.
(4)Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) upon conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the Company’s $172.5 million of convertible senior notes due 2021 that were issued in a private placement in May 2016. The imputed interest rate is 8.12% for the convertible notes due 2021, while the actual coupon interest rate of the notes was 3.25%. The difference between the imputed interest expense and the coupon interest expense is excluded from management’s assessment of the Company’s operating performance because management believes that this non-cash expense is not indicative of its core, ongoing operating performance.
(5) Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments.
(6)The non-GAAP reconciling adjustments are those adjustments made to reconcile Earnings (loss) from continuing operations before interest and income taxes to Adjusted earnings from continuing operations before interest and income taxes.
(6) (7)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. In addition, the Company entered into convertible note hedge transactions to offset any potential dilution from the convertible notes. Although the anti-dilutive impact of the convertible note hedges is not reflected under GAAP, the Company includes the anti-dilutive impact of the convertible note hedges in non-GAAP diluted average shares outstanding, if applicable.
Segment Results of Operations for the Three Months Ended September 30, 2017 Compared2021 compared with the Three Months Ended September 30, 20162020
The following is a summary of the results of operations of our two reportable segments: Audio and PD.Precision Devices.
See Note 15.16. 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 (loss) from continuing operations before interest and income taxes to our consolidated net earnings (loss) from continuing operations.
Audio | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
(in millions) | | 2021 | | Percent of Revenues | | 2020 | | Percent of Revenues |
Revenues | | $ | 177.7 | | | | | $ | 164.8 | | | |
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Earnings from continuing operations before interest and income taxes | | $ | 36.6 | | | 20.6% | | $ | 17.8 | | | 10.8% |
Stock-based compensation expense | | 2.1 | | | | | 2.2 | | | |
Intangibles amortization expense | | 2.7 | | | | | 2.7 | | | |
Impairment charges | | 4.0 | | | | | 7.6 | | | |
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Other (1) | | 0.3 | | | | | 0.4 | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 45.7 | | | 25.7% | | $ | 30.7 | | | 18.6% |
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(1) Other represents the ongoing net lease cost (income) related to facilities not used in operations. |
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| | Three Months Ended September 30, |
(in millions) | | 2017 | | Percent of Revenues | | 2016 | | Percent of Revenues |
Revenues | | $ | 167.8 |
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| | $ | 193.4 |
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Operating earnings | | $ | 27.7 |
| | 16.5% | | $ | 36.2 |
| | 18.7% |
Other income, net
| | (0.4 | ) | | | | (0.3 | ) | | |
Earnings from continuing operations before interest and income taxes | | $ | 28.1 |
| | 16.7% | | $ | 36.5 |
| | 18.9% |
Stock-based compensation expense | | 2.8 |
| | | | 2.1 |
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Intangibles amortization expense | | 1.1 |
| | | | 5.2 |
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Restructuring charges | | 0.6 |
| | | | 0.9 |
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Production transfer costs (1) | | 1.4 |
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Adjusted earnings from continuing operations before interest and income taxes ("Adjusted EBIT") | | $ | 34.0 |
| | 20.3% | | $ | 44.7 |
| | 23.1% |
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(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities in Asia. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented. |
Revenues
Audio revenuesRevenues were $167.8$177.7 million for the third quarter of 2017,2021, compared with $193.4$164.8 million for the third quarter of 2016, a decrease2020, an increase of $25.6$12.9 million or 13.2%7.8%. Revenues decreasedincreased primarily due to lower shipments ofhigher shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by MEMS microphones to one of our North American customers as a result of the later than prior year ramp of new handsets, weakness at key Chinese handset OEMs, and lower average selling prices in MEMS microphones and hearing health transducers. In addition, shipments of hearing health transducers decreased from prior year as we have been more disciplined with our pricing. These decreases were partially offset by higher shipments of MEMS microphones to the IoT market.and computing markets. The IoT and computing markets are above pre-pandemic levels, with the computing market benefiting from the work-from-home and remote-learning trends. Hearing health demand has returned to pre-pandemic levels.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings from continuing operations before interest and income taxesEBIT was a $28.1$36.6 million for the third quarter of 2017,2021, compared with $36.5earnings of $17.8 million for the third quarter of 2016, a decrease2020, an increase of $8.4$18.8 million. The decrease wasincreases were primarily due to an overall decreasehigher revenues, higher gross profit margin, a reduction in shipmentsimpairment charges, and lower legal expenses in connection with the protection of MEMS microphonesour intellectual property. The gross profit margin increase was driven by product cost reductions, positive mix, and hearing health transducers, lower average selling prices, lower fixed overhead absorption, and a decrease in production transfer costs,higher factory capacity utilization, partially offset by benefits fromunfavorable foreign currency exchange rate changes and net unfavorable inventory reserve adjustments. Our 2021 plant productivity has improved due to our productivity initiatives, lower amortization expenses, and the benefits of our operating cost reduction initiatives.factories returning to pre-pandemic production levels.
Adjusted EBIT was $34.0$45.7 million for the third quarter of 2017,2021, compared with $44.7$30.7 million for the third quarter of 2016, a decrease2020, an increase of $10.7$15.0 million. Adjusted EBIT margin for the third quarter of 20172021 was 20.3%25.7%, compared to 23.1%18.6% for the third quarter of 2016.2020. The decrease wasincreases were primarily due to an overall decrease in shipments of MEMS microphones and hearing health transducers, lower average selling prices,higher revenues, higher gross profit margin, and lower fixed overhead absorption,legal expenses in connection with the protection of our intellectual property. The gross profit margin increase was driven by product cost reductions, positive mix, and higher factory capacity utilization, partially offset by benefits fromunfavorable foreign currency exchange rate changes and net unfavorable inventory reserve adjustments. Our 2021 plant productivity has improved due to our productivity initiatives and the benefits of our operating cost reduction initiatives.factories returning to pre-pandemic production levels.
Precision Devices
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| | Three Months Ended September 30, |
(in millions) | | 2017 | | Percent of Revenues | | 2016 | | Percent of Revenues |
Revenues | | $ | 53.9 |
| | | | $ | 49.7 |
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Operating earnings | | $ | 6.4 |
| | 11.9% | | $ | 5.3 |
| | 10.7% |
Other income, net | | (0.2 | ) | | | | — |
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Earnings before interest and income taxes ("EBIT") | | $ | 6.6 |
| | 12.2% | | $ | 5.3 |
| | 10.7% |
Stock-based compensation expense | | 0.2 |
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Intangibles amortization expense | | 0.6 |
| | | | 0.4 |
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Impairment charges | | 0.3 |
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Production transfer costs (1) | | 0.1 |
| | | | 0.4 |
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Adjusted earnings before interest and income taxes ("Adjusted EBIT") | | $ | 7.8 |
| | 14.5% | | $ | 6.4 |
| | 12.9% |
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(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to lower-cost facilities. These amounts are included in earnings before interest and income taxes for each period presented. |
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| | Three Months Ended September 30, | |
(in millions) | | 2021 | | Percent of Revenues | | 2020 | | Percent of Revenues | | |
Revenues | | $ | 55.3 | | | | | $ | 41.0 | | | | | |
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Earnings from continuing operations before interest and income taxes | | $ | 14.0 | | | 25.3% | | $ | 8.0 | | | 19.5% | | |
Stock-based compensation expense | | 0.7 | | | | | 0.2 | | | | | |
Intangibles amortization expense | | 1.6 | | | | | 0.6 | | | | | |
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Restructuring charges | | — | | | | | 0.1 | | | | | |
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Other (1) | | 0.3 | | | | | — | | | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 16.6 | | | 30.0% | | $ | 8.9 | | | 21.7% | | |
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(1) Expenses related to the acquisition of IMC. | | |
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Revenues
PD revenuesRevenues were $53.9$55.3 million for the third quarter of 2017,2021, compared with $49.7$41.0 million for the third quarter of 2016,2020, an increase of $4.2$14.3 million or 8.5%34.9%. Revenues increased primarily due to our acquisition of IMC and higher capacitor shipments primarily fordemand from the medtech, industrial, defense, medical, and automotiveelectric vehicle markets as well as increased revenues related to our Capacitors Acquisition in January 2017,, partially offset by lower pricing.decreased demand in the communications market. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.
Earnings and Adjusted Earnings Before Interest and Income Taxes
PD EBIT was $6.6 million for the third quarter of 2017, compared with $5.3 million for the third quarter of 2016, an increase of $1.3 million. EBIT margin for the third quarter of 2017 was 12.2%, compared to 10.7% for the third quarter of 2016. The increases were primarily due to benefits from productivity initiatives, increased shipments, and realized cost savings from our production transfers to lower-cost Asian manufacturing facilities, partially offset by lower pricing.
PD Adjusted EBIT was $7.8 million for the third quarter of 2017, compared with $6.4 million for the third quarter of 2016, an increase of $1.4 million. Adjusted EBIT margin for the third quarter of 2017 was 14.5%, compared with 12.9% for the third quarter of 2016. The increases were primarily due to benefits from productivity initiatives, increased shipments, and realized cost savings from our production transfers to lower-cost Asian manufacturing facilities, partially offset by lower pricing.
Segment Results of Operations for the Nine Months Ended September 30, 2017 Compared with the Nine Months Ended September 30, 2016
The following is a summary of the results of operations of our two reportable segments: Audio and PD.
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 from continuing operations before interest and income taxes to our consolidated net earnings (loss) from continuing operations.
Audio
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| | Nine Months Ended September 30, |
(in millions) | | 2017 | | Percent of Revenues | | 2016 | | Percent of Revenues |
Revenues | | $ | 450.1 |
| | | | $ | 471.6 |
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Operating earnings | | $ | 30.7 |
| | 6.8% | | $ | 49.6 |
| | 10.5% |
Other expense (income), net | | 0.8 |
| | | | (1.0 | ) | | |
Earnings from continuing operations before interest and income taxes ("EBIT") | | $ | 29.9 |
| | 6.6% | | $ | 50.6 |
| | 10.7% |
Stock-based compensation expense | | 8.4 |
| | | | 7.1 |
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Intangibles amortization expense | | 5.3 |
| | | | 15.6 |
| | |
Impairment charges | | 21.3 |
| | | | 0.5 |
| | |
Restructuring charges | | 6.0 |
| | | | 7.1 |
| | |
Production transfer costs (1) | | 4.2 |
| | | | 1.0 |
| | |
Other loss | | — |
| | | | 0.1 |
| | |
Adjusted earnings from continuing operations before interest and income taxes ("Adjusted EBIT") | | $ | 75.1 |
| | 16.7% | | $ | 82.0 |
| | 17.4% |
| | | | | | | | |
(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities in Asia. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented. |
Revenues
Audio revenues were $450.1 million for the nine months ended September 30, 2017, compared with $471.6 million for the nine months ended September 30, 2016, a decrease of $21.5 million or 4.6%. Revenues decreased primarily due to lower average selling prices in MEMS microphones and hearing health transducers. In addition, shipments of hearing health transducers decreased from prior year as we have been more disciplined with our pricing, partially offset by higher shipments of MEMS microphones to the IoT market.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Audio EBIT was $29.9$14.0 million for the third quarter of 2021, compared with $8.0 million for the third quarter of 2020, an increase of $6.0 million. EBIT margin for the third quarter of 2021 was 25.3%, compared to 19.5% for the third quarter of 2020. The increases were primarily due to higher revenues, including the acquisition of IMC and higher gross profit margin, partially offset by IMC operating expenses and an increase in intangible amortization. The gross profit margin increase was driven by the benefits of productivity initiatives, higher factory utilization, and net favorable inventory reserve adjustments, partially offset by higher precious metals cost and unfavorable mix. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
Adjusted EBIT was $16.6 million for the third quarter of 2021, compared with $8.9 million for the third quarter of 2020, an increase of $7.7 million. Adjusted EBIT margin for the third quarter of 2021 was 30.0%, compared with 21.7% for the third quarter of 2020. The increases were primarily due to higher revenues, including the acquisition of IMC and higher gross profit margin, partially offset by IMC operating expenses. The gross profit margin increase was driven by the benefits of productivity initiatives, higher factory utilization, and net favorable inventory reserve adjustments, partially offset by higher precious metals cost and unfavorable mix. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
Segment Results of Operations for the Nine Months Ended September 30, 2021 compared with the Nine Months Ended September 30, 2020
Audio
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2021 | | Percent of Revenues | | 2020 | | Percent of Revenues |
Revenues | | $ | 490.6 | | | | | $ | 389.4 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Earnings (loss) from continuing operations before interest and income taxes | | $ | 95.0 | | | 19.4% | | $ | (0.5) | | | NM (2) |
Stock-based compensation expense | | 7.8 | | | | | 8.4 | | | |
Intangibles amortization expense | | 8.1 | | | | | 8.0 | | | |
Impairment charges | | 4.0 | | | | | 7.6 | | | |
Restructuring charges | | 0.3 | | | | | 11.0 | | | |
| | | | | | | | |
| | | | | | | | |
Other (1) | | 1.2 | | | | | 0.4 | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 116.4 | | | 23.7% | | $ | 34.9 | | | 9.0% |
| | | | | | | | |
(1) Other represents the ongoing net lease cost (income) related to facilities not used in operations. |
(2) Not meaningful. |
|
Revenues
Revenues were $490.6 million for the nine months ended September 30, 2017,2021, compared with $50.6$389.4 million for the nine months ended September 30, 2016, a decrease2020, an increase of $20.7 million. EBIT margin for the nine months ended September 30, 2017 was 6.6%, compared to 10.7% for the nine months ended September 30, 2016. The decrease was$101.2 million or 26.0%. Revenues increased primarily due to lower average selling prices, higher impairments of long-lived assets, lower fixed overhead absorption,shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by MEMS microphones in the IoT and computing markets. The IoT and computing markets are above pre-pandemic levels, with the computing market benefiting from the work-from-home and remote-learning trends. Hearing health demand has returned to pre-pandemic levels. The increased restructuring charges,demand is partially offset by benefitslower average pricing on mature products.
Earnings (Loss) and Adjusted Earnings from our productivity initiatives, lower amortization expenses, benefits of our operating cost reduction initiatives, favorable impactsContinuing Operations Before Interest and Income Taxes
Earnings from foreign currency exchange rate changes,continuing operations before interest and higher shipments of MEMS microphones.
Audio Adjusted EBIT was $75.1income taxes were $95.0 million for the nine months ended September 30, 2017,2021, compared with $82.0a loss from continuing operations before interest and income taxes of $0.5 million for the nine months ended September 30, 2016,2020, an increase of $95.5 million. The increases were primarily due to higher revenues, higher gross profit margin, a decreasereduction in restructuring charges, lower legal expenses in connection with the protection of $6.9our intellectual property, a reduction in operating expenses, and lower impairment charges. The gross profit margin increase was driven by product cost reductions, higher factory capacity utilization, positive mix, and net favorable inventory reserve adjustments, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line.
Adjusted EBIT was $116.4 million for the nine months ended September 30, 2021, compared with $34.9 million for the nine months ended September 30, 2020, an increase of $81.5 million. Adjusted EBIT margin for the nine months ended September 30, 20172021 was 16.7%23.7%, compared to 17.4%9.0% for the nine months ended September 30, 2016.2020. The decrease wasincreases were primarily due to higher revenues, higher gross profit margin, lower average selling priceslegal expenses in connection with the protection of our intellectual property, and lower fixed overhead absorption,a reduction in operating expenses. The gross profit margin increase was driven by product cost reductions, higher factory capacity utilization, positive mix, and net favorable inventory reserve adjustments, partially offset by benefits from our productivity initiatives, benefits of our operating cost reduction initiatives, favorable impacts fromlower average pricing on mature products and unfavorable foreign currency exchange rate changes, and higher shipmentschanges. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line.
Precision Devices
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2021 | | Percent of Revenues | | 2020 | | Percent of Revenues |
Revenues | | $ | 143.2 | | | | | $ | 131.7 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Earnings from continuing operations before interest and income taxes | | $ | 28.3 | | | 19.8% | | $ | 26.2 | | | 19.9% |
Stock-based compensation expense | | 2.1 | | | | | 0.5 | | | |
Intangibles amortization expense | | 3.4 | | | | | 1.8 | | | |
| | | | | | | | |
Restructuring charges | | — | | | | | 0.1 | | | |
| | | | | | | | |
Production transfer costs (1) | | — | | | | | 0.1 | | | |
Other (2) | | 1.0 | | | | | — | | | |
Adjusted earnings from continuing operations before interest and income taxes | | $ | 34.8 | | | 24.3% | | $ | 28.7 | | | 21.8% |
| | | | | | | | |
(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to existing facilities. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented. |
(2) Expenses related to the acquisition of IMC. |
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2017 | | Percent of Revenues | | 2016 | | Percent of Revenues |
Revenues | | $ | 155.5 |
| | | | $ | 147.1 |
|
| |
| | | | | | | | |
Operating earnings | | $ | 17.6 |
| | 11.3% | | $ | 10.1 |
| | 6.9% |
Other income, net | | (0.4 | ) | | | | (0.2 | ) | | |
Earnings before interest and income taxes ("EBIT") | | $ | 18.0 |
| | 11.6% | | $ | 10.3 |
| | 7.0% |
Stock-based compensation expense | | 0.6 |
| | | | 0.7 |
| | |
Intangibles amortization expense | | 1.7 |
| | | | 1.2 |
| | |
Impairment charges | | 0.3 |
| | | | — |
| | |
Restructuring charges | | 0.3 |
| | | | 2.1 |
| | |
Production transfer costs (1) | | 0.7 |
| | | | 1.9 |
| | |
Other loss | | 0.1 |
| | | | — |
| | |
Adjusted earnings before interest and income taxes ("Adjusted EBIT") | | $ | 21.7 |
| | 14.0% | | $ | 16.2 |
| | 11.0% |
|
(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to lower-cost facilities. These amounts are included in earnings before interest and income taxes for each period presented. |
Revenues
PD revenuesRevenues were $155.5$143.2 million for the nine months ended September 30, 2017,2021, compared with $147.1$131.7 million for the nine months ended September 30, 2016,2020, an increase of $8.4$11.5 million or 5.7%8.7%. Revenues increaseddecreased primarily due to our acquisition of IMC and higher capacitor demand from the industrial, medtech, and timing device product shipments primarily for the defense, medical, and automotiveelectric vehicle markets as well as increased revenues related to our Capacitors Acquisition in January 2017,, partially offset by lower pricing.decreased demand in the communications and defense markets. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
PD EBIT was $18.0$28.3 million for the nine months ended September 30, 2017,2021, compared with $10.3$26.2 million for the nine months ended September 30, 2016,2020, an increase of $7.7$2.1 million. EBIT margin for the nine months ended September 30, 20172021 was 11.6%19.8%, compared to 7.0%19.9% for the nine months ended September 30, 2016. The increases were2020. EBIT increased primarily due to benefits from productivity initiatives, increased shipments, lower restructuring charges,higher revenues and production transfer costs, along with realized cost savings from our production transfers to lower-cost Asian manufacturing facilities,gross profit margin, partially offset by lowerIMC operating expenses, increases in intangible amortization, and stock-based compensation. The gross profit margin increase was driven by benefits of productivity initiatives, higher factory utilization, net favorable inventory reserve adjustments, and higher pricing, partially offset by higher precious metals cost and lower fixed overhead absorption.unfavorable foreign currency exchange rate changes. EBIT margin was consistent with the prior period. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
PD Adjusted EBIT was $21.7$34.8 million for the nine months ended September 30, 2017,2021, compared with $16.2$28.7 million for the nine months ended September 30, 2016,2020, an increase of $5.5$6.1 million. Adjusted EBIT margin for the nine months ended September 30, 20172021 was 14.0%24.3%, compared with 11.0%21.8% for the nine months ended September 30, 2016.2020. The increases were primarily due to benefits from productivity initiatives, increased shipments,higher revenues and realized cost savings from our production transfers to lower-cost Asian manufacturing facilities,gross profit margin, partially offset by lower pricing.
IMC operating expenses. The gross profit margin increase was driven by benefits of productivity initiatives, higher factory utilization, net favorable inventory reserve adjustments, and higher pricing, partially offset by higher precious metals cost and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
Liquidity and Capital Resources
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, and capital expenditures, for at least the next twelve months.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 in the United States above and beyond our domestic cash on the balance sheet, the free cash flow generated by the domestic businessesbusiness, and availability under our revolving credit facility, we would most likely seek to raise long-term financing through the U.S. capital marketsdebt or private borrowings. Our ability to make payments on and to refinance our indebtedness as well as any debt that we may incur in the future, will depend on our ability in the future to generate cash from operations, financings or asset sales, and the tax consequences of our repatriation of overseas cash.bank markets.
In May 2016, we sold $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021 ("the Notes") and concurrently entered into convertible note hedge transactions with respect to our common stock to minimize the potential dilution upon conversion of the Notes. We have elected to settle the principal amount of the Notes in cash. If the conversion value exceeds the principal amount of the Notes, we will deliver shares of our common stock to settle the remainder of our obligation. In addition, we entered into warrant transactions whereby we sold warrants to acquire shares of our common stock at a strike price of $21.1050 per share. The Notes will mature inon November 1, 2021, unless earlier converted. The Notes are unsecured, senior obligations and interest is payable semi-annually in arrears. The Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election. We have primarily used the net proceeds to reduce borrowings outstanding under our term loan facility.outstanding. For additional information, refer to Note 9.10. Borrowings to our Consolidated Financial Statements.
On July 7, 2016,February 24, 2020, we completed the saleannounced that our Board of Directors had authorized a share repurchase program of up to $100 million of our Speakercommon stock. The timing and Receiver Product Line for $45.0 millionamount of any shares repurchased will be determined by us based on our evaluation of market conditions and other factors, and will be made in cash, lessaccordance 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 adjustmentsof 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, 2021, we repurchased 1,011,124 shares of common stock for a net amount receivedtotal of $40.6$20.0 million. We have primarily used the net proceeds to reduce borrowings outstanding under our
On September 4, 2020, we entered into a new Credit Agreement (the "New Credit Agreement"). The New Credit Agreement provides for a senior secured revolving credit facility. Referfacility (the "New Credit Facility") with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. For additional information, refer to Note 2. Disposed and Discontinued Operations10. Borrowings to our Consolidated Financial Statements for additional information.Statements.
On January 11, 2017,May 3, 2021, we completed an acquisitionacquired all of certain assetsthe outstanding shares of a capacitors manufacturercommon stock of IMC for cash consideration of $4.0 million, of which $2.5 million was paid during$80.7 million. The acquired business provides RF filters to the first quarter of 2017, with the remaining $1.5 million to be paid quarterly in equal installments from 2018 through 2019, less any purchase price adjustments. Thisdefense, industrial, and communications markets. The acquisition's operations are included in the PD segment.
On October 11, 2017, we entered into a Revolving Credit Facility Agreement (the "New Credit Facility"). For additional information, refer to Note 17. Subsequent Events4. Acquisition to our Consolidated Financial Statements.
On October 26, 2017, the Company entered into an agreementOur ability to sell its timing device (oscillator) business, part of the Precision Devices segment,make payments on and to Microsemi Corporation for $130.0 million, subject to purchase price adjustments for working capital. This transaction is subject to regulatory approval and customary closing conditions. We expect the transaction to closerefinance our indebtedness, as well as any debt that we may incur in the fourth quarter of 2017 and that itfuture, will be slightly dilutive to future earnings. As a result, the Company expects to reclassify the assets, liabilities, and results of operations of the product line to discontinued operationsdepend on our ability in the fourth quarterfuture to generate cash from operations and financings. Due to the global nature of 2017. For additional information, refer to Note 17. Subsequent Events to our Consolidated Financial Statements.
operations, a significant portion of our cash is generated and typically held outside the United States. Our cash and cash equivalents totaled $57.7$140.0 million and $66.2$147.8 million at September 30, 20172021 and December 31, 2016,2020, respectively. Of these amounts, cash held by our non-U.S. operations totaled $55.0$83.2 million and $58.4$101.4 million as of September 30, 20172021 and December 31, 2016,2020, 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.
Cash Flow Summary
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) | | 2021 | | 2020 |
Net cash flows provided by (used in): | | | | |
Operating activities | | $ | 116.6 | | | $ | 52.6 | |
Investing activities | | (109.4) | | | (20.3) | |
Financing activities | | (14.9) | | | 28.2 | |
Effect of exchange rate changes on cash and cash equivalents | | (0.1) | | | 0.2 | |
Net (decrease) increase in cash and cash equivalents | | $ | (7.8) | | | $ | 60.7 | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2017 | | 2016 |
Net cash flows provided by (used in): | | | | |
Operating activities | | $ | 31.1 |
| | $ | 37.8 |
|
Investing activities | | (45.4 | ) | | 13.6 |
|
Financing activities | | 5.0 |
| | (54.5 | ) |
Effect of exchange rate changes on cash and cash equivalents | | 0.8 |
| | (0.2 | ) |
Net decrease in cash and cash equivalents | | $ | (8.5 | ) | | $ | (3.3 | ) |
Operating Activities
Cash provided by operating activities in 2017 decreased $6.72021 increased $64.0 million compared to 2016,2020, primarily due to aan improvement in net earnings, which was largely driven by higher investmentrevenues and improved gross profit margins. The improvement in adjusted working capital (a non-GAAP measure calculated as receivables, net of allowances, plus inventories, less accounts payable) of $50.6 million,earnings was partially offset by lower cash operating expenses. During 2017,the net sum of unfavorable changes in accounts receivable, inventories, and accounts payable, which is attributable to higher customer demand and increased to support the launch of new handsets at our largest customer and in conjunction with the transfer of certain hearing health production from China to our facility in the Philippines.activity.
Investing Activities
The cash used in investing activities during 20172021 was primarily driven by the acquisition of IMC and capital expenditures to support product innovation and cost savings. The cash used in investing activities during 2020 was driven by capital expenditures to support our manufacturing capacity expansion and the Capacitors Acquisition. The cash provided by investing activities in 2016 was driven by the $40.6 million of proceeds received from the sale of our Speaker and Receiver Product Line, partially offset by capital expenditures.expansion.
In 2017,2021, we expect capital expenditures to be in the range of 5.0% to 6.0% to 8.0% of revenue.revenues.
Financing Activities
Cash provided byused in financing activities during 20172021 is primarily related to the borrowings under our revolving credit facility$20.0 million of $15.0 millionrepurchases of common stock and the $3.3 million of proceeds received for option exercises, partially offset by the $7.2 million principal payment on our term loan and the $4.9$7.6 million payment of taxes related to net share settlement of equity awards, whereas cash used in financing activities for 2016 was primarily related to the $166.5 million in principal payments to our term loan, a $44.5 million purchase of convertible note hedges, $45.0 million in net payments to our revolving credit facility, and the $6.7 million of debt issuance costs, partially offset by proceeds of $172.5$14.4 million from the issuanceexercise of convertible senior notes and $39.1options. Cash provided by financing activities during 2020 is primarily related to the net borrowings under our revolving credit facility of $50.0 million, partially offset by the $15.0 million of proceeds fromrepurchases of common stock and the issuance$6.1 million payment of warrants. For additional information on our debt, see Note 9. Borrowingstaxes related to our Consolidated Financial Statements.net share settlement of equity awards.
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 14.15. Commitments and Contingent Liabilities to our Consolidated Financial Statements.
Borrowings
Borrowings (net of debt issuance costs, debt discount, and amortization) consist of the following:
| | | | | | | | | | | | | | |
(in millions) | | September 30, 2021 | | December 31, 2020 |
3.25% convertible senior notes | | $ | 171.8 | | | $ | 165.1 | |
Revolving credit facility | | — | | | — | |
Total | | 171.8 | | | 165.1 | |
Less current maturities | | 171.8 | | | 165.1 | |
Total long-term debt | | $ | — | | | $ | — | |
|
| | | | | | | | |
(in millions) | | September 30, 2017 | | December 31, 2016 |
3.25% Convertible Senior Notes | | $ | 140.2 |
| | $ | 135.1 |
|
Term loan and revolving credit facility | | 171.0 |
| | 163.1 |
|
Total | | 311.2 |
| | 298.2 |
|
Less: current maturities | | 13.3 |
| | 9.7 |
|
Total long-term debt | | $ | 297.9 |
| | $ | 288.5 |
|
Commitments under the New Credit Facility will terminate, and loans outstanding thereunder will mature, on January 2, 2024; provided, that if all the Notes have not been repaid, refinanced, and/or converted to our common stock by August 2, 2021 (the "Springing Maturity Test Date"), then the commitments under the New Credit Facility will terminate, and the loans outstanding thereunder will mature, on such earlier date unless, from and after the Springing Maturity Test Date and for so long as the Notes have not been repaid, refinanced, and/or converted to our common stock, we do not permit liquidity (as defined in the New Credit Agreement) for any period of three consecutive business days to be less than $150.0 million. We maintained the required liquidity from August 2, 2021 through September 30, 2021.
The interest rate under the term loan and revolving credit facilityNew Credit Facility is variable based on LIBOR at the time of the borrowing and the Company'sour total leverage as measured by a total indebtedness to Consolidated EBITDA ratio (as defined in the agreements governing the facilities).ratio. Based upon the Company'sour total indebtedness to Consolidated EBITDAleverage ratio, the Company'sour borrowing rate could range from LIBOR + 1.25%1.50% to LIBOR + 2.25%2.50%. In addition, a commitment fee accrues on the average daily unused portion of the New Credit Facility at a rate of 0.225% to 0.375%. At September 30, 2017,2021, we were in compliance with all covenants under these facilities.
Critical Accounting Policies and 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 policies 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, 20162020 filed with the Securities and Exchange Commission on February 21, 2017.10, 2021. There are no material changes in our previously reported critical accounting policies.
Recent Accounting Standards
The adoption of recent accounting standards, as included in Note 16.2. Recent Accounting Standards to our Consolidated Financial Statements, has not had and is not 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, 2017, 2021, 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, 2016.2020. For a discussion of our exposure to market risk as of December 31, 2016,2020, 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, 2016.2020.
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 20172021 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 14.15. 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
For a discussion of our potential risks and uncertainties, seeThere have been no material changes from the informationrisk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. There are no material developments2020, as updated in our previously reported risk factors.Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.
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 million of the Company's common stock. 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.
The Company did not repurchase any shares of its common stock during the three months ended September 30, 2021. As of September 30, 2021, the remaining amount authorized for share repurchases was $63.8 million.
Item 6. Exhibits
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101 | The following financial information from Knowles Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 20172021 formatted in XBRL (eXtensible Business Reporting Language):Inline XBRL: (i) Consolidated Statements of Earnings (Unaudited) for the three and nine months ended September 30, 20172021 and 2016,2020, (ii) Consolidated Statements of Comprehensive Earnings (Unaudited) for the three and nine months ended September 30, 20172021 and 2016,2020, (iii) Consolidated Balance Sheets (Unaudited) as of September 30, 20172021 and December 31, 2016,2020, (iv) Consolidated StatementStatements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2017,2021 and 2020, (v) Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 20172021 and 2016,2020, and (vi) the Notes to the Consolidated Financial Statements (Unaudited) tagged as blocks of text and including detailed tags. |
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104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL and contained in Exhibit 101. |
Signatures
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.
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| | KNOWLES CORPORATION |
| | |
Date: | October 28, 2021 | /s/ John S. Anderson |
| | John S. Anderson |
| | Senior Vice President & Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | |
| | KNOWLES CORPORATION |
| | |
Date: | October 30, 2017 | /s/ John S. Anderson |
| | John S. Anderson |
| | Senior Vice President & Chief Financial Officer |
| | (Principal Financial Officer) |