ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented below refer to and should be read in conjunction with our audited Consolidated Financial Statements and related notes under Item 8. "Financial Statements and Supplementary Data." The following discussion contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”
Management’s discussion and analysis, which we refer to as “MD&A,” of our results of operations, financial condition, and cash flows should be read together with the audited Consolidated Financial Statements and accompanying notes included under Item 8. "Financial Statements and Supplementary Data," to provide an understanding of our financial condition, changes in financial condition, and results of our operations. We believe the assumptions underlying the Consolidated Financial Statements are reasonable. However, the Consolidated Financial Statements included herein may not necessarily reflect our results of operations, financial position, and cash flows in the future.
As discussed in Note 2. Disposed and Discontinued Operations to our audited Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data", we completed the sale of our high-end oscillators business ("Timing Device Business") in the fourth quarter of 2017 and the sale of our speaker and receiver product line ("Speaker and Receiver Product Line") in the third quarter of 2016. Accordingly, the results of operations and related assets and liabilities for the Timing Device Business and the Speaker and Receiver Product Line have been reclassified as discontinued operations for all periods presented. Unless otherwise indicated, discussion within this MD&A and elsewhere within this Annual Report on Form 10-K refers to results from continuing operations.
Our Business
We are a market leader and global provider of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medtech, defense, automotive, and industrial markets. We use our leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. We are also a leader in acoustic components, high-end capacitors, and mmWave radio frequency ("RF") solutions for a diverse set of markets. Our focus on the customer, combined with 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.
Our Business Segments
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 ASC 280 - Segment Reporting and are comprised of (i) Audio and (ii) Precision Devices ("PD"). The segments are aligned around similar product applications serving our key end markets, to enhance focus on end market growth strategies.
Our Audio group designs and manufactures innovative audio products, including microphones and balanced armature speakers, audio processors, and software and algorithms used in applications that serve the mobile, ear, and IoT markets. Locations include the sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.
Our PD group specializes in the design and delivery of high performance capacitor products and mmWave RF solutions for technically demanding applications. Our high performance capacitor products are used in applications such as power supplies and medical implants, which sell to a diverse set of customers for mission critical applications across the communications, medtech, defense, automotive, and industrial markets. Our mmWave RF solutions primarily solve high 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 base stations. Locations include the 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 December 20, 2019, we acquired substantially all of the assets of the MEMS Microphone Application-specific integrated circuit Design Business (“ASIC Design Business”) from ams AG for $57.9 million. The acquired business, which does not generate revenues, includes intellectual property and an assembled workforce. The acquisition’s operations are included in the Audio segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
On January 3, 2019, we acquired substantially all of the assets of DITF Interconnect Technology, Inc. ("DITF") for $11.1 million. The acquired business provides thin film components to the defense, telecommunication, industrial, and medtech markets. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On January 19, 2018, we acquired substantially all of the assets of Compex Corporation ("Compex") for $18.7 million. The acquired business provides single layer electronic components to the telecommunicaton, fiber optics, and defense markets. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On November 28, 2017, we completed the sale of the Timing Device Business, part of the PD segment, for $130.0 million, plus purchase price adjustments for a net amount of $135.1 million. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On January 11, 2017, we completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during the first quarter of 2017. An additional $1.0 million was paid during 2018, with the remaining $0.2 million paid in the first quarter of 2019. This acquisition's operations are included in the PD segment.
For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2018 compared to the year ended December 31, 2017, refer to Part II, Item 7. 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, 2018, which was filed with the SEC on February 19, 2019 and is incorporated by reference herein.
Non-GAAP Financial Measures
In addition to the GAAP financial measures included in this item, we have presented certain non-GAAP financial measures. We use non-GAAP measures as supplements to our GAAP results of operations in evaluating certain aspects of our business, and our executive management team and Board of Directors focus on non-GAAP items as key measures of our performance for business planning purposes. These measures assist us in comparing our performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in our opinion, do not reflect our core operating performance. We believe that our presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that we use internally for purposes of assessing our core operating performance. The Company does not consider these non-GAAP financial measures to be a substitute for the information provided by GAAP financial results. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, see the reconciliation included herein.
Results of Operations for the Year Ended December 31, 2019 compared with the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
854.8
|
|
|
$
|
826.9
|
|
|
$
|
744.2
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
328.0
|
|
|
$
|
322.6
|
|
|
$
|
286.0
|
|
Non-GAAP gross profit
|
|
$
|
333.6
|
|
|
$
|
327.0
|
|
|
$
|
299.9
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before interest and income taxes
|
|
$
|
80.8
|
|
|
$
|
77.1
|
|
|
$
|
40.0
|
|
Adjusted earnings from continuing operations before interest and income taxes
|
|
$
|
126.9
|
|
|
$
|
117.2
|
|
|
$
|
110.6
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
16.6
|
|
|
$
|
(4.5
|
)
|
|
$
|
12.9
|
|
Non-GAAP provision for income taxes
|
|
$
|
17.6
|
|
|
$
|
13.0
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
49.7
|
|
|
$
|
65.6
|
|
|
$
|
6.5
|
|
Non-GAAP net earnings from continuing operations
|
|
$
|
101.6
|
|
|
$
|
94.5
|
|
|
$
|
81.2
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations - diluted
|
|
$
|
0.53
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|
|
$
|
0.72
|
|
|
$
|
0.07
|
|
Non-GAAP diluted earnings per share from continuing operations
|
|
$
|
1.07
|
|
|
$
|
1.01
|
|
|
$
|
0.88
|
|
Revenues
Revenues for the year ended December 31, 2019 were $854.8 million, compared with $826.9 million for the year ended December 31, 2018, an increase of $27.9 million or 3.4%. This change was due to an increase in PD revenues of $27.3 million primarily due to higher shipments to the defense, telecommunications, and medtech markets, our acquisition of DITF, and higher pricing. Audio revenues had an increase of $0.6 million primarily due to higher demand for MEMS microphones and balanced armature speakers in Ear and IoT applications, partially offset by lower demand for MEMS microphones and Intelligent Audio solutions in handset applications. Audio revenues were also impacted by lower average pricing on mature products.
Cost of Goods Sold
Cost of goods sold ("COGS") for the year ended December 31, 2019 was $525.1 million, compared with $503.9 million for the year ended December 31, 2018, an increase of $21.2 million or 4.2%. This increase was primarily the result of higher shipping volume, personnel and factory overhead increases in PD to support higher production volumes and manufacturing capacity, warranty claims (net of supplier recoveries), and higher precious metal pricing, partially offset by product cost reductions and favorable foreign currency exchange rate changes.
Restructuring Charges
We undertake restructuring programs from time to time to better align our operations with current market conditions. Such activities include facility consolidations, headcount reductions, and other measures to further optimize operations. It is likely that we will have restructuring charges in the future as we continue to consolidate our manufacturing footprint. Details regarding restructuring programs undertaken during the reporting period are as follows:
During the year ended December 31, 2019, we recorded total restructuring charges of $6.0 million. We recorded $1.7 million within Gross profit, primarily for actions associated with transferring certain operations of capacitors manufacturing to other existing facilities in order to further optimize operations in the PD segment. We also recorded restructuring charges of $4.3 million within Operating expenses, primarily for actions associated with rationalizing the Audio segment workforce.
During the year ended December 31, 2018, we recorded total restructuring charges of $2.1 million. We recorded $0.4 million within Gross profit, primarily for actions associated with transferring certain operations of capacitors manufacturing to other existing facilities in order to further optimize operations in the PD segment. We also recorded restructuring charges of $1.7 million within Operating expenses, primarily for actions associated with rationalizing the Audio segment workforce.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the year ended December 31, 2019 was $328.0 million, compared with $322.6 million for the year ended December 31, 2018, an increase of $5.4 million or 1.7%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2019 was 38.4%, compared with 39.0% for the year ended December 31, 2018. The gross profit increase was primarily due to product cost reductions, higher shipping volumes, and favorable foreign currency exchange rate changes, partially offset by lower average pricing on mature products, personnel and factory overhead increases in PD to support higher production volumes and manufacturing capacity, warranty claims, and higher precious metal pricing. The gross profit margin decrease was primarily due to lower average pricing on mature products, personnel and factory overhead increases in PD to support higher production volumes and manufacturing capacity, warranty claims (net of supplier recoveries), and higher precious metal pricing, partially offset by product cost reductions and favorable foreign currency exchange rate changes.
Non-GAAP gross profit for the year ended December 31, 2019 was $333.6 million, compared with $327.0 million for the year ended December 31, 2018, an increase of $6.6 million or 2.0%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2019 was 39.0%, as compared with 39.5% for the year ended December 31, 2018. The non-GAAP gross profit increase was primarily due to product cost reductions, higher shipping volumes, and favorable foreign currency exchange rate changes, partially offset by lower average pricing on mature products, personnel and factory overhead increases in PD to support higher production volumes and manufacturing capacity, warranty claims, and higher precious metal pricing. The gross profit margin decrease was primarily due to lower average pricing on mature products, personnel and factory overhead increases in PD to support higher production volumes and manufacturing capacity, warranty claims (net of supplier recoveries), and higher precious metal pricing, partially offset by product cost reductions and favorable foreign currency exchange rate changes.
Research and Development Expenses
Research and development expenses for the years ended December 31, 2019 and 2018 were $96.8 million and $100.6 million, respectively, a decrease of $3.8 million or 3.8%. Research and development expenses as a percentage of revenues for the years ended December 31, 2019 and 2018 were 11.3% and 12.2%, respectively. The decreases were primarily driven by lower incentive compensation and lower salary compensation as a result of headcount reductions within the Audio segment workforce.
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 2019 were $145.7 million, compared with $142.5 million for the year ended December 31, 2018, an increase of $3.2 million or 2.2%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2019 were 17.0%, compared with 17.2% for the year ended December 31, 2018. The increase in expenses was primarily driven by shareholder activism, higher legal expense related to protecting our intellectual property, and our acquisition of DITF, partially offset by lower incentive and stock-based compensation. Selling and administrative expenses as a percentage of revenues decreased due to the increase in revenues from the prior year.
Interest Expense, net
Interest expense, net for the year ended December 31, 2019 was $14.5 million, compared with $16.0 million for the year ended December 31, 2018, a decrease of $1.5 million or 9.4%. The decrease in interest expense is primarily due to lower outstanding borrowings. For additional information on borrowings and interest expense, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
Provision for (Benefit from) Income Taxes and Non-GAAP Provision for Income Taxes
The effective tax rate ("ETR") for the year ended December 31, 2019 was a 25.0% provision, compared with a 7.4% benefit for the year ended December 31, 2018. The change in the ETR is primarily due to the mix of earnings by taxing jurisdictions and the Tax Reform Act. As a result of the IRS approval for an entity classification election received during the fourth quarter of 2018, we recorded a $17.8 million reduction to our transition tax liability.
The ETR for the years ended December 31, 2019 and 2018 was favorably impacted by two tax holidays granted to us by Malaysia. For additional information on these tax holidays, see Note 13. Income Taxes to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data."
The non-GAAP ETR for the year ended December 31, 2019 was a 14.8% provision, compared with a 12.1% provision for the year ended December 31, 2018. The change in the non-GAAP ETR was due to the mix of earnings by taxing jurisdictions and the Tax Reform Act.
The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which we generate taxable income or loss, the favorable impact of our 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 reduced tax rates as a result of our tax holidays in Malaysia, subject to our satisfaction of certain conditions that we expect to continue to satisfy. Unless extended or otherwise renegotiated, our existing tax holidays in Malaysia will expire in 2021. The U.S. operations were in a cumulative loss position as of December 31, 2019 and 2018. Based on this, and other relevant information, the Company concluded that tax losses and deferred tax assets generated in the U.S. would not be benefited currently or in the future.
Earnings from Continuing Operations
Earnings from continuing operations for the year ended December 31, 2019 was $49.7 million, compared with $65.6 million for the year ended December 31, 2018, a decrease of $15.9 million. The decrease is primarily due to a higher provision for income taxes, partially offset by higher gross profit.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes ("EBIT") from continuing operations for the year ended December 31, 2019 was $80.8 million, compared with $77.1 million for the year ended December 31, 2018, an increase of $3.7 million or 4.8%. EBIT margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2019 was 9.5%, as compared with 9.3% for the year ended December 31, 2018. The increases in EBIT and EBIT margin were primarily due to higher gross profit.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2019 was $126.9 million, compared with $117.2 million for the year ended December 31, 2018, an increase of $9.7 million or 8.3%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2019 was 14.8%, as compared with 14.2% for the year ended December 31, 2018. The increases in Adjusted EBIT and Adjusted EBIT margin were primarily due to higher non-GAAP gross profit and lower non-GAAP operating expenses.
(Loss) Earnings from Discontinued Operations, net
The loss from discontinued operations was $0.6 million for the year ended December 31, 2019, compared with earnings of $2.1 million for the year ended December 31, 2018. The change in discontinued operations was primarily driven by an unrecognized tax benefit recognized in 2019 related to the Speaker and Receiver Product Line and a favorable purchase price adjustment in 2018 related to the Timing Device Business.
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 $0.53 for the year ended December 31, 2019, compared with $0.72 for the year ended December 31, 2018. The change was mainly driven by a higher provision for income taxes, partially offset by higher EBIT.
Non-GAAP diluted earnings per share from continuing operations for the year ended December 31, 2019 was $1.07, compared with $1.01 for the year ended December 31, 2018. The increase in non-GAAP diluted earnings per share was mainly driven by higher adjusted EBIT, partially offset by a higher non-GAAP provision for income taxes and the impact of higher non-GAAP diluted average shares outstanding.
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except share and per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
Gross profit
|
|
$
|
328.0
|
|
|
$
|
322.6
|
|
|
$
|
286.0
|
|
Stock-based compensation expense
|
|
1.6
|
|
|
1.6
|
|
|
1.8
|
|
Impairment charges
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Restructuring charges
|
|
1.7
|
|
|
0.4
|
|
|
4.0
|
|
Production transfer costs (2)
|
|
2.3
|
|
|
2.2
|
|
|
6.7
|
|
Other (3)
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Non-GAAP gross profit
|
|
$
|
333.6
|
|
|
$
|
327.0
|
|
|
$
|
299.9
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
49.7
|
|
|
$
|
65.6
|
|
|
$
|
6.5
|
|
Interest expense, net
|
|
14.5
|
|
|
16.0
|
|
|
20.6
|
|
Provision for (benefit from) income taxes
|
|
16.6
|
|
|
(4.5
|
)
|
|
12.9
|
|
Earnings from continuing operations before interest and income taxes
|
|
80.8
|
|
|
77.1
|
|
|
40.0
|
|
Stock-based compensation expense
|
|
25.2
|
|
|
27.0
|
|
|
24.7
|
|
Intangibles amortization expense
|
|
7.0
|
|
|
6.5
|
|
|
7.3
|
|
Impairment charges
|
|
—
|
|
|
—
|
|
|
21.3
|
|
Restructuring charges
|
|
6.0
|
|
|
2.1
|
|
|
10.2
|
|
Production transfer costs (2)
|
|
2.3
|
|
|
2.6
|
|
|
6.8
|
|
Other (3)
|
|
5.6
|
|
|
1.9
|
|
|
0.3
|
|
Adjusted earnings from continuing operations before interest and income taxes
|
|
$
|
126.9
|
|
|
$
|
117.2
|
|
|
$
|
110.6
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
14.5
|
|
|
$
|
16.0
|
|
|
$
|
20.6
|
|
Interest expense, net non-GAAP reconciling adjustments (4)
|
|
6.8
|
|
|
6.3
|
|
|
6.1
|
|
Non-GAAP interest expense
|
|
$
|
7.7
|
|
|
$
|
9.7
|
|
|
$
|
14.5
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
16.6
|
|
|
$
|
(4.5
|
)
|
|
$
|
12.9
|
|
Income tax effects of non-GAAP reconciling adjustments (5)
|
|
1.0
|
|
|
17.5
|
|
|
2.0
|
|
Non-GAAP provision for income taxes
|
|
$
|
17.6
|
|
|
$
|
13.0
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
49.7
|
|
|
$
|
65.6
|
|
|
$
|
6.5
|
|
Non-GAAP reconciling adjustments (6)
|
|
46.1
|
|
|
40.1
|
|
|
70.6
|
|
Interest expense, net non-GAAP reconciling adjustments (4)
|
|
6.8
|
|
|
6.3
|
|
|
6.1
|
|
Income tax effects of non-GAAP reconciling adjustments (5)
|
|
1.0
|
|
|
17.5
|
|
|
2.0
|
|
Non-GAAP net earnings from continuing operations
|
|
$
|
101.6
|
|
|
$
|
94.5
|
|
|
$
|
81.2
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.07
|
|
Earnings per share non-GAAP reconciling adjustment
|
|
0.54
|
|
|
0.29
|
|
|
0.81
|
|
Non-GAAP diluted earnings per share from continuing operations
|
|
$
|
1.07
|
|
|
$
|
1.01
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
Diluted average shares outstanding
|
|
93,439,023
|
|
|
91,194,747
|
|
|
90,490,007
|
|
Non-GAAP adjustment (7)
|
|
1,449,627
|
|
|
2,046,989
|
|
|
1,959,801
|
|
Non-GAAP diluted average shares outstanding (7)
|
|
94,888,650
|
|
|
93,241,736
|
|
|
92,449,808
|
|
(1) In addition to the GAAP financial measures included herein, Knowles has presented certain non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable GAAP measures. Knowles believes that non-GAAP measures are useful as supplements to its GAAP results of operations to evaluate certain aspects of its operations and financial performance, and its management team primarily focuses on non-GAAP items in evaluating Knowles' performance for business planning purposes. Knowles also believes that these measures assist it with comparing its performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in Knowles' opinion, do not reflect its core operating performance. Knowles believes that its presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that Knowles uses internally for purposes of assessing its core operating performance.
(2) 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 from continuing operations before interest and income taxes for each period presented.
|
|
(3)
|
In 2019, Other expenses of $4.4 million represent expenses related to shareholder activism and the remaining Other expenses relate to the acquisition of the ASIC Design Business by the Audio segment and the acquisition of DITF by the PD segment. In 2018, Other expenses in Gross profit and Operating expenses represent expenses related to acquisitions and the remaining Other expenses represent an adjustment to pre-spin-off pension obligations.
|
|
|
(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. Adjustments are also made to exclude certain impacts of the Tax Reform Act and the resulting consequences that were accounted for as uncertain tax positions.
|
|
|
(6)
|
The non-GAAP reconciling adjustments are those adjustments made to reconcile Earnings from continuing operations before interest and income taxes to Adjusted earnings from continuing operations before interest and income taxes.
|
|
|
(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 Year Ended December 31, 2019 Compared with the Year Ended December 31, 2018
Audio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
|
2019
|
|
Percent of Revenues
|
|
2018
|
|
Percent of Revenues
|
|
2017
|
|
Percent of Revenues
|
Revenues
|
|
$
|
682.8
|
|
|
|
|
$
|
682.2
|
|
|
|
|
$
|
637.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
$
|
107.2
|
|
|
15.7%
|
|
$
|
105.1
|
|
|
15.4%
|
|
$
|
75.8
|
|
|
11.9%
|
Other income, net
|
|
(0.1
|
)
|
|
|
|
(0.6
|
)
|
|
|
|
(0.3
|
)
|
|
|
Earnings from continuing operations before interest and income taxes
|
|
$
|
107.3
|
|
|
15.7%
|
|
$
|
105.7
|
|
|
15.5%
|
|
$
|
76.1
|
|
|
11.9%
|
Stock-based compensation expense
|
|
13.1
|
|
|
|
|
13.4
|
|
|
|
|
11.5
|
|
|
|
Intangibles amortization expense
|
|
4.7
|
|
|
|
|
4.7
|
|
|
|
|
6.5
|
|
|
|
Impairment charges
|
|
—
|
|
|
|
|
—
|
|
|
|
|
21.3
|
|
|
|
Restructuring charges
|
|
4.8
|
|
|
|
|
1.4
|
|
|
|
|
8.1
|
|
|
|
Production transfer costs (1)
|
|
—
|
|
|
|
|
1.0
|
|
|
|
|
6.3
|
|
|
|
Other (2)
|
|
0.4
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
Adjusted earnings from continuing operations before interest and income taxes
|
|
$
|
130.3
|
|
|
19.1%
|
|
$
|
126.2
|
|
|
18.5%
|
|
$
|
129.8
|
|
|
20.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to existing facilities in Asia. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented.
|
(2) In 2019, Other represents expenses related to the acquisition of the ASIC Design Business.
|
Revenues
Audio revenues were $682.8 million for the year ended December 31, 2019, compared with $682.2 million for the year ended December 31, 2018, an increase of $0.6 million or 0.1%. Revenues increased primarily due to higher demand for MEMS microphones and balanced armature speakers in Ear and IoT applications, partially offset by lower demand for MEMS microphones and Intelligent Audio solutions in handset applications. Audio revenues were also impacted by lower average pricing on mature products.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Audio EBIT from continuing operations was $107.3 million for the year ended December 31, 2019, compared with $105.7 million for the year ended December 31, 2018, an increase of $1.6 million or 1.5%. EBIT margin for the year ended December 31, 2019 was 15.7%, compared to 15.5% for the year ended December 31, 2018. The increases were primarily driven by lower incentive compensation, partially offset by increased restructuring charges.
Audio Adjusted EBIT was $130.3 million for the year ended December 31, 2019, compared with $126.2 million for the year ended December 31, 2018, an increase of $4.1 million or 3.2%. Adjusted EBIT margin for the year ended December 31, 2019 was 19.1%, compared with 18.5% for the year ended December 31, 2018. The increases were primarily driven by lower incentive compensation.
Precision Devices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
|
2019
|
|
Percent of Revenues
|
|
2018
|
|
Percent of Revenues
|
|
2017
|
|
Percent of Revenues
|
Revenues
|
|
$
|
172.0
|
|
|
|
|
$
|
144.7
|
|
|
|
|
$
|
106.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
$
|
30.3
|
|
|
17.6%
|
|
$
|
27.7
|
|
|
19.1%
|
|
$
|
18.4
|
|
|
17.2%
|
Other (income) expense, net
|
|
(0.1
|
)
|
|
|
|
0.2
|
|
|
|
|
(0.8
|
)
|
|
|
Earnings from continuing operations before interest and income taxes
|
|
$
|
30.4
|
|
|
17.7%
|
|
$
|
27.5
|
|
|
19.0%
|
|
$
|
19.2
|
|
|
18.0%
|
Stock-based compensation expense
|
|
1.4
|
|
|
|
|
0.8
|
|
|
|
|
0.4
|
|
|
|
Intangibles amortization expense
|
|
2.3
|
|
|
|
|
1.8
|
|
|
|
|
0.8
|
|
|
|
Restructuring charges
|
|
0.8
|
|
|
|
|
0.5
|
|
|
|
|
0.1
|
|
|
|
Production transfer costs (1)
|
|
2.3
|
|
|
|
|
1.6
|
|
|
|
|
0.5
|
|
|
|
Other (2)
|
|
0.5
|
|
|
|
|
1.7
|
|
|
|
|
0.1
|
|
|
|
Adjusted earnings from continuing operations before interest and income taxes
|
|
$
|
37.7
|
|
|
21.9%
|
|
$
|
33.9
|
|
|
23.4%
|
|
$
|
21.1
|
|
|
19.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) In 2019, Other represents expenses related to the acquisition of DITF. In 2018, Other represents expenses related to the acquisition of Compex and an adjustment to pre-spin-off pension obligations.
|
Revenues
PD revenues were $172.0 million for the year ended December 31, 2019, compared with $144.7 million for the year ended December 31, 2018, an increase of $27.3 million or 18.9%. Revenues increased primarily due to higher shipments to the defense, telecommunications, and medtech markets, our acquisition of DITF, and higher pricing.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
PD EBIT from continuing operations was $30.4 million for the year ended December 31, 2019, compared with $27.5 million for the year ended December 31, 2018, an increase of $2.9 million or 10.5%. EBIT margin for the year ended December 31, 2019 was 17.7%, compared with 19.0% for the year ended December 31, 2018. The increase in EBIT was primarily driven by higher gross profit as a result of product cost reductions, increased shipments, and higher pricing, partially offset by personnel and factory overhead increases to support higher production volumes and manufacturing capacity. In addition, PD is experiencing higher precious metal pricing. Despite an increase in EBIT, our EBIT margin decreased driven by lower gross margins as a result of adding production personnel to support growth and experiencing higher precious metal pricing, partially offset by the benefits of product cost reductions and higher pricing.
PD Adjusted EBIT was $37.7 million for the year ended December 31, 2019, compared with $33.9 million for the year ended December 31, 2018, an increase of $3.8 million or 11.2%. Adjusted EBIT margin for the year ended December 31, 2019 was 21.9%, compared with 23.4% for the year ended December 31, 2018. The increase in adjusted EBIT was primarily driven by higher gross profit as a result of product cost reductions, increased shipments, and higher pricing, partially offset by personnel and factory overhead increases to support higher production volumes and manufacturing capacity. In addition, PD is experiencing higher precious metal pricing. Despite an increase in EBIT, our EBIT margin decreased driven by lower gross margins as a result of adding production personnel to support growth and experiencing higher precious metal pricing, partially offset by the benefits of product cost reductions and higher pricing.
Financial Condition
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, dividends (if any), capital expenditures, and strategic investments. We have secured a revolving line of credit in the United States from a syndicate of commercial banks to provide additional liquidity. Furthermore, if we were to require additional cash above and beyond our cash on the balance sheet, the free cash flow generated by the business, and availability under our revolving credit facility, we would most likely seek to raise long-term financing through the U.S. debt or bank markets.
In May 2016, we sold the Notes and concurrently entered into convertible note hedge transactions and separate warrants. The Notes will mature in November 2021, unless earlier repurchased by us or converted pursuant to their terms. The Notes are unsecured, senior obligations and interest is payable semiannually 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. For additional information, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On January 11, 2017, we completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during 2017. An additional $1.0 million was paid during 2018, with the remaining $0.2 million paid during the first quarter of 2019. This acquisition's operations are included in the PD segment.
On October 11, 2017, we entered into the New Credit Facility. For additional information, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On November 28, 2017, we completed the sale of the Timing Device Business, part of the PD segment, for $130.0 million, plus purchase price adjustments for a net amount of $135.1 million. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On January 19, 2018, we acquired substantially all of the assets of Compex for $18.7 million. The acquired business provides single layer electronic components to the telecommunicaton, fiber optics, and defense markets. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
On January 3, 2019, the Company acquired substantially all of the assets of DITF for $11.1 million. The acquired business provides thin film components to the defense, telecommunication, industrial, and medtech markets. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
On December 20, 2019, the Company acquired substantially all of the assets of the ASIC Design Business for $57.9 million. The acquired business, which does not generate revenues, includes intellectual property and an assembled workforce. The acquisition’s operations are included in the Audio segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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 and financings. Due to the global nature of our operations, a significant portion of our cash is generated and held outside the United States. Our cash and cash equivalents totaled $78.4 million and $73.5 million at December 31, 2019 and 2018, respectively. Of these amounts, cash held by our non-U.S. operations totaled $74.6 million and $55.3 million as of December 31, 2019 and 2018, 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 presented on a consolidated basis (including discontinued operations). Cash flows are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
|
2019
|
|
2018
|
|
2017
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
123.9
|
|
|
$
|
98.5
|
|
|
$
|
92.9
|
|
Investing activities
|
|
(110.5
|
)
|
|
(88.0
|
)
|
|
69.5
|
|
Financing activities
|
|
(8.5
|
)
|
|
(48.6
|
)
|
|
(117.9
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
—
|
|
|
(0.1
|
)
|
|
1.0
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
4.9
|
|
|
$
|
(38.2
|
)
|
|
$
|
45.5
|
|
Operating Activities
Cash provided by operating activities in 2019 increased $25.4 million compared to 2018, primarily due to a net sum of favorable changes in accounts payable, inventories, and receivables. In addition, there was a decrease in income taxes paid and improved earnings before income taxes and discontinued operations, partially offset by the increased payment in 2019 to settle our annual incentive compensation obligation, which was accrued at a higher level in the previous year.
Investing Activities
Capital expenditures, primarily to support capacity expansion, innovation, and cost savings, were $41.2 million and $80.1 million for the years ended December 31, 2019 and 2018, respectively. The cash used in investing activities during 2019 was driven by capital expenditures and the acquisitions of the ASIC Design Business and DITF. The cash used in investing activities during 2018 was driven by capital expenditures and the acquisition of Compex, partially offset with escrow proceeds from the sale of our Timing Device Business in 2017.
Financing Activities
Cash used in financing activities during 2019 is primarily related to the net payments under our revolving credit facility of $9.0 million and the $6.4 million payment of taxes related to net share settlement of equity awards, partially offset by the net proceeds of $9.8 million from exercise of stock-based awards. The cash used in financing activities for 2018 was primarily related to the $41.7 million net payment on our revolving credit facility and the $4.7 million payment of taxes related to net share settlement of equity awards.
Liquidity and Capital Resources
Free Cash Flow
In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure free cash flow and free cash flow as a percentage of revenues. Free cash flow is calculated as cash flow provided by operating activities less capital expenditures. Our management believes these measures are useful in measuring our cash generated from operations that is available to repay debt, pay dividends, fund acquisitions, and repurchase Knowles’ common stock. Free cash flow and free cash flow as a percentage of revenues are not presented in accordance with GAAP and may not be comparable to similarly titled measures used by other companies in our industry. As such, free cash flow and free cash flow as a percentage of revenues should not be considered in isolation from, or as an alternative to, any other liquidity measures determined in accordance with GAAP.
Our businesses tend to have stronger revenues in the third and fourth quarters of each fiscal year. This is particularly true of those businesses that serve the consumer electronics market. Our businesses tend to have short product cycles due to the highly technical nature of the industries they serve, which can result in new OEM product launches that can impact quarterly revenues, earnings, and cash flow.
The following table reconciles our free cash flow to cash flow provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Years Ended December 31,
|
Free Cash Flow
|
|
2019
|
|
2018
|
|
2017
|
Cash flow provided by operating activities
|
|
$
|
123.9
|
|
|
$
|
98.5
|
|
|
$
|
92.9
|
|
Less: Capital expenditures
|
|
(41.2
|
)
|
|
(80.1
|
)
|
|
(51.6
|
)
|
Free cash flow
|
|
$
|
82.7
|
|
|
$
|
18.4
|
|
|
$
|
41.3
|
|
Free cash flow as a percentage of revenues
|
|
9.7
|
%
|
|
2.2
|
%
|
|
5.5
|
%
|
In 2019, we generated free cash flow of $82.7 million, representing 9.7% of revenues, compared to free cash flow in 2018 of $18.4 million, representing 2.2% of revenues. The increase in free cash flow in 2019 compared to 2018 was primarily due to decreased capital expenditures and a net sum of favorable changes in accounts payable, inventories, and receivables.
In 2020, we expect capital expenditures to be in the range of 5.0% to 7.0% of revenues.
Contingent Obligations
We are involved in various legal proceedings, claims, and investigations arising in the normal course of business. Legal contingencies are discussed in Note 15. Commitments and Contingent Liabilities to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
A summary of our contractual obligations and commitments as of December 31, 2019 and the years when these obligations are expected to be due is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(in millions)
|
|
Total
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
Debt (1)
|
|
$
|
172.5
|
|
|
$
|
—
|
|
|
$
|
172.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating leases (2)
|
|
37.5
|
|
|
10.6
|
|
|
17.6
|
|
|
8.0
|
|
|
1.3
|
|
Purchase obligations (3)
|
|
93.3
|
|
|
93.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Finance leases (2)
|
|
10.6
|
|
|
2.4
|
|
|
4.7
|
|
|
3.5
|
|
|
—
|
|
Post-retirement benefits (4)
|
|
1.6
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total obligations
|
|
$
|
315.5
|
|
|
$
|
107.9
|
|
|
$
|
194.8
|
|
|
$
|
11.5
|
|
|
$
|
1.3
|
|
|
|
(1) Relates to the maturity of indebtedness under our New Credit Facility due in October 2022 and our Notes due in November 2021. Does not give effect to any early repayment of or future amounts which may be drawn under the New Credit Facility.
|
(2) Represents commitments related to operating and finance leases. See Note 8. Leases to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
|
(3) Represents off-balance sheet commitments for purchase obligations related to open purchase orders with our vendors.
|
(4) Amounts represent estimated contributions under our subsidiary's non-U.S. defined benefit pension plans. See Note 16. Employee Benefit Plans to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."
|
Borrowings
In May 2016, we issued $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021, unless earlier repurchased by us or converted pursuant to their terms. Interest is payable semiannually in arrears on May 1 and November 1 of each year, commencing on November 1, 2016. The Notes are governed by an indenture (the "Indenture") between us, as issuer, and U.S. Bank National Association as trustee. Upon conversion, we will pay or deliver cash, shares of our common stock or a combination of cash and shares of common stock, at our election. The initial conversion rate is 54.2741 shares of common stock per $1,000 principal amount of Notes. The initial conversion price is $18.4250 per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), we may be required, in certain circumstances, to increase the conversion rate by a number of additional shares for a holder that elects to convert the Notes in connection with such make-whole fundamental change.
On October 11, 2017, Knowles entered into the New Credit Facility which contains 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. The New Credit Facility replaced the Company's Prior Credit Facilities discussed in Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." 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 any currencies agreed by the issuing bank. The New Credit Facility serves as refinancing of indebtedness under and terminates the Prior Credit Facilities.
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 have not 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 Company's total indebtedness to Consolidated EBITDA ratio as of the end of and for the most recent period of four fiscal quarters for which financial statements have been delivered (the “Applicable Rate”); or (2) in the case of borrowings denominated in U.S. dollars, alternate base rate (“ABR”); 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 the swingline lender.
The interest rate under the New Credit Facility is variable based on LIBOR at the time of the borrowing and the Company’s leverage as measured by a total indebtedness to Consolidated EBITDA ratio. Based upon the Company’s total indebtedness to Consolidated EBITDA ratio, the Company’s borrowing rate could range from LIBOR + 1.25% to LIBOR + 2.25%. In addition, a commitment fee accrues on the average daily unused portion of the New Credit Facility at a rate of 0.20% to 0.35%.
We have the right to prepay borrowings under the facilities and to reduce the unutilized portion of the New Credit Facility, in each case, at any time without premium or penalty (except for Eurodollar breakage fees, if any). We are required to prepay borrowings under the term facility with 100% of the net cash proceeds of sales or dispositions of assets or other property (including, among others, the proceeds of issuances of equity interests by subsidiaries), subject to certain reinvestment rights and other exceptions. As we are exposed to market risk for changes in interest rates based on the structure of our indebtedness, we entered into an interest rate swap on November 12, 2014 to convert variable interest rate payments into a fixed rate on a notional amount of $100.0 million of debt for monthly interest payments starting in January 2016 and ending in July 2018. In December 2017, the Company entered into a partial termination of the interest rate swap and reduced the notional amount to $50.0 million.
The facilities contain customary covenants, which include, among others, limitations or restrictions on the incurrence of indebtedness, the incurrence of liens, entry into sales and leaseback transactions, mergers, transfers of all or substantially all assets, transactions with affiliates, and certain transactions limiting the ability of subsidiaries to pay dividends, in each case, subject to certain exceptions. The New Credit Facility includes requirements, to be tested quarterly, that the Company maintains (i) a minimum ratio of Consolidated EBITDA to consolidated interest expense of 3.25 to 1.0, (the "Interest Coverage Ratio"), (ii) a maximum ratio of Consolidated total indebtedness to Consolidated EBITDA of 3.75 to 1.0 ("the Leverage Ratio"), and (iii) a maximum ratio of senior secured indebtedness to Consolidated EBITDA of 3.25 to 1.0 (the "Senior Secured Leverage Ratio"). For these ratios, Consolidated EBITDA and consolidated interest expense are calculated using the most recent four consecutive fiscal quarters in a manner defined in the New Credit Facility. At December 31, 2019, the Company was in compliance with these covenants and it expects to remain in compliance with all of its debt covenants over the next twelve months.
Risk Management
We are exposed to certain market risks which exist as part of our ongoing business operations, including changes in currency exchange rates, the dependence on key customers, price volatility for certain commodities, and changes in interest rates. We do not engage in speculative or leveraged transactions and do not hold or issue financial instruments for trading purposes.
Foreign Currency Exposure
We conduct business through our subsidiaries in many different countries and fluctuations in currency exchange rates could have a significant impact on the reported results of operations, which are presented in U.S. dollars. A significant and growing portion of our products are manufactured in lower-cost locations and sold in various countries. Cross-border transactions, both with external parties and intercompany relationships, could result in increased foreign exchange exposures. A weakening of foreign currencies relative to the U.S. dollar would adversely affect the U.S. dollar value of the Company’s foreign currency-denominated sales, but would be beneficial to the cost of materials, products, and services purchased overseas. A strengthening of foreign currencies relative to the U.S. dollar would positively affect the U.S. dollar value of the Company’s foreign currency-denominated sales, but would have a negative effect on the cost of materials, products, and services purchased overseas. Our foreign currency exposure is primarily driven by changes in the Chinese renminbi (yuan), the Malaysian ringgit, and the Philippine peso. Based on our current sales and manufacturing activity, a sustained 10% weakening of the U.S. dollar for a period of one year would reduce our operating results by approximately $17.4 million pre-tax. See Note 11. Hedging Transactions and Derivative Instruments to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for information on the Company's hedges of foreign currency exchange rate risk.
Dependence on Key Customers; Concentration of Credit
The loss of any key customer and our inability to replace revenues provided by a key customer may have a material adverse effect on our business and financial condition. For the years ended December 31, 2019, 2018, and 2017, Apple Inc. accounted for approximately 22%, 19%, and 19% of our total revenues, respectively. For the year ended December 31, 2017, Samsung Electronics Co., Ltd. accounted for approximately 10% of our total revenues. No other customer accounted for more than 10% of total revenues during these periods. If a key customer fails to meet payment obligations, our operating results and financial condition could be adversely affected.
Commodity Pricing
We use a wide variety of raw materials, primarily metals, and semi-processed or finished components, which are generally available from a number of sources. While the required raw materials are generally available, commodity pricing for various precious metals, such as palladium, gold, brass, stainless steel, and copper, fluctuates. As a result, our operating results are exposed to such fluctuations. Although some cost increases may be recovered through increased prices to customers if commodity prices trend upward, we also attempt to control such costs through fixed-price contracts with suppliers and various other programs through our global supply chain activities.
Interest Rates
Borrowings under our New Credit Facility are at variable interest rates. We did not have variable rate borrowings outstanding as of December 31, 2019.
Critical Accounting Policies
Our Consolidated Financial Statements are based on the application of GAAP. GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues, and expense amounts we report. These estimates can also affect supplemental information contained in our public disclosures, including information regarding contingencies, risk, and our financial condition. The significant accounting policies used in the preparation of our Consolidated Financial Statements are discussed in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. We believe our use of estimates and underlying accounting assumptions conforms to GAAP and is consistently applied. We review valuations based on estimates for reasonableness on a consistent basis.
Revenue Recognition: We adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning January 1, 2018 or later are presented under ASC 606, while prior period results continue to be reported in accordance with previous guidance. We did not recognize a cumulative effect adjustment to retained earnings as of January 1, 2018 as the impact of the standard on the Consolidated Financial Statements was not material. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with our historical practice of recognizing revenue when title and risk of loss pass to the customer.
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our revenue is generated through the manufacture and sale of a broad range of specialized products and components. For product and component sales, each good sold to a customer typically represents a distinct performance obligation. Our performance obligation to provide goods to a customer is typically satisfied at a point in time upon completion of the shipping process as indicated by the terms of the contract, at which point control is transferred to the customer and revenue is recognized. We have no significant arrangements with multiple performance obligations. Remaining performance obligations consist of the aggregate amount of the total transaction price that is unsatisfied or partially satisfied. As of December 31, 2019 and 2018, our total remaining performance obligations were immaterial. We recognize sales-based royalty revenue under third-party license agreements as the related sales are made by licensees.
The terms of a contract or historical business practice can give rise to variable consideration, including customer discounts, rebates, and returns. We estimate variable consideration using either the expected value or most likely amount method. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of revenue will not occur in a subsequent reporting period. Our estimates of variable consideration are based on all reasonably available information (historical, current, and forecasted). Rebates are recognized over the contract period based on expected revenue levels. Sales discounts and rebates totaled $4.7 million, $8.1 million, and $9.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. Returns and allowances totaled $6.6 million, $7.7 million, and $8.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Inventories: Inventories are stated at the lower of cost or net realizable value, determined on the first-in, first-out ("FIFO") basis. The value of inventory may decline as a result of surplus inventory, price reductions, or technological obsolescence. It is the Company’s policy to carry reserves against the carrying value of inventory when items have no future demand (obsolete inventory) and additionally, where inventory items on hand have demand, yet have insufficient forecasted activity to consume the entire stock within a reasonable period. It is the Company’s policy to carry reserves against the carrying value of such at-risk inventory items after considering the nature of the risk and any mitigating factors.
Goodwill and Indefinite-Lived Intangible Assets: Goodwill represents the excess of purchase consideration over the fair value of the net assets of businesses acquired. Goodwill and certain other intangible assets deemed to have indefinite lives (primarily trademarks) are not amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if there are events or circumstances indicating the carrying value of individual reporting units or assets may exceed their respective fair values on a more likely than not basis. The Company performs its annual impairment assessment in the fourth quarter of each year on October 1. Recoverability of goodwill is measured at the reporting unit level. Following the sale of the Timing Device Business on November 28, 2017, the Company has three reporting units. The goodwill balances associated with the Mobile Consumer Electronics ("MCE"), Hearing Health Technologies ("HHT"), and Capacitors reporting units were $740.9 million, $137.8 million, and $31.2 million, respectively, as of December 31, 2019.
The impairment assessment compares the fair value of each reporting unit to its carrying value. Impairment is measured as the amount by which the carrying value of a reporting unit exceeds its fair value. Fair value is estimated using a discounted cash flow model that includes the Company’s market participant assumptions, forecasted future cash flows based on historical performance and future estimated results, determinations of appropriate discount rates, and other assumptions which are considered reasonable and inherent in the discounted cash flow analysis. Significant assumptions used in the assessment include forecasted revenue and terminal growth rates, profit margins, income taxes, and the Company's weighted average cost of capital. These assumptions require significant judgment and actual results may differ from estimated amounts. The fair value of all of the Company’s reporting units exceeded the carrying values by at least 30%, resulting in no goodwill impairment charges. Potential circumstances that could have a negative effect on the fair value of our reporting units include, but are not limited to, lower than forecasted growth rates or profit margins and changes in the weighted average cost of capital. A reduction in the estimated fair value of the reporting units could trigger an impairment in the future. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and intangible assets.
In testing its indefinite-lived trademarks for impairment, the Company uses a relief from royalty method to calculate and compare the fair value of the intangible asset to its carrying value. This method estimates the fair value of trademarks by calculating the present value of royalty income that could hypothetically be earned by licensing the trademark to a third party. Any excess of carrying value over the estimated fair value is recognized as an impairment loss. No impairment of indefinite-lived intangibles was indicated for the years ended December 31, 2019, 2018, or 2017.
See Note 7. Goodwill and Other Intangible Assets to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for additional information on goodwill and indefinite-lived intangible assets.
Other Intangible and Long-Lived Assets: Other intangible assets with determinable lives consist primarily of customer relationships, developed technology, patents, and trademarks and are amortized over their estimated useful lives, typically ranging from 5 to 10 years. We rely on patents and proprietary technology, and seek patent protection for products and production methods. We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. These costs are amortized over the remaining estimated useful life of the patent, which is typically 7 to 10 years. We assess future economic benefit and/or the successful outcome of legal action related to patent defense, which involves considerable management judgment and a different outcome could result in material write-offs of the carrying value of these assets. No legal costs were capitalized related to the defense of our patents during the years ended December 31, 2019, 2018, and 2017.
Long-lived assets (including intangible assets with determinable lives) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows is produced and compared to its carrying value. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value as determined by an estimate of discounted future cash flows.
No impairments were recorded during the years ended December 31, 2019 and 2018. During the year ended December 31, 2017, we recorded pre-tax impairment charges in continuing operations of $5.1 million related to fixed assets and $16.2 million related to intangible assets resulting from an updated strategic plan that was completed for Audio segment product lines. The updated strategic plan identified a decline of future demand for a specific product line, which indicated projected future cash flows may not be sufficient to recover the carrying value of the associated developed technology and property, plant, and equipment assets. See Note 4. Impairments to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for additional details.
Income Taxes and Deferred Tax Balances: We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. A valuation allowance is recorded to reduce deferred tax assets to the net amount that is more likely than not to be realized.
We establish valuation allowances for our deferred tax assets if, based on all available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such assessments, significant weight is given to evidence that can be objectively verified. The assessment of the need for a valuation allowance requires considerable judgment on the part of management with respect to the benefits that could be realized from future taxable income, as well as other positive and negative factors.
We have evaluated our deferred tax assets for each of the reporting periods, including an assessment of cumulative income over the prior three-year period. Since we are in a cumulative loss position in the U.S., there is significant negative evidence that impairs the ability to rely on projections of future income. Due to a lack of significant positive evidence and cumulative losses in the respective prior three-year periods, a valuation allowance was required for the 2019, 2018, and 2017 periods. The valuation allowance was reduced in 2017 as a result of income recognized under the Internal Revenue Code Section 965 tax on foreign deferred earnings and changes to the net operating loss carryforward periods, allowing the use of existing deferred tax liabilities to reduce existing valuation allowances.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Adjustments are made to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that are believed to be appropriate, as well as the related net interest and penalties. The effective tax rates on a continuing operations basis for 2019, 2018, and 2017 were a 25.0% provision, 7.4% benefit, and 66.5% provision, respectively.
On December 22, 2017, the Tax Reform Act was enacted which significantly changed U.S.tax law. Since enactment of the Tax Reform Act, the IRS and U.S. Treasury Department have issued and are expected to issue further interpretive guidance that impacts taxpayers. We will continue to evaluate such guidance as it is issued and will recognize any resulting impact in the period the related regulations are enacted.
Accruals and Reserves: We have accruals and reserves that require the use of estimates and judgment with regard to risk exposure and ultimate liability. We estimate losses under these programs using certain factors, which include but are not limited to, actuarial assumptions, our experience, and relevant industry data. We review these factors quarterly and consider the current level of accruals and reserves adequate relative to current market conditions and experience. We have established liabilities for restructuring activities, in accordance with appropriate accounting principles. These liabilities, for both severance and exit costs, require the use of estimates. Though we believe that these estimates accurately reflect the anticipated costs, actual results may be different than the estimated amounts.
Stock-Based Compensation: The principal awards issued under the stock-based compensation plans include stock options, restricted stock units ("RSUs"), and performance share units ("PSUs"). The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is expected to ultimately vest is generally recognized as expense on a straight-line basis, generally over the explicit service period and is included in Cost of goods sold, Research and development expenses, and Selling and administrative expenses in the Consolidated Statements of Earnings, depending on the functional area of the underlying employees. The cost related to PSUs is recognized based on the expected attainment of performance targets. Changes in estimates that impact the number of shares expected to vest are recognized prospectively through cumulative adjustments.
We use the Black-Scholes valuation model to estimate the fair value of stock options granted to employees. The fair value of each RSU granted is equal to the share price at the date of the grant. The fair value of PSUs is determined by using a binomial model simulation. At the time of grant, we estimate forfeitures, based on historical experience, in order to estimate the portion of the award that will ultimately vest. See Note 14. Equity Incentive Program to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for additional information related to our stock-based compensation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
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FINANCIAL STATEMENT SCHEDULE
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Page
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Knowles Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Knowles Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under Item 8 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Mobile Consumer Electronics (“MCE”) Reporting Unit
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $910 million as of December 31, 2019 and the goodwill associated with the MCE reporting unit was $741 million. Management performs its annual impairment assessment in the fourth quarter of each year on October 1, or more frequently if there are events or circumstances indicating the carrying value of individual reporting units may exceed their respective fair values on a more likely than not basis. Fair value is estimated using a discounted cash flow model. Assumptions used in the assessment include forecasted revenue and terminal growth rates, profit margins, income taxes, and the Company's weighted average cost of capital.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the MCE reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s fair value estimate and significant assumptions, including the forecasted revenue growth rates and profit margins. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the MCE reporting unit, (ii) evaluating the appropriateness of the discounted cash flow model, (iii) testing the completeness, accuracy and relevance of underlying data used in the model, and (iv) evaluating the significant assumptions used by management, including the forecasted revenue growth rates and profit margins. Evaluating management’s assumptions related to the forecasted revenue growth rates and profit margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the MCE reporting unit, (ii) consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model.
Developed technology intangible asset acquired as part of the ASIC Design Business acquisition
As described in Note 3 to the consolidated financial statements, the Company acquired substantially all of the assets of the ASIC Design Business from ams AG for net consideration of $58 million, which included a developed technology intangible asset valued at $33 million. The fair value for the developed technology was determined using the multi-period excess earnings method under the income approach. Significant assumptions used in assessing the fair value of developed technology include expected future cost savings, technology obsolescence rate, and discount rate.
The principal considerations for our determination that performing procedures relating to the developed technology intangible asset acquired as part of the ASIC Design Business acquisition is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the developed technology intangible asset. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence related to management’s significant assumptions, including the expected future cost savings, technology obsolescence rate, and discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the developed technology intangible asset and controls over development of the assumptions related to the valuation of the developed technology intangible asset, including the expected future cost savings, technology obsolescence rate, and discount rate. These procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of the developed technology intangible asset, and (iii) testing management’s excess earnings method used to estimate the fair value of the developed technology intangible asset, using professionals with specialized skill and knowledge to assist in doing so. Testing management’s process included evaluating the appropriateness of the valuation method and the reasonableness of the significant assumptions, including the expected future cost savings, technology obsolescence rate, and discount rate. The reasonableness of the expected future cost savings assumption was evaluated based upon the savings a market participant would expect to realize by owning the developed technology after giving effect to both historical purchases and planned future production levels. The obsolescence rate was evaluated by considering the historical obsolescence of previous and related technology products. Professionals with specialized skill and knowledge were used to assist in the evaluation of the discount rate, which included considering the cost of capital of comparable businesses and other industry factors.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 12, 2020
We have served as the Company’s auditor since 2013.
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except share and per share amounts)
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Years Ended December 31,
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2019
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2018
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2017
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Revenues
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$
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854.8
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$
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826.9
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$
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744.2
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Cost of goods sold
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525.1
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503.9
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|
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452.8
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Impairment charges
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—
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—
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1.4
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Restructuring charges - cost of goods sold
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1.7
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|
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0.4
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4.0
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Gross profit
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328.0
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322.6
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286.0
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Research and development expenses
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96.8
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100.6
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93.4
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Selling and administrative expenses
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145.7
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142.5
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126.6
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Impairment charges
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—
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—
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19.9
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Restructuring charges
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4.3
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1.7
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6.2
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Operating expenses
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246.8
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244.8
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246.1
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Operating earnings
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81.2
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|
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77.8
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39.9
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Interest expense, net
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14.5
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16.0
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20.6
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Other expense (income), net
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0.4
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0.7
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|
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(0.1
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)
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Earnings before income taxes and discontinued operations
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66.3
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|
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61.1
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|
|
19.4
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Provision for (benefit from) income taxes
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16.6
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|
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(4.5
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)
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|
12.9
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Earnings from continuing operations
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49.7
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|
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65.6
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|
|
6.5
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(Loss) earnings from discontinued operations, net
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(0.6
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)
|
|
2.1
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|
|
61.8
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|
Net earnings
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$
|
49.1
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|
|
$
|
67.7
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|
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$
|
68.3
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Earnings per share from continuing operations:
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|
|
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Basic
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$
|
0.55
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|
|
$
|
0.73
|
|
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$
|
0.07
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Diluted
|
$
|
0.53
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|
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$
|
0.72
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|
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$
|
0.07
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(Loss) earnings per share from discontinued operations:
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Basic
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$
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(0.01
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)
|
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$
|
0.02
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|
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$
|
0.69
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Diluted
|
$
|
—
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|
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$
|
0.02
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
Basic
|
$
|
0.54
|
|
|
$
|
0.75
|
|
|
$
|
0.76
|
|
Diluted
|
$
|
0.53
|
|
|
$
|
0.74
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
Basic
|
91,156,124
|
|
|
90,050,051
|
|
|
89,329,794
|
|
Diluted
|
93,439,023
|
|
|
91,194,747
|
|
|
90,490,007
|
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net earnings
|
$
|
49.1
|
|
|
$
|
67.7
|
|
|
$
|
68.3
|
|
|
|
|
|
|
|
Other comprehensive (loss) earnings, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
1.3
|
|
|
(9.9
|
)
|
|
27.1
|
|
|
|
|
|
|
|
Employee benefit plans:
|
|
|
|
|
|
Actuarial (losses) gains and prior service costs arising during period
|
(3.7
|
)
|
|
(0.7
|
)
|
|
0.7
|
|
Amortization or settlement of actuarial losses and prior service costs
|
0.5
|
|
|
0.5
|
|
|
0.6
|
|
Net change in employee benefit plans
|
(3.2
|
)
|
|
(0.2
|
)
|
|
1.3
|
|
|
|
|
|
|
|
Changes in fair value of cash flow hedges:
|
|
|
|
|
|
Unrealized net gains (losses) arising during period
|
0.2
|
|
|
(2.0
|
)
|
|
3.4
|
|
Net losses reclassified into earnings
|
0.7
|
|
|
1.1
|
|
|
0.3
|
|
Total cash flow hedges
|
0.9
|
|
|
(0.9
|
)
|
|
3.7
|
|
|
|
|
|
|
|
Other comprehensive (loss) earnings, net of tax
|
(1.0
|
)
|
|
(11.0
|
)
|
|
32.1
|
|
|
|
|
|
|
|
Comprehensive earnings
|
$
|
48.1
|
|
|
$
|
56.7
|
|
|
$
|
100.4
|
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
78.4
|
|
|
$
|
73.5
|
|
Receivables, net of allowances of $0.8 and $0.6
|
159.6
|
|
|
140.3
|
|
Inventories, net
|
141.8
|
|
|
140.1
|
|
Prepaid and other current assets
|
8.6
|
|
|
11.1
|
|
Total current assets
|
388.4
|
|
|
365.0
|
|
Property, plant, and equipment, net
|
206.5
|
|
|
211.7
|
|
Goodwill
|
909.9
|
|
|
887.9
|
|
Intangible assets, net
|
91.7
|
|
|
56.7
|
|
Operating lease right-of-use assets
|
33.6
|
|
|
—
|
|
Other assets and deferred charges
|
24.5
|
|
|
26.6
|
|
Total assets
|
$
|
1,654.6
|
|
|
$
|
1,547.9
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
87.7
|
|
|
$
|
77.2
|
|
Accrued compensation and employee benefits
|
32.1
|
|
|
40.2
|
|
Operating lease liabilities
|
9.3
|
|
|
—
|
|
Other accrued expenses
|
16.5
|
|
|
20.1
|
|
Federal and other taxes on income
|
5.9
|
|
|
4.3
|
|
Total current liabilities
|
151.5
|
|
|
141.8
|
|
Long-term debt
|
156.8
|
|
|
158.1
|
|
Deferred income taxes
|
2.2
|
|
|
2.1
|
|
Long-term operating lease liabilities
|
25.1
|
|
|
—
|
|
Other liabilities
|
29.9
|
|
|
34.3
|
|
Liabilities of discontinued operations
|
0.6
|
|
|
—
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued
|
—
|
|
|
—
|
|
Common stock - $0.01 par value; 400,000,000 shares authorized; 91,701,745 and 90,212,779 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
0.9
|
|
|
0.9
|
|
Additional paid-in capital
|
1,574.7
|
|
|
1,545.9
|
|
Accumulated deficit
|
(175.1
|
)
|
|
(224.2
|
)
|
Accumulated other comprehensive loss
|
(112.0
|
)
|
|
(111.0
|
)
|
Total stockholders' equity
|
1,288.5
|
|
|
1,211.6
|
|
Total liabilities and stockholders' equity
|
$
|
1,654.6
|
|
|
$
|
1,547.9
|
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total Stockholders' Equity
|
Balance at January 1, 2017
|
$
|
0.9
|
|
|
$
|
1,499.8
|
|
|
$
|
(360.2
|
)
|
|
$
|
(132.1
|
)
|
|
$
|
1,008.4
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
68.3
|
|
|
—
|
|
|
68.3
|
|
Other comprehensive earnings, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
32.1
|
|
|
32.1
|
|
Stock-based compensation expense
|
—
|
|
|
25.1
|
|
|
—
|
|
|
—
|
|
|
25.1
|
|
Common stock issued for exercise of stock options
|
—
|
|
|
3.3
|
|
|
—
|
|
|
—
|
|
|
3.3
|
|
Tax on restricted stock unit vesting
|
—
|
|
|
(5.1
|
)
|
|
—
|
|
|
—
|
|
|
(5.1
|
)
|
Balance at December 31, 2017
|
$
|
0.9
|
|
|
$
|
1,523.1
|
|
|
$
|
(291.9
|
)
|
|
$
|
(100.0
|
)
|
|
$
|
1,132.1
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
67.7
|
|
|
—
|
|
|
67.7
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.0
|
)
|
|
(11.0
|
)
|
Stock-based compensation expense
|
—
|
|
|
27.0
|
|
|
—
|
|
|
—
|
|
|
27.0
|
|
Common stock issued for exercise of stock options
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Tax on restricted stock unit vesting
|
—
|
|
|
(4.7
|
)
|
|
—
|
|
|
—
|
|
|
(4.7
|
)
|
Balance at December 31, 2018
|
$
|
0.9
|
|
|
$
|
1,545.9
|
|
|
$
|
(224.2
|
)
|
|
$
|
(111.0
|
)
|
|
$
|
1,211.6
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
49.1
|
|
|
—
|
|
|
49.1
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
Stock-based compensation expense
|
—
|
|
|
25.2
|
|
|
—
|
|
|
—
|
|
|
25.2
|
|
Common stock issued for exercise of stock options and other
|
—
|
|
|
10.0
|
|
|
—
|
|
|
—
|
|
|
10.0
|
|
Tax on restricted stock unit vesting
|
—
|
|
|
(6.4
|
)
|
|
—
|
|
|
—
|
|
|
(6.4
|
)
|
Balance at December 31, 2019
|
$
|
0.9
|
|
|
$
|
1,574.7
|
|
|
$
|
(175.1
|
)
|
|
$
|
(112.0
|
)
|
|
$
|
1,288.5
|
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Operating Activities
|
|
|
|
|
|
Net earnings
|
$
|
49.1
|
|
|
$
|
67.7
|
|
|
$
|
68.3
|
|
Adjustments to reconcile net earnings to cash from operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
54.4
|
|
|
52.4
|
|
|
57.3
|
|
Stock-based compensation
|
25.2
|
|
|
27.0
|
|
|
25.1
|
|
Impairment of intangibles
|
—
|
|
|
—
|
|
|
16.2
|
|
Non-cash interest expense and amortization of debt issuance costs
|
8.1
|
|
|
7.6
|
|
|
7.6
|
|
Loss on disposal of fixed assets
|
0.2
|
|
|
0.2
|
|
|
—
|
|
Impairment charges on fixed and other assets
|
—
|
|
|
—
|
|
|
5.5
|
|
Gain on sale of business
|
—
|
|
|
(1.6
|
)
|
|
(62.3
|
)
|
Deferred income taxes
|
(0.7
|
)
|
|
8.7
|
|
|
(30.1
|
)
|
Other, net
|
1.3
|
|
|
(2.8
|
)
|
|
4.9
|
|
Changes in assets and liabilities (excluding effects of foreign exchange):
|
|
|
|
|
|
Receivables, net
|
(17.8
|
)
|
|
(0.3
|
)
|
|
2.4
|
|
Inventories, net
|
(0.3
|
)
|
|
(15.7
|
)
|
|
(34.0
|
)
|
Prepaid and other current assets
|
2.7
|
|
|
(1.3
|
)
|
|
(8.4
|
)
|
Accounts payable
|
12.1
|
|
|
(6.3
|
)
|
|
4.9
|
|
Accrued compensation and employee benefits
|
(8.1
|
)
|
|
7.9
|
|
|
(0.9
|
)
|
Other accrued expenses
|
(0.6
|
)
|
|
(8.8
|
)
|
|
7.3
|
|
Accrued taxes
|
2.7
|
|
|
(5.1
|
)
|
|
0.9
|
|
Other non-current assets and non-current liabilities
|
(4.4
|
)
|
|
(31.1
|
)
|
|
28.2
|
|
Net cash provided by operating activities
|
123.9
|
|
|
98.5
|
|
|
92.9
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
Additions to property, plant, and equipment
|
(41.2
|
)
|
|
(80.1
|
)
|
|
(51.6
|
)
|
Acquisitions of business (net of cash acquired)
|
(69.3
|
)
|
|
(18.0
|
)
|
|
(2.5
|
)
|
Proceeds from the sale of business
|
—
|
|
|
10.0
|
|
|
123.1
|
|
Proceeds from the sale of property, plant, and equipment
|
—
|
|
|
0.1
|
|
|
0.5
|
|
Net cash (used in) provided by investing activities
|
(110.5
|
)
|
|
(88.0
|
)
|
|
69.5
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
Payments under revolving credit facility
|
(19.0
|
)
|
|
(47.7
|
)
|
|
(185.0
|
)
|
Borrowings under revolving credit facility
|
10.0
|
|
|
6.0
|
|
|
190.7
|
|
Principal payments on term loan debt
|
—
|
|
|
—
|
|
|
(118.5
|
)
|
Debt issuance costs
|
—
|
|
|
—
|
|
|
(1.7
|
)
|
Payment of consideration owed for acquisitions
|
(1.2
|
)
|
|
(1.0
|
)
|
|
—
|
|
Payments of finance lease obligations
|
(1.7
|
)
|
|
(1.7
|
)
|
|
(1.6
|
)
|
Tax on restricted stock unit vesting
|
(6.4
|
)
|
|
(4.7
|
)
|
|
(5.1
|
)
|
Net proceeds from exercise of stock-based awards
|
9.8
|
|
|
0.5
|
|
|
3.3
|
|
Net cash used in financing activities
|
(8.5
|
)
|
|
(48.6
|
)
|
|
(117.9
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
(0.1
|
)
|
|
1.0
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
4.9
|
|
|
(38.2
|
)
|
|
45.5
|
|
Cash and cash equivalents at beginning of period
|
73.5
|
|
|
111.7
|
|
|
63.4
|
|
Add: Cash and cash equivalents at beginning of period from discontinued operations
|
—
|
|
|
—
|
|
|
2.8
|
|
Less: Cash and cash equivalents at end of period from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents at end of period
|
$
|
78.4
|
|
|
$
|
73.5
|
|
|
$
|
111.7
|
|
|
|
|
|
|
|
Supplemental information - cash paid during the year for:
|
|
|
|
|
|
Income taxes
|
$
|
12.1
|
|
|
$
|
18.0
|
|
|
$
|
13.1
|
|
Interest
|
$
|
7.5
|
|
|
$
|
9.0
|
|
|
$
|
11.3
|
|
See accompanying Notes to Consolidated Financial Statements
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. Summary of Significant Accounting Policies
Background - Knowles Corporation (NYSE:KN) is a market leader and global provider of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medtech, defense, automotive, and industrial markets. The Company uses its leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. Knowles is also a leader in acoustic components, high-end capacitors, and mmWave radio frequency ("RF") solutions for a diverse set of markets. The Company's focus on the customer, combined with its unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enable the Company to deliver innovative solutions that optimize the user experience. References to "Knowles," "the Company," "we," "our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.
On December 20, 2019, the Company acquired substantially all of the assets of the MEMS Microphone Application-specific integrated circuit Design Business (“ASIC Design Business”). See Note 3. Acquisitions for additional information related to the transaction.
On January 3, 2019, the Company acquired substantially all of the assets of DITF Interconnect Technology, Inc. ("DITF"), a thin film components manufacturer. See Note 3. Acquisitions for additional information related to the transaction.
On January 19, 2018, the Company acquired substantially all of the assets of Compex Corporation ("Compex"), a capacitors manufacturer. See Note 3. Acquisitions for additional information related to the transaction.
On November 28, 2017, the Company completed the sale of its high-end oscillators business ("Timing Device Business"). On July 7, 2016, the Company completed the sale of its speaker and receiver product line (“Speaker and Receiver Product Line”). In accordance with Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations and related assets and liabilities for the Timing Device Business and Speaker and Receiver Product Line have been reclassified as discontinued operations for all periods presented. See Note 2. Disposed and Discontinued Operations for additional information related to the transactions.
In January 2017, the Company changed its allocation of resources and internal reporting structure to facilitate delivering growth in its core business. Following these changes, the Company's two reportable segments are Audio and Precision Devices ("PD"). See Note 18. Segment Information for additional information related to the Company’s segments.
Financial Statement Presentation - The Consolidated Financial Statements included in this Annual Report on Form 10-K are presented in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and disclosures. These estimates may be adjusted due to changes in future economic, industry, or customer financial conditions, as well as changes in technology or demand. Estimates are used in accounting for, among other items, allowances for doubtful accounts receivable, inventory reserves, restructuring reserves, warranty reserves, pension and post-retirement plans, stock-based compensation, corporate allocations, useful lives for depreciation and amortization of long-lived assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, deferred tax assets, uncertain income tax positions, changes in tax laws, and contingencies. Actual results may ultimately differ from estimates, although management does not believe such differences would materially affect the financial statements in any individual year. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the Consolidated Financial Statements in the period that they are determined.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and temporary cash investments with original maturities less than three months.
Allowance for Doubtful Accounts – The Company maintains allowances for estimated losses as a result of customers' inability to make required payments. Management evaluates the aging of the accounts receivable balances, the financial condition of its customers, historical trends, and the time outstanding of specific balances to estimate the amount of accounts receivable that may not be collected in the future and records the appropriate provision.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Inventories – Inventories are stated at the lower of cost or net realizable value, determined on the first-in, first-out ("FIFO") basis. The value of inventory may decline as a result of surplus inventory, price reductions, or technological obsolescence. It is the Company’s policy to carry reserves against the carrying value of inventory when items have no future demand (obsolete inventory) and additionally, where inventory items on hand have demand, yet have insufficient forecasted activity to consume the entire stock within a reasonable period. It is the Company’s policy to carry reserves against the carrying value of such at-risk inventory items after considering the nature of the risk and any mitigating factors.
Property, Plant, and Equipment - Property, plant, and equipment includes the historic cost of land, buildings, equipment, and significant improvements to existing plant and equipment or, in the case of acquisitions, a fair market value appraisal of such assets completed at the time of acquisition. Property, plant, and equipment also includes the cost of purchased software. Expenditures for maintenance, repairs, and minor renewals are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and the gain or loss realized on disposition is reflected in earnings. The Company historically depreciates its assets on a straight-line basis over their estimated useful lives as follows: buildings and improvements 5 to 31.5 years; machinery and equipment 1.5 to 7 years; furniture and fixtures 2 to 5 years; vehicles 3 to 5 years; and software 3 to 5 years.
Leases - The Company adopted ASC 842, Leases, on January 1, 2019 under the prospective transition method that did not require comparative period financial statements to be adjusted. Periods prior to January 1, 2019 have been presented in accordance with prior guidance (ASC 840). Refer to the Recently Adopted Accounting Standards section below for additional information.
The Company determines whether an arrangement is a lease at contract inception. Lease liabilities and right-of-use assets are recognized on the lease commencement date based on the net present value of fixed lease payments over the lease term. The Company includes options to extend or terminate a lease within the lease term when it is reasonably certain the option will be exercised. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. Right-of-use assets include prepaid fixed lease payments and exclude lease incentives. As the Company's leases generally do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate to determine the present value of fixed lease payments based on information available at the lease commencement date.
Fixed lease expense for operating leases and right-of-use asset amortization for finance leases are generally recognized on a straight-line basis over the lease term. Variable lease payments, such as payments based on an index rate or usage, are expensed as incurred and excluded from lease liabilities and right-of-use assets. The Company combines lease components and nonlease components such as maintenance into a single lease component, which results in the capitalization of all fixed payments within lease liabilities and right-of-use assets.
Derivative Instruments - The Company uses derivative financial instruments to hedge its exposures to various risks, including interest rate and foreign currency exchange rate risk. The Company does not enter into derivative financial instruments for speculative purposes and does not have a material portfolio of derivative financial instruments. Derivative financial instruments used for hedging purposes must be designated and effective as a hedge of the identified risk exposure at inception of the contract. The Company recognizes all derivatives as either assets or liabilities on the Consolidated Balance Sheets and measures those instruments at fair value. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivatives is recorded as a component of other comprehensive earnings and subsequently recognized in net earnings when the hedged items impact earnings.
Goodwill and Indefinite-Lived Intangible Assets - Goodwill represents the excess of purchase consideration over the fair value of the net assets of businesses acquired. Goodwill and certain other intangible assets deemed to have indefinite lives (primarily trademarks) are not amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if there are events or circumstances indicating the carrying value of individual reporting units or assets may exceed their respective fair values on a more likely than not basis. The Company performs its annual impairment assessment in the fourth quarter of each year on October 1. Recoverability of goodwill is measured at the reporting unit level. Following the sale of the Timing Device Business on November 28, 2017, the Company has three reporting units. The goodwill balances associated with the Mobile Consumer Electronics ("MCE"), Hearing Health Technologies ("HHT"), and Capacitors reporting units were $740.9 million, $137.8 million, and $31.2 million, respectively, as of December 31, 2019.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The impairment assessment compares the fair value of each reporting unit to its carrying value. Impairment is measured as the amount by which the carrying value of a reporting unit exceeds its fair value. Fair value is estimated using a discounted cash flow model that includes the Company’s market participant assumptions, forecasted future cash flows based on historical performance and future estimated results, determinations of appropriate discount rates, and other assumptions which are considered reasonable and inherent in the discounted cash flow analysis. Significant assumptions used in the assessment include forecasted revenue and terminal growth rates, profit margins, income taxes, and the Company's weighted average cost of capital. These assumptions require significant judgment and actual results may differ from estimated amounts. The fair value of all of the Company’s reporting units exceeded the carrying values by at least 30%, resulting in no goodwill impairment charges. Potential circumstances that could have a negative effect on the fair value of our reporting units include, but are not limited to, lower than forecasted growth rates or profit margins and changes in the weighted average cost of capital. A reduction in the estimated fair value of the reporting units could trigger an impairment in the future. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and intangible assets.
In testing its indefinite-lived trademarks for impairment, the Company uses a relief from royalty method to calculate and compare the fair value of the intangible asset to its carrying value. This method estimates the fair value of trademarks by calculating the present value of royalty income that could hypothetically be earned by licensing the trademark to a third party. Any excess of carrying value over the estimated fair value is recognized as an impairment loss. No impairment of indefinite-lived intangibles was indicated for the years ended December 31, 2019, 2018, or 2017.
See Note 7. Goodwill and Other Intangible Assets for additional information on goodwill and indefinite-lived intangible assets.
Other Intangible and Long-Lived Assets - Other intangible assets with determinable lives consist primarily of customer relationships, developed technology, patents, and trademarks and are amortized over their estimated useful lives, typically ranging from 5 to 10 years. The Company relies on patents and proprietary technology, and seeks patent protection for products and production methods. The Company capitalizes external legal costs incurred in the defense of its patents when it believes that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. These costs are amortized over the remaining estimated useful life of the patent, which is typically 7 to 10 years. The Company’s assessment of future economic benefit and/or the successful outcome of legal action related to patent defense involves considerable management judgment and a different outcome could result in material write-offs of the carrying value of these assets. The Company capitalized no legal costs related to the defense of its patents during the years ended December 31, 2019, 2018, and 2017.
Long-lived assets (including intangible assets with determinable lives) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows is produced and compared to its carrying value. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value as determined by an estimate of discounted future cash flows.
The Company recorded no impairments during the years ended December 31, 2019 and 2018. During the year ended December 31, 2017, the Company recorded impairments and other charges related to its continuing operations of $21.3 million. See Note 4. Impairments for additional details.
Foreign Currency - Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, are translated into U.S. dollars at year-end exchange rates. Revenue and expense items are translated using weighted-average yearly exchange rates. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss. Assets and liabilities of an entity that are denominated in currencies other than an entity’s functional currency are re-measured into the functional currency using end of period exchange rates or historical rates where applicable to certain balances. Gains and losses related to these re-measurements are recorded within the Consolidated Statements of Earnings as a component of Other expense (income), net.
Revenue Recognition - The Company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning January 1, 2018 or later are presented under ASC 606, while prior period results continue to be reported in accordance with previous guidance. The Company did not recognize a cumulative effect adjustment to retained earnings as of January 1, 2018 as the impact of the standard on the Consolidated Financial Statements was not material. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company's historical practice of recognizing revenue when title and risk of loss pass to the customer.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The majority of the Company’s revenue is generated through the manufacture and sale of a broad range of specialized products and components. For product and component sales, each good sold to a customer typically represents a distinct performance obligation. The Company’s performance obligation to provide goods to a customer is typically satisfied at a point in time upon completion of the shipping process as indicated by the terms of the contract, at which point control is transferred to the customer and revenue is recognized. The Company has no significant arrangements with multiple performance obligations. Remaining performance obligations consist of the aggregate amount of the total transaction price that is unsatisfied or partially satisfied. As of December 31, 2019 and 2018, our total remaining performance obligations were immaterial. The Company recognizes sales-based royalty revenue under third-party license agreements as the related sales are made by licensees.
The terms of a contract or historical business practice can give rise to variable consideration, including customer discounts, rebates, and returns. The Company estimates variable consideration using either the expected value or most likely amount method. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of revenue will not occur in a subsequent reporting period. Our estimates of variable consideration are based on all reasonably available information (historical, current, and forecasted). Rebates are recognized over the contract period based on expected revenue levels. Sales discounts and rebates totaled $4.7 million, $8.1 million, and $9.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. Returns and allowances totaled $6.6 million, $7.7 million, and $8.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.
The Company elected to account for shipping and handling activities that occur after control of the related good transfers to the customer as fulfillment activities rather than evaluating such activities as performance obligations. As a result, all shipping and handling costs related to contracts with customers are recognized in the Cost of goods sold line on the Consolidated Statements of Earnings, which is consistent with our historical practice. Additionally, the Company elected to apply the practical expedient allowing incremental costs of obtaining a contract to be expensed as incurred if the amortization period of the resulting asset would have been less than one year. These costs primarily consist of sales commissions and the Company has no such significant costs exceeding the one year limit for applying the practical expedient.
Receivables, net from contracts with customers were $152.8 million and $128.6 million as of December 31, 2019 and 2018, respectively. See Note 18. Segment Information for disclosures regarding the disaggregation of revenues.
Stock-Based Compensation – The principal awards issued under the stock-based compensation plans include stock options, restricted stock units ("RSUs"), and performance share units ("PSUs"). The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is expected to ultimately vest is generally recognized as expense on a straight-line basis, generally over the explicit service period and is included in Cost of goods sold, Research and development expenses, and Selling and administrative expenses in the Consolidated Statements of Earnings, depending on the functional area of the underlying employees. The cost related to PSUs is recognized based on the expected attainment of performance targets. Changes in estimates that impact the number of shares expected to vest are recognized prospectively through cumulative adjustments.
The Company uses the Black-Scholes valuation model to estimate the fair value of stock options granted to employees. The fair value of each RSU granted is equal to the share price at the date of the grant. The fair value of each PSU is determined using a binomial model simulation. At the time of grant, the Company estimates forfeitures, based on historical experience, in order to estimate the portion of the award that will ultimately vest. See Note 14. Equity Incentive Program for additional information related to the Company’s stock-based compensation.
Income Taxes - The Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The Company offsets and presents deferred tax liabilities and assets, as well as any related valuation allowance, as a single non-current amount on the Consolidated Balance Sheets on a jurisdictional basis.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The Company establishes valuation allowances for its deferred tax assets if, based on all available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such assessments, significant weight is given to evidence that can be objectively verified. The assessment of the need for a valuation allowance requires considerable judgment on the part of management with respect to the benefits that could be realized from future taxable income, as well as other positive and negative factors. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment.
The Company recognizes tax benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Adjustments are made to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company's financial condition and operating results. The provision for income taxes includes the effects of any reserves that are believed to be appropriate, as well as the related net interest and penalties.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted, which significantly changed U.S. tax law. Since enactment of the Tax Reform Act, the Internal Revenue Service and U.S. Treasury Department have issued and are expected to issue further interpretive guidance that impacts taxpayers. The Company will continue to evaluate such guidance as it is issued and will recognize any resulting impact in the period the related regulations are enacted.
Research and Development Costs – Research and development costs, including qualifying engineering costs, are expensed when incurred.
Non-cash Investing Activities - Purchases of property, plant, and equipment included in accounts payable at December 31, 2019, 2018, and 2017 were $4.7 million, $7.1 million, and $8.5 million, respectively. These non-cash amounts are not reflected as outflows to Additions to property, plant, and equipment within investing activities of the Consolidated Statements of Cash Flows for the respective periods.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12 to simplify the accounting for income taxes. This guidance removes certain exceptions to the general principles in ASC 740 and amends existing guidance to improve consistent application. The standard is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted and prospective application of the guidance is required. The Company has not yet determined the impact of the standard on its Consolidated Financial Statements or its adoption date.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-14 to amend disclosure requirements related to defined benefit pension and other postretirement plans. The standard is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption is permitted and retrospective application of the guidance is required. The Company elected to early adopt the standard in the fourth quarter of 2019, which did not have a significant impact on its disclosures. As the standard relates only to disclosures, there was no impact on the Consolidated Financial Statements. See Note 16. Employee Benefit Plans for disclosures reflecting the amended requirements on a retrospective basis.
In February 2018, the FASB issued ASU 2018-02, which allows the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Reform Act. The standard also requires certain disclosures concerning stranded tax effects regardless of the election with respect to stranded tax effects resulting from the Tax Reform Act. The standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the Tax Reform Act were recognized. The Company elected to reclassify the stranded tax effects resulting from the Tax Reform Act upon adoption of the standard on January 1, 2019. The impact of the reclassification from accumulated other comprehensive loss to accumulated deficit was less than $0.1 million. The Company's policy is to release income tax effects from accumulated other comprehensive loss in the period the underlying item expires.
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|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
In February 2016, the FASB issued ASU 2016-02 and issued subsequent amendments to the initial guidance within ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20, and ASU 2019-01, which are collectively referred to as ASC 842. This guidance requires a lessee to recognize a lease liability and right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The Company adopted the standard as of January 1, 2019 under the prospective transition method that did not require comparative period financial statements to be adjusted. Periods prior to January 1, 2019 have been presented in accordance with prior guidance (ASC 840). See Note 8. Leases for additional information. The Company elected the transition package of practical expedients for leases that commenced before the adoption date, which among other things, allowed the Company to carry forward historical lease classifications. The Company also elected the practical expedient to not separate nonlease components from lease components, which increased lease liabilities and right-of-use assets through the inclusion of fixed payments for nonlease components such as maintenance.
The Company assessed its lease portfolio as of the adoption date as well as implemented accounting processes and enhanced internal controls for the continued maintenance of the lease portfolio under the new standard. The Company recognized approximately $40 million of operating lease liabilities and right-of-use assets on its Consolidated Balance Sheets as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842 as finance lease liabilities and right-of-use assets were recognized on the Consolidated Balance Sheets for periods prior to January 1, 2019 under ASC 840. The standard did not materially impact the Consolidated Statements of Earnings or Consolidated Statements of Cash Flows.
2. Disposed and Discontinued Operations
Management and the Board of Directors periodically conduct strategic reviews of the Company's businesses.
On November 28, 2017, the Company completed the sale of its Timing Device Business, part of the PD segment, for $130.0 million, plus purchase price adjustments for a net amount of $135.1 million. The Company recorded a gain of $63.9 million as a result of the sale, which included $0.4 million of gain amounts reclassified from Accumulated other comprehensive loss into earnings related to currency translation adjustments. The purchase price included $10.0 million held in escrow that was received during the year ended December 31, 2018.
On July 7, 2016, the Company completed the sale of its Speaker and Receiver Product Line for $45.0 million in cash, less purchase price adjustments for a net amount received of $40.6 million.
The results of operations and financial positions of the Timing Device Business and Speaker and Receiver Product Line have been reclassified to discontinued operations for all periods presented as these disposals represent strategic shifts that have a major effect on the Company's results of operations.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Summarized results of the Company's discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92.2
|
|
Cost of goods sold
|
—
|
|
|
—
|
|
|
61.5
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
0.4
|
|
Restructuring charges - cost of goods sold
|
—
|
|
|
—
|
|
|
0.1
|
|
Gross profit
|
—
|
|
|
—
|
|
|
30.2
|
|
Research and development expenses
|
—
|
|
|
—
|
|
|
7.7
|
|
Selling and administrative expenses
|
—
|
|
|
—
|
|
|
18.5
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
0.2
|
|
Operating expenses
|
—
|
|
|
—
|
|
|
26.4
|
|
Other (income) expense, net
|
—
|
|
|
(0.2
|
)
|
|
1.3
|
|
Gain on sale of business (1)
|
—
|
|
|
(1.6
|
)
|
|
(62.3
|
)
|
Earnings from discontinued operations before taxes (2)
|
—
|
|
|
1.8
|
|
|
64.8
|
|
Provision for (benefit from) income taxes
|
0.6
|
|
|
(0.3
|
)
|
|
3.0
|
|
(Loss) earnings from discontinued operations, net of tax
|
$
|
(0.6
|
)
|
|
$
|
2.1
|
|
|
$
|
61.8
|
|
(1) The Company recorded a change in estimated purchase price adjustments related to the Timing Device Business of $1.8 million during the third quarter of 2018.
(2) The Company's policy is to not allocate interest expense to discontinued operations unless it is directly attributable to the operations. The discontinued operations did not have any such interest expense in the periods presented.
Assets and liabilities of discontinued operations are summarized below:
|
|
|
|
|
(in millions)
|
December 31, 2019
|
Liabilities of discontinued operations:
|
|
Other liabilities (1)
|
$
|
0.6
|
|
Total liabilities
|
$
|
0.6
|
|
(1) The Company recorded an unrecognized tax benefit related to the Speaker and Receiver Product Line during the fourth quarter of 2019.
There were no assets and liabilities of discontinued operations as of December 31, 2018.
The following table presents the depreciation, amortization, and capital expenditures related to discontinued operations:
|
|
|
|
|
(in millions)
|
Year Ended December 31, 2017
|
Depreciation
|
$
|
2.3
|
|
Amortization of intangible assets
|
1.2
|
|
Capital expenditures
|
2.1
|
|
There was no depreciation, amortization of intangible assets, or capital expenditures related to discontinued operations during the years ended December 31, 2019 and 2018. There were no capital expenditures in accounts payable at December 31, 2019, 2018, or 2017.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
3. Acquisitions
ASIC Design Business
On December 20, 2019, the Company acquired substantially all of the assets of the ASIC Design Business from ams AG for $57.9 million. The acquired business, which does not generate revenues, includes intellectual property and an assembled workforce. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the Audio segment. Included in the Consolidated Statements of Earnings is a loss before income taxes of $0.1 million from the date of acquisition through December 31, 2019.
The table below represents a preliminary allocation of the purchase price to net assets acquired as of December 20, 2019:
|
|
|
|
|
(in millions)
|
Property, plant, and equipment
|
$
|
0.6
|
|
Developed technology
|
33.3
|
|
In-process research and development
|
3.7
|
|
Non-competition agreement
|
1.6
|
|
Goodwill
|
18.8
|
|
Assumed current liabilities
|
(0.1
|
)
|
Total purchase price
|
$
|
57.9
|
|
The preceding purchase price allocation is subject to change as additional information about the fair values of assets and liabilities becomes available. Any change in the acquisition date fair value of the acquired net assets will change the amount of the purchase price allocated to goodwill. The Company expects to finalize the purchase price allocation as soon as practicable, but not later than one year from the acquisition date.
Intangible Assets
The fair values for developed technology and in-process research and development ("IPR&D") were determined using the multi-period excess earnings method under the income approach. This method reflects the present value of expected future cash flows less charges representing the contribution of other assets to those cash flows. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of developed technology and IPR&D include expected future cost savings, technology obsolescence rates, discount rates, and expected costs to complete IPR&D. Discount rates of 13.0% and 14.0% were applied to the expected future cash flows to reflect the risk related to developed technology and IPR&D, respectively.
Developed technologies will be amortized over an estimated useful life of 6 years based on the technology cycle and cash flows over the forecast period. IPR&D is initially classified as an indefinite-lived intangible asset and assessed for impairment thereafter. Upon completion of the underlying project, IPR&D is reclassified as a definite-lived intangible asset and amortized over its estimated useful life. The IPR&D project is expected to be complete in 2021.
The excess of the total purchase price over the total fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to synergies and the assembled workforce. All of the goodwill resulting from this acquisition is tax deductible. Goodwill has been allocated to the Audio segment, which is the segment expected to benefit from the acquisition.
The Company believes the fair values assigned to intangible assets are based on reasonable assumptions and estimates that approximate the amounts a market participant would pay for these intangible assets as of the acquisition date. Actual results could differ materially from these estimates.
Unaudited Pro-forma Summary
The following unaudited pro-forma summary presents consolidated financial information as if the ASIC Design Business had been acquired on January 1, 2018. The unaudited pro-forma financial information is based on historical results of operations and financial positions of the Company and the ASIC Design Business. The pro-forma results include estimated amortization of definite-lived intangible assets and exclude transaction costs.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The unaudited pro-forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2018. In addition, the unaudited pro-forma information should not be deemed to be indicative of future results.
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Years Ended December 31,
|
(in millions, except share and per share amounts)
|
2019
|
|
2018
|
Earnings from continuing operations:
|
|
|
|
As reported
|
$
|
49.7
|
|
|
$
|
65.6
|
|
Pro-forma
|
40.7
|
|
|
56.1
|
|
Basic earnings per share from continuing operations:
|
|
|
|
As reported
|
$
|
0.55
|
|
|
$
|
0.73
|
|
Pro-forma
|
0.45
|
|
|
0.62
|
|
Diluted earnings per share from continuing operations:
|
|
|
|
As reported
|
$
|
0.53
|
|
|
$
|
0.72
|
|
Pro-forma
|
0.44
|
|
|
0.62
|
|
DITF
On January 3, 2019, the Company acquired substantially all of the assets of DITF for $11.1 million. The acquired business provides thin film components to the defense, telecommunication, industrial, and medtech markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the PD segment. Included in the Consolidated Statements of Earnings are DITF's revenues and earnings before income taxes of $8.9 million and $0.3 million, respectively, from the date of acquisition through December 31, 2019.
The table below represents the final allocation of the purchase price to net assets acquired as of January 3, 2019:
|
|
|
|
|
(in millions)
|
Receivables
|
$
|
1.2
|
|
Inventories
|
0.9
|
|
Property, plant, and equipment
|
2.8
|
|
Customer relationships
|
1.4
|
|
Developed technology
|
1.3
|
|
Trademarks and other amortized intangible assets
|
0.7
|
|
Other assets
|
0.5
|
|
Goodwill
|
3.2
|
|
Assumed liabilities
|
(0.9
|
)
|
Total purchase price
|
$
|
11.1
|
|
Customer relationships, developed technology, and trademarks will be amortized over estimated useful lives of 6 years, 6 years, and 7 years, respectively. The fair value for customer relationships was determined using the excess earnings method under the income approach. The fair values of developed technology and trademarks were determined using the relief from royalty method under the income approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates.
The excess of the total purchase price over the total fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to the assembled workforce and synergies. None of the goodwill resulting from this acquisition is tax deductible. Goodwill has been allocated to the PD segment, which is the segment expected to benefit from the acquisition.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Pro-forma financial information has not been provided as the acquisition did not have a material impact on the Consolidated Statements of Earnings.
Compex
On January 19, 2018, the Company acquired substantially all of the assets of Compex for $16.0 million, plus purchase price adjustments for a net amount of $18.7 million. The asset purchase agreement relating to the acquisition provided for a $0.6 million post-closing working capital adjustment that settled during the second quarter of 2018 as well as a $1.0 million holdback that was paid during the third quarter of 2019 and was previously recorded in the Other accrued expenses line on the Consolidated Balance Sheets. The acquired business provides single layer electronic components to the telecommunication, fiber optics, and defense markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the PD segment. Included in the Consolidated Statements of Earnings are Compex's revenues and earnings before income taxes of $12.6 million and $3.4 million, respectively, from the date of acquisition through December 31, 2018.
The following unaudited pro-forma summary presents consolidated financial information as if Compex had been acquired on January 1, 2017. The unaudited pro-forma financial information is based on historical results of operations and financial positions of the Company and Compex. The pro-forma results include estimated amortization of definite-lived intangible assets and the estimated depreciation expense of the fixed asset step-up to fair value. The pro-forma results exclude transaction costs and the estimated cost of the inventory step-up to fair value.
The unaudited pro-forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2017. In addition, the unaudited pro-forma information should not be deemed to be indicative of future results.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except share and per share amounts)
|
2018
|
|
2017
|
Revenues from continuing operations:
|
|
|
|
As reported
|
$
|
826.9
|
|
|
$
|
744.2
|
|
Pro-forma
|
827.5
|
|
|
755.7
|
|
Earnings from continuing operations:
|
|
|
|
As reported
|
$
|
65.6
|
|
|
$
|
6.5
|
|
Pro-forma
|
66.3
|
|
|
7.4
|
|
Basic earnings per share from continuing operations:
|
|
|
|
As reported
|
$
|
0.73
|
|
|
$
|
0.07
|
|
Pro-forma
|
0.74
|
|
|
0.08
|
|
Diluted earnings per share from continuing operations:
|
|
|
|
As reported
|
$
|
0.72
|
|
|
$
|
0.07
|
|
Pro-forma
|
0.73
|
|
|
0.08
|
|
Other Acquisition
On January 11, 2017, the Company completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during the year ended December 31, 2017. An additional $1.0 million was paid during the year ended December 31, 2018, with the remaining $0.2 million paid in the first quarter of 2019. The financial results of this acquisition were included in the Consolidated Financial Statements from the date of acquisition within the PD segment.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
4. Impairments
The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no asset impairments recorded during the years ended December 31, 2019 and 2018. During the second quarter of 2017, an updated strategic plan was completed for Audio segment product lines. The updated strategic plan identified a decline of future demand for a specific product line, which indicated projected future cash flows may not be sufficient to recover the carrying value of the associated developed technology and property, plant, and equipment assets. The utilization of undiscounted future cash flows was used to determine recoverability of the long-lived assets. The fair value of the intangibles was determined through the use of discounted cash flows, and the fair value of fixed assets was determined using their liquidation value. As a result of this analysis, the Company concluded that the fair values of these long-lived assets were less than their respective carrying values. The Company recorded total impairment charges of $21.3 million, of which $5.1 million was related to fixed assets and $16.2 million was related to intangible assets. The Company recorded $1.4 million of the charges within Impairment charges in Gross profit and recorded $19.9 million within the Impairment charges line item in Operating expenses within the Consolidated Statements of Earnings.
5. Inventories, net
The following table details the major components of inventories, net:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Raw materials
|
$
|
82.8
|
|
|
$
|
70.8
|
|
Work in progress
|
30.9
|
|
|
30.2
|
|
Finished goods
|
53.5
|
|
|
65.3
|
|
Subtotal
|
167.2
|
|
|
166.3
|
|
Less reserves
|
(25.4
|
)
|
|
(26.2
|
)
|
Total
|
$
|
141.8
|
|
|
$
|
140.1
|
|
6. Property, Plant, and Equipment, net
The following table details the major components of property, plant, and equipment, net:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Land
|
$
|
7.7
|
|
|
$
|
7.5
|
|
Buildings and improvements
|
104.5
|
|
|
102.3
|
|
Machinery, equipment, and other
|
533.1
|
|
|
499.9
|
|
Subtotal
|
645.3
|
|
|
609.7
|
|
Less accumulated depreciation
|
(438.8
|
)
|
|
(398.0
|
)
|
Total
|
$
|
206.5
|
|
|
$
|
211.7
|
|
Depreciation expense totaled $47.4 million, $45.9 million, and $46.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. There were no fixed asset impairments recorded during the years ended December 31, 2019 and 2018. The Company recorded fixed asset impairments of $5.1 million for the year ended December 31, 2017.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill by reportable segment for the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Audio
|
|
Precision Devices
|
|
Total
|
Balance at January 1, 2018
|
$
|
859.9
|
|
|
$
|
25.0
|
|
|
$
|
884.9
|
|
Acquisition
|
—
|
|
|
3.0
|
|
|
3.0
|
|
Balance at December 31, 2018
|
859.9
|
|
|
28.0
|
|
|
887.9
|
|
Acquisitions
|
18.8
|
|
|
3.2
|
|
|
22.0
|
|
Balance at December 31, 2019
|
$
|
878.7
|
|
|
$
|
31.2
|
|
|
$
|
909.9
|
|
The gross carrying value and accumulated amortization for each major class of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
(in millions)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
Trademarks
|
$
|
1.0
|
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.2
|
|
Patents
|
40.8
|
|
|
31.5
|
|
|
40.8
|
|
|
26.9
|
|
Customer relationships
|
12.0
|
|
|
3.6
|
|
|
10.6
|
|
|
2.0
|
|
Developed technology
|
36.5
|
|
|
0.7
|
|
|
4.4
|
|
|
2.7
|
|
Non-competition agreements
|
1.8
|
|
|
0.1
|
|
|
0.2
|
|
|
—
|
|
Total
|
92.1
|
|
|
36.1
|
|
|
56.5
|
|
|
31.8
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
Trademarks
|
32.0
|
|
|
|
|
32.0
|
|
|
|
IPR&D
|
3.7
|
|
|
|
|
—
|
|
|
|
Total
|
35.7
|
|
|
|
|
32.0
|
|
|
|
Total intangible assets, net
|
$
|
91.7
|
|
|
|
|
$
|
56.7
|
|
|
|
As of December 31, 2019, the weighted average remaining useful lives for the amortizable intangible assets are: trademarks at 5.5 years, patents at 2.0 years, customer relationships at 6.7 years, developed technology at 6.0 years, and non-competition agreements at 3.0 years. The weighted average remaining useful life in total for all amortizable intangible assets was 5.3 years as of December 31, 2019.
Total amortization expense for the years ended December 31, 2019, 2018, and 2017 was $7.0 million, $6.5 million, and $7.3 million, respectively. Amortization expense for the next five years, based on current intangible balances, is estimated to be as follows:
|
|
|
|
|
(in millions)
|
|
2020
|
$
|
13.0
|
|
2021
|
13.0
|
|
2022
|
7.7
|
|
2023
|
7.1
|
|
2024
|
7.0
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
8. Leases
The Company has leases for manufacturing, sales, support, and engineering facilities, certain manufacturing and office equipment, and vehicles. The majority of the leases have remaining terms of 1 to 8 years, some of which include options to extend the leases for up to 6 years, and some of which include options to terminate the leases within 1 year. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company subleases certain facilities to third parties.
The following table details the components of lease cost:
|
|
|
|
|
(in millions)
|
Year Ended
December 31, 2019
|
Operating lease cost (1)
|
$
|
9.8
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
2.2
|
|
Interest on lease liabilities
|
0.2
|
|
Sublease income
|
(2.9
|
)
|
Total lease cost
|
$
|
9.3
|
|
(1) Includes short-term and variable lease costs, which were immaterial.
The components of lease cost other than Interest on lease liabilities are presented within the Cost of goods sold, Research and development expenses, and Selling and administrative expenses lines on the Consolidated Statements of Earnings based on the use of the underlying assets. Interest on lease liabilities is presented within the Interest expense, net line on the Consolidated Statements of Earnings.
The following table presents supplemental balance sheet information related to finance leases:
|
|
|
|
|
|
(in millions)
|
Balance Sheet Line
|
December 31, 2019
|
Finance lease right-of-use assets
|
Property, plant, and equipment, net
|
$
|
11.7
|
|
|
|
|
Current finance lease liabilities
|
Other accrued expenses
|
$
|
2.4
|
|
Long-term finance lease liabilities
|
Other liabilities
|
6.9
|
|
Total finance lease liabilities
|
|
$
|
9.3
|
|
The following table presents supplemental cash flow information related to leases:
|
|
|
|
|
(in millions)
|
Year Ended
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
10.4
|
|
Operating cash flows from finance leases
|
0.6
|
|
Financing cash flows from finance leases
|
1.7
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
2.6
|
|
Finance leases
|
0.3
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The following table details weighted-average remaining lease terms and discount rates:
|
|
|
|
|
December 31, 2019
|
Weighted-average remaining lease term (in years):
|
|
Operating leases
|
4.3
|
|
Finance leases
|
5.1
|
|
Weighted-average discount rate:
|
|
Operating leases
|
4.3
|
%
|
Finance leases
|
5.6
|
%
|
The following table details maturities of lease liabilities as of December 31, 2019:
|
|
|
|
|
|
|
|
|
(in millions)
|
Operating Leases
|
|
Finance Leases
|
2020
|
$
|
10.6
|
|
|
$
|
2.4
|
|
2021
|
9.3
|
|
|
2.4
|
|
2022
|
8.3
|
|
|
2.3
|
|
2023
|
6.3
|
|
|
2.3
|
|
2024
|
1.7
|
|
|
1.2
|
|
2025 and thereafter
|
1.3
|
|
|
—
|
|
Total lease payments
|
37.5
|
|
|
10.6
|
|
Less interest
|
(3.1
|
)
|
|
(1.3
|
)
|
Present value of lease liabilities
|
$
|
34.4
|
|
|
$
|
9.3
|
|
Years Ended December 31, 2018 and 2017
Total rental expense for all operating leases, net of sublease rental income, was $7.3 million and $6.8 million for the years ended December 31, 2018 and 2017, respectively. Total sublease rental income was $2.3 million and $2.2 million for the years ended December 31, 2018 and 2017, respectively. Contingent rentals under the operating leases were not significant.
The aggregate future minimum lease payments for capital and operating leases as of December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
Operating Leases
|
|
Capital Leases
|
2019
|
$
|
9.7
|
|
|
$
|
2.3
|
|
2020
|
9.3
|
|
|
2.3
|
|
2021
|
8.8
|
|
|
2.3
|
|
2022
|
8.1
|
|
|
2.3
|
|
2023
|
6.1
|
|
|
2.3
|
|
2024 and thereafter
|
3.8
|
|
|
2.6
|
|
Total minimum lease payments
|
45.8
|
|
|
14.1
|
|
Less sublease rental income
|
(8.8
|
)
|
|
—
|
|
Net minimum lease payments
|
$
|
37.0
|
|
|
14.1
|
|
Less imputed interest
|
|
|
(1.6
|
)
|
Present value of capital lease obligations
|
|
|
$
|
12.5
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
9. Other Accrued Expenses and Other Liabilities
The following table details the major components of other accrued expenses:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Sales volume rebates
|
$
|
3.3
|
|
|
$
|
4.7
|
|
Accrued short-term finance leases
|
2.4
|
|
|
2.4
|
|
Accrued taxes other than income taxes
|
2.0
|
|
|
2.1
|
|
Accrued insurance
|
1.9
|
|
|
1.6
|
|
Restructuring and exit costs
|
1.4
|
|
|
0.9
|
|
Warranty
|
0.9
|
|
|
0.5
|
|
Hedging liability
|
0.3
|
|
|
0.6
|
|
Other (1)
|
4.3
|
|
|
7.3
|
|
Total
|
$
|
16.5
|
|
|
$
|
20.1
|
|
(1) Represents other miscellaneous accruals, none of which are individually significant.
The following table details the major components of other liabilities:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Deferred compensation, including defined benefit plans
|
$
|
17.1
|
|
|
$
|
17.0
|
|
Long-term finance leases
|
6.9
|
|
|
10.1
|
|
Unrecognized tax benefits
|
4.2
|
|
|
3.5
|
|
Restructuring and exit costs
|
—
|
|
|
0.2
|
|
Other
|
1.7
|
|
|
3.5
|
|
Total
|
$
|
29.9
|
|
|
$
|
34.3
|
|
Warranty Accruals
Estimated warranty program claims are provided for at the time of sale. Amounts provided for are based on historical costs and adjusted for new claims. The changes in the carrying amount of product warranties were as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
Beginning balance, January 1
|
$
|
0.5
|
|
|
$
|
2.1
|
|
Provision for warranties
|
3.8
|
|
|
0.4
|
|
Settlements made
|
(3.4
|
)
|
|
(1.9
|
)
|
Other adjustments, including currency translation
|
—
|
|
|
(0.1
|
)
|
Ending balance, December 31
|
$
|
0.9
|
|
|
$
|
0.5
|
|
10. Restructuring and Related Activities
Restructuring and related activities are designed to better align the Company's operations with current market conditions through targeted facility consolidations, headcount reductions, and other measures to further optimize operations.
During the year ended December 31, 2019, the Company recorded restructuring charges of $1.7 million within Gross profit, primarily for actions associated with transferring certain operations of capacitors manufacturing to other existing facilities in order to further optimize operations in the PD segment, as well as rationalizing the Audio segment workforce. The Company also recorded restructuring charges of $4.3 million within Operating expenses, primarily for actions associated with rationalizing the Audio segment workforce.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
During the year ended December 31, 2018, the Company recorded restructuring charges of $0.4 million within Gross profit, primarily for actions associated with transferring certain operations of capacitors manufacturing to other existing facilities in order to further optimize operations in the PD segment. The Company also recorded restructuring charges of $1.7 million within Operating expenses, primarily for actions associated with rationalizing the Audio segment workforce.
During the year ended December 31, 2017, the Company recorded restructuring charges of $4.0 million within Gross profit for actions primarily associated with transferring certain operations of hearing health manufacturing to an existing, lower-cost Asian manufacturing facility. These charges were recorded within the Audio segment. The Company also recorded restructuring charges of $6.2 million within Operating expenses, primarily for actions associated with rationalizing the workforce.
The following table details restructuring charges incurred by reportable segment for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Audio
|
$
|
4.8
|
|
|
$
|
1.4
|
|
|
$
|
8.1
|
|
Precision Devices
|
0.8
|
|
|
0.5
|
|
|
0.1
|
|
Corporate
|
0.4
|
|
|
0.2
|
|
|
2.0
|
|
Total
|
$
|
6.0
|
|
|
$
|
2.1
|
|
|
$
|
10.2
|
|
The following table details the Company’s severance and other restructuring accrual activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Severance Pay and Benefits
|
|
Contract Termination and Other Costs
|
|
Total
|
Balance at January 1, 2017
|
$
|
2.4
|
|
|
$
|
0.4
|
|
|
$
|
2.8
|
|
Restructuring charges (1)
|
8.4
|
|
|
1.8
|
|
|
10.2
|
|
Payments
|
(6.5
|
)
|
|
(1.8
|
)
|
|
(8.3
|
)
|
Other, including foreign currency
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Balance at December 31, 2017
|
4.7
|
|
|
0.4
|
|
|
5.1
|
|
Restructuring charges
|
2.1
|
|
|
—
|
|
|
2.1
|
|
Payments
|
(5.9
|
)
|
|
(0.1
|
)
|
|
(6.0
|
)
|
Other, including foreign currency
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Balance at December 31, 2018
|
0.8
|
|
|
0.3
|
|
|
1.1
|
|
Restructuring charges
|
6.0
|
|
|
—
|
|
|
6.0
|
|
Payments
|
(5.4
|
)
|
|
—
|
|
|
(5.4
|
)
|
Other, including foreign currency (2)
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Balance at December 31, 2019
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
|
(1)
|
During the year ended December 31, 2017, the Company reversed $1.2 million of previously recorded restructuring charges in Gross profit due to subsequent developments that impacted the previously estimated amounts.
|
(2) Contract termination accruals related to leases of $0.3 million were reclassified to the related operating lease right-of-use assets upon adoption of ASC 842 on January 1, 2019.
The severance and restructuring accruals are recorded in the following line items on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Other accrued expenses
|
$
|
1.4
|
|
|
$
|
0.9
|
|
Other liabilities
|
—
|
|
|
0.2
|
|
Total
|
$
|
1.4
|
|
|
$
|
1.1
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
11. Hedging Transactions and Derivative Instruments
The Company is affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as "market risks." The Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks, which are primarily foreign currency risk and interest rate risk related to ongoing business operations.
Cash Flow Hedging
The Company uses cash flow hedges to minimize the variability in cash flows of assets, liabilities, or forecasted transactions caused by fluctuations in foreign currency exchange rates or market interest rates. These derivatives, which are designated cash flow hedges, are carried at fair value. The changes in their fair values are recorded to Accumulated Other Comprehensive Income (Loss) ("AOCI") and reclassified in current earnings when the hedge contract matures or becomes ineffective.
To manage its exposure to foreign currency exchange rates, the Company has entered into currency deliverable forward contracts. These derivative instruments allow the Company to hedge portions of its forecasted intercompany sales, which are expected to occur within the next twelve months and are denominated in non-functional currencies. The Company maintains a foreign currency cash flow hedging program primarily to reduce the risk that the net U.S. dollar cash inflows from non-U.S. dollar sales and non-U.S. dollar net cash outflows from procurement activities will be adversely affected by changes in foreign currency exchange rates. At December 31, 2019 and 2018, the notional value of the derivatives related to currency forward contracts, principally the Chinese yuan, Malaysian ringgit, and Philippine peso, was $61.1 million and $41.6 million, respectively.
To manage its exposure to market risk for changes in interest rates, the Company entered into an interest rate swap on November 12, 2014 to convert variable interest rate payments into a fixed rate on a notional amount of $100.0 million of debt for monthly interest payments that began in January 2016. The Company designated the swap as a cash flow hedge with re-measurement gains and losses recorded through AOCI. In December 2017, the Company entered into a partial termination of the interest rate swap and reduced the notional amount to $50.0 million. The interest rate swap ended in July 2018.
Economic (Non-Designated) Hedging
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency risk. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effectively economic hedges. The changes in fair value of these economic hedges are immediately recognized in earnings.
The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in non-functional currencies. The Company does not enter into these hedges for speculative reasons. These derivatives are carried at fair value with changes in fair value immediately recognized in earnings within Other expense (income), net. In addition, these derivative instruments minimize the impact of exchange rate movements on the Company’s balance sheet, as the gains or losses on these derivatives are intended to offset gains and losses from the reduction of the hedged assets and liabilities. At December 31, 2019 and 2018, the notional value of the derivatives related to economic hedging was $41.8 million and $19.8 million, respectively.
The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates, or other financial indices. The Company does not view the fair values of its derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions or other exposures. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Fair Value Measurements
All derivatives are carried at fair value on the Company’s Consolidated Balance Sheets. ASC 820, Fair Value Measurement, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 - Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company determines the fair values of its derivatives based on standard valuation models or observable market inputs such as quoted market prices, foreign currency exchange rates, or interest rates; therefore, the Company classifies the derivatives within Level 2 of the valuation hierarchy.
The Company early adopted ASU 2017-12 as of January 1, 2018. As the standard required adoption of the amended presentation requirements on a prospective basis, the Company began presenting the impact of foreign exchange contracts qualifying as cash flow hedges within the Cost of goods sold line on the Consolidated Statements of Earnings as of January 1, 2018. These amounts were classified in the Other expense (income), net line in prior periods. This change aligns the presentation of the impact of these hedges with the same line on the Consolidated Statements of Earnings that is used to present the earnings effect of the hedged item.
The fair values of derivative instruments held by the Company are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets (Liabilities)
|
Hedge Type
|
Contract Type
|
Balance Sheet Line
|
December 31, 2019
|
|
December 31, 2018
|
Derivatives designated as hedging instruments
|
|
|
|
Cash flow hedges
|
Foreign exchange contracts
|
Prepaid and other current assets
|
$
|
0.9
|
|
|
$
|
0.2
|
|
Cash flow hedges
|
Foreign exchange contracts
|
Other accrued expenses
|
(0.2
|
)
|
|
(0.6
|
)
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
Economic hedges
|
Foreign exchange contracts
|
Prepaid and other current assets
|
0.5
|
|
|
0.2
|
|
Economic hedges
|
Foreign exchange contracts
|
Other accrued expenses
|
(0.1
|
)
|
|
—
|
|
The pre-tax amount of unrealized gain (loss) recognized in accumulated other comprehensive loss on derivatives designated as hedging instruments is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Hedge Type
|
Contract Type
|
|
2019
|
|
2018
|
|
2017
|
Cash flow hedges
|
Foreign exchange contracts
|
|
$
|
0.2
|
|
|
$
|
(2.5
|
)
|
|
$
|
3.6
|
|
Cash flow hedges
|
Interest rate contracts
|
|
—
|
|
|
0.1
|
|
|
0.3
|
|
There was no tax benefit or expense for the year ended December 31, 2019. The table above excludes a tax benefit of $0.4 million and tax expense of $0.5 million for the years ended December 31, 2018 and 2017, respectively.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The pre-tax impact of derivatives on the Consolidated Statements of Earnings is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
Hedge Type
|
Contract Type
|
|
Cost of goods sold
|
Other expense (income), net
|
|
Cost of goods sold
|
Interest expense, net
|
Other expense (income), net
|
|
Interest expense, net
|
Other expense (income), net
|
Total amounts per Consolidated Statements of Earnings
|
|
$
|
525.1
|
|
$
|
0.4
|
|
|
$
|
503.9
|
|
$
|
16.0
|
|
$
|
0.7
|
|
|
$
|
20.6
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of derivatives designated as hedging instruments
|
|
|
|
Amount of loss (gain) reclassified from accumulated other comprehensive loss into earnings:
|
Cash flow hedges
|
Foreign exchange contracts
|
|
0.9
|
|
—
|
|
|
1.4
|
|
—
|
|
—
|
|
|
—
|
|
(0.3
|
)
|
Cash flow hedges
|
Interest rate contracts
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
0.8
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of derivatives not designated as hedging instruments
|
|
|
|
Amount of (gain) loss recognized in earnings:
|
|
|
|
|
|
|
|
|
|
|
Economic hedges
|
Foreign exchange contracts
|
|
—
|
|
(0.9
|
)
|
|
—
|
|
—
|
|
0.9
|
|
|
—
|
|
(0.3
|
)
|
12. Borrowings
Borrowings (net of debt issuance costs, debt discount, and amortization) consist of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
3.25% convertible senior notes
|
$
|
156.8
|
|
|
$
|
149.1
|
|
Revolving credit facility
|
—
|
|
|
9.0
|
|
Total
|
156.8
|
|
|
158.1
|
|
Less current maturities (1)
|
—
|
|
|
—
|
|
Total long-term debt
|
$
|
156.8
|
|
|
$
|
158.1
|
|
(1) There are no required principal payments due under the 3.25% convertible senior notes until maturity in November 2021.
Total debt principal payments over the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Debt principal payments
|
$
|
—
|
|
|
$
|
172.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
3.25% Convertible Senior Notes Due November 1, 2021
In May 2016, the Company issued $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021 (the "Notes"), unless earlier repurchased by the Company or converted pursuant to their terms. Interest is payable semiannually in arrears on May 1 and November 1 of each year and commenced on November 1, 2016.
The Notes are governed by an Indenture (the "Indenture") between the Company, as issuer, and U.S. Bank National Association as trustee. Upon conversion, the Company will pay or deliver cash, shares of the Company's common stock, or a combination of cash and shares of common stock, at the Company's election. The Company’s current intent is to settle the principal amount of the Notes in cash. The initial conversion rate is 54.2741 shares of common stock per $1,000 principal amount of Notes. The initial conversion price is $18.4250 per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), the Company may be required, in certain circumstances, to increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Prior to the close of business on the business day immediately preceding August 1, 2021, the Notes will be convertible only under the following circumstances:
|
|
|
=
|
during any calendar quarter and only during such calendar quarters, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
|
=
|
during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
|
=
|
upon the occurrence of specified corporate events.
|
On or after August 1, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. As of December 31, 2019, no event has occurred that would permit the conversion of the Notes. The Notes are the Company’s senior unsecured obligations.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the liability component, totaling $5.0 million, are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component, totaling $1.3 million, were netted with the equity component in stockholders' equity.
The Notes consist of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Liability component:
|
|
|
|
Principal
|
$
|
172.5
|
|
|
$
|
172.5
|
|
Less debt issuance costs and debt discount, net of amortization
|
(15.7
|
)
|
|
(23.4
|
)
|
Total
|
156.8
|
|
|
149.1
|
|
Less current maturities (1)
|
—
|
|
|
—
|
|
Long-term portion
|
$
|
156.8
|
|
|
$
|
149.1
|
|
|
|
|
|
Equity component (2)
|
$
|
29.9
|
|
|
$
|
29.9
|
|
(1) There are no required principal payments due until maturity in November 2021.
(2) Recorded in the Consolidated Balance Sheets within additional paid-in capital, inclusive of the $1.3 million of issuance costs
in equity.
The total estimated fair value of the Notes at December 31, 2019 was $226.3 million. The fair value was determined based on the closing trading price of the Notes as of the last trading day of 2019.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The following table sets forth total interest expense recognized related to the Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
3.25% coupon
|
$
|
5.6
|
|
|
$
|
5.6
|
|
|
$
|
5.6
|
|
Amortization of debt issuance costs
|
0.9
|
|
|
0.9
|
|
|
0.9
|
|
Amortization of debt discount
|
6.8
|
|
|
6.3
|
|
|
5.8
|
|
Total
|
$
|
13.3
|
|
|
$
|
12.8
|
|
|
$
|
12.3
|
|
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions (the “Note Hedges”) with respect to its common stock. In the second quarter of 2016, the Company paid an aggregate amount of $44.5 million for the Note Hedges. The Note Hedges will expire upon maturity of the Notes. The Note Hedges are intended to offset the potential dilution upon conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes in the event that the market value per share of the Company's common stock, as measured under the Note Hedges, is greater than the strike price of the Note Hedges, which initially corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. The Note Hedges are separate transactions entered into by the Company, and are not part of the Notes or the Warrants, and have been accounted for as part of additional paid-in capital. Holders of the Notes do not have any rights with respect to the Note Hedges.
Warrants
In addition to the Note Hedges, in the second quarter of 2016, the Company entered into warrant transactions, whereby the Company sold warrants to acquire shares of the Company's common stock at a strike price of $21.1050 per share (the “Warrants”). The Company received aggregate proceeds of $39.1 million from the sale of the Warrants. If the market price per share of the Company's common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants could have a dilutive effect on the Company's common stock, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. The Warrants are separate transactions entered into by the Company, and are not part of the Notes or the Note Hedges, and have been accounted for as part of additional paid-in capital. Holders of the Notes and Note Hedges do not have any rights with respect to the Warrants.
Revolving Credit Facility
Revolving credit facility borrowings consist of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
$400.0 million revolving credit facility due October 2022
|
$
|
—
|
|
|
$
|
9.0
|
|
Less current maturities
|
—
|
|
|
—
|
|
Long-term portion
|
$
|
—
|
|
|
$
|
9.0
|
|
On October 11, 2017, the Company entered into a Revolving Credit Facility Agreement (the "New Credit Facility"). The New Credit Facility contains 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 any currencies agreed by the issuing bank.
The New Credit Facility serves as refinancing of indebtedness 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 (“Prior Credit Facilities”).
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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 Notes have not 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 Rate”); or (2) in the case of borrowings denominated in U.S. dollars, alternate base rate (“ABR”); 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 the swingline lender.
The interest rate under the New Credit Facility is variable based on LIBOR at the time of the borrowing and the Company’s leverage as measured by a total indebtedness to Consolidated EBITDA ratio. Based upon the Company’s total indebtedness to Consolidated EBITDA ratio, the Company’s borrowing rate could range from LIBOR + 1.25% to LIBOR + 2.25%. In addition, a commitment fee accrues on the average daily unused portion of the New Credit Facility at a rate of 0.20% to 0.35%.
The New Credit Facility includes requirements, to be tested quarterly, that the Company maintains (i) a minimum ratio of Consolidated EBITDA to consolidated interest expense of 3.25 to 1.0, (the "Interest Coverage Ratio"), (ii) a maximum ratio of Consolidated total indebtedness to Consolidated EBITDA of 3.75 to 1.0 (the "Leverage Ratio"), and (iii) a maximum ratio of senior secured indebtedness to Consolidated EBITDA of 3.25 to 1.0 (the "Senior Secured Leverage Ratio"). For these ratios, Consolidated EBITDA and consolidated interest expense are calculated using the most recent four consecutive fiscal quarters in a manner defined in the New Credit Facility. At December 31, 2019, the Company was in compliance with these covenants and it expects to remain in compliance with all of its debt covenants over the next twelve months.
On January 27, 2014, the Company entered into a $200.0 million five-year senior secured revolving credit facility as well as a $300.0 million five-year senior secured term loan facility pursuant to a Credit Agreement (the "Original Credit Agreement"), which are referred to collectively as the Prior Credit Facilities.
On December 31, 2014, the Company amended its Prior Credit Facilities to (i) increase the amount of the revolving credit facility in the Original Credit Agreement to $350.0 million from $200.0 million, (ii) increase the amount of the letter of credit subfacility in the Original Credit Agreement to $50.0 million from $25.0 million, (iii) eliminate the swing line subfacility in the amount of up to $35.0 million in the Original Credit Agreement, and (iv) reduce to $100.0 million from $250.0 million the amount of additional incremental revolving or term loans in the Original Credit Agreement. All other terms and conditions of the Prior Credit Facilities remained essentially the same.
On February 9, 2016, the Company entered into a third amendment to its Prior Credit Facilities that includes a permanent reduction by the Company of the aggregate revolving commitment under the Prior Credit Facilities from $350.0 million to $300.0 million.
On April 27, 2016, the Company entered into a fourth amendment to its Prior Credit Facilities to permit the Company to execute the offering of the Notes and the related transactions.
The weighted-average interest rate on the Company's borrowings under the New Credit Facility and Prior Credit Facilities was 3.98%, 3.56%, and 3.58% for the years ended December 31, 2019, 2018, and 2017, respectively. The weighted-average interest rate on the Company's borrowings under the New Credit Facility and Prior Credit Facilities for the years ended December 31, 2018 and 2017 includes interest expense related to the monthly interest rate swap settlements that ended in July 2018. The weighted-average commitment fee on the revolving lines of credit was 0.23%, 0.24%, and 0.36% for the years ended December 31, 2019, 2018, and 2017, respectively.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Interest expense and interest income for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Interest expense (1)
|
$
|
15.3
|
|
|
$
|
16.6
|
|
|
$
|
20.8
|
|
Interest income
|
(0.8
|
)
|
|
(0.6
|
)
|
|
(0.2
|
)
|
Interest expense, net
|
$
|
14.5
|
|
|
$
|
16.0
|
|
|
$
|
20.6
|
|
(1) During 2017, the Company wrote off $0.4 million of debt issuance costs related to the Prior Credit Facilities to interest expense upon entering into the New Credit Facility.
See Note 11. Hedging Transactions and Derivative Instruments for information on derivatives used to manage interest rate risk.
13. Income Taxes
The components of earnings before income taxes and discontinued operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
(48.3
|
)
|
|
$
|
(34.1
|
)
|
|
$
|
402.7
|
|
Foreign
|
114.6
|
|
|
95.2
|
|
|
(383.3
|
)
|
Total earnings before income taxes and discontinued operations
|
$
|
66.3
|
|
|
$
|
61.1
|
|
|
$
|
19.4
|
|
Income tax expense (benefit) for the years ended December 31, 2019, 2018, and 2017 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
0.7
|
|
|
$
|
(25.0
|
)
|
|
$
|
28.9
|
|
State and local
|
0.2
|
|
|
0.1
|
|
|
0.1
|
|
Foreign
|
15.9
|
|
|
11.6
|
|
|
11.7
|
|
Total current tax expense (benefit)
|
$
|
16.8
|
|
|
$
|
(13.3
|
)
|
|
$
|
40.7
|
|
Deferred:
|
|
|
|
|
|
U.S. Federal
|
$
|
0.1
|
|
|
$
|
7.8
|
|
|
$
|
(26.8
|
)
|
State and local
|
(0.1
|
)
|
|
0.2
|
|
|
—
|
|
Foreign
|
(0.2
|
)
|
|
0.8
|
|
|
(1.0
|
)
|
Total deferred tax (benefit) expense
|
(0.2
|
)
|
|
8.8
|
|
|
(27.8
|
)
|
Total income tax expense (benefit)
|
$
|
16.6
|
|
|
$
|
(4.5
|
)
|
|
$
|
12.9
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The reconciliation of the U.S. Federal income tax rate to the Company’s effective income tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
U.S. Federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of Federal income tax benefit
|
0.2
|
%
|
|
0.4
|
%
|
|
(0.2
|
)%
|
Foreign operations tax effect
|
5.0
|
%
|
|
4.0
|
%
|
|
27.0
|
%
|
Research and experimentation tax credits
|
(5.0
|
)%
|
|
(5.0
|
)%
|
|
(11.6
|
)%
|
Valuation allowance
|
15.0
|
%
|
|
22.9
|
%
|
|
60.8
|
%
|
Tax contingencies
|
1.3
|
%
|
|
(4.3
|
)%
|
|
6.6
|
%
|
Tax holiday
|
(24.6
|
)%
|
|
(24.3
|
)%
|
|
(78.0
|
)%
|
Foreign taxes
|
2.1
|
%
|
|
0.9
|
%
|
|
(5.0
|
)%
|
Non-deductible and non-taxable interest
|
(2.9
|
)%
|
|
1.4
|
%
|
|
(0.8
|
)%
|
Stock-based compensation
|
3.0
|
%
|
|
3.1
|
%
|
|
9.3
|
%
|
Other, principally non-tax deductible items (1)
|
0.3
|
%
|
|
3.2
|
%
|
|
13.5
|
%
|
Transition tax
|
—
|
%
|
|
(28.9
|
)%
|
|
89.7
|
%
|
U.S. tax reform
|
—
|
%
|
|
—
|
%
|
|
(85.3
|
)%
|
Global low tax and foreign derived intangible income
|
10.6
|
%
|
|
(1.7
|
)%
|
|
—
|
%
|
Prior period items
|
(1.0
|
)%
|
|
(0.1
|
)%
|
|
5.5
|
%
|
Effective income tax rate
|
25.0
|
%
|
|
(7.4
|
)%
|
|
66.5
|
%
|
(1) Includes income tax expense related to the Malaysian tax consequences of the intra-entity intellectual property sale between the U.S. and Malaysia that increases the effective income tax rate by 18.5% for the year ended December 31, 2017.
The Company’s effective tax rate is favorably impacted by two tax holidays granted to us by Malaysia effective through December 31, 2021. These tax holidays are subject to the Company’s satisfaction of certain conditions, including investment or sales thresholds, which the Company expects to maintain. The Malaysian tax holidays reduce the anticipated effective rate on qualified income to approximately 6.0% and 7.2% versus the statutory rate of 24.0%, through 2021. If the Company fails to satisfy such conditions, the Company’s effective tax rate may be significantly adversely impacted. The continuing operations benefit of these incentives for the years ended December 31, 2019, 2018, and 2017 is estimated to be $14.6 million, $13.3 million, and $13.8 million, respectively. The continuing operations benefit of the tax holidays on a per share basis for the years ended December 31, 2019, 2018, and 2017 was $0.16, $0.15, and $0.15, respectively.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The components of the Company’s deferred tax assets and liabilities included the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2019
|
|
December 31, 2018
|
Deferred tax assets:
|
|
|
|
Accrued compensation, principally post-retirement, and other employee benefits
|
$
|
14.1
|
|
|
$
|
15.1
|
|
Accrued expenses, principally for state income taxes, interest, and warranty
|
6.5
|
|
|
4.6
|
|
Net operating loss and other carryforwards (1)
|
67.6
|
|
|
155.9
|
|
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes
|
4.1
|
|
|
3.9
|
|
Convertible note hedges
|
3.9
|
|
|
5.7
|
|
Plant and equipment, principally due to differences in depreciation
|
10.2
|
|
|
9.4
|
|
Total gross deferred tax assets
|
106.4
|
|
|
194.6
|
|
Valuation allowance (1)
|
(85.3
|
)
|
|
(131.2
|
)
|
Total deferred tax assets
|
$
|
21.1
|
|
|
$
|
63.4
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets, principally due to different tax and financial reporting bases
|
$
|
(3.7
|
)
|
|
$
|
(8.7
|
)
|
Debt discount on convertible notes
|
(2.9
|
)
|
|
(4.4
|
)
|
Other liabilities (1)
|
(1.0
|
)
|
|
(37.2
|
)
|
Total gross deferred tax liabilities
|
(7.6
|
)
|
|
(50.3
|
)
|
Net deferred tax asset
|
$
|
13.5
|
|
|
$
|
13.1
|
|
|
|
|
|
Classified as follows in the Consolidated Balance Sheets:
|
|
|
|
Other assets and deferred charges (non-current deferred tax assets)
|
$
|
15.7
|
|
|
$
|
15.2
|
|
Deferred income taxes (non-current deferred tax liabilities)
|
(2.2
|
)
|
|
(2.1
|
)
|
Net deferred tax asset
|
$
|
13.5
|
|
|
$
|
13.1
|
|
(1) These decreases primarily related to the liquidation of the Company's Austrian subsidiaries.
The Company recorded valuation allowances of $85.3 million and $131.2 million at December 31, 2019 and 2018, respectively, against deferred tax assets from continuing operations as the Company believes it is more likely than not that these assets will not be realized. Management believes that it is more likely than not that the Company will realize the benefits of the remaining deferred tax assets. The amount of the deferred tax asset is considered realizable, however, it could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present, requiring that additional weight be given to subjective evidence such as our projections for growth.
At December 31, 2019, the Company had $27.4 million of Federal net operating losses that are available, of which $11.6 million will expire in the next 5 to 10 years, and of which $15.8 million will expire in the next 10 to 20 years. There are $54.6 million of State net operating losses that are available between 2021 and 2036. There are $13.0 million of non-U.S. net operating loss carryforwards, of which $9.1 million will expire in the next 10 to 20 years and $3.9 million can be carried forward indefinitely.
The Company has $22.2 million of U.S. federal research and development credits that begin to expire in 2020 and $16.7 million of foreign tax credits that begin to expire in 2027. In addition, the Company has $18.2 million of state credits, of which $2.1 million will expire between 2020 and 2035 if unused, and $16.1 million can be carried forward indefinitely.
The Company has not provided for U.S. federal income taxes on the historical undistributed earnings of its international subsidiaries because such earnings are currently reinvested in foreign jurisdictions and will continue to be reinvested indefinitely. Our Malaysian principal subsidiary is our primary source of foreign earnings and cash. Any future decision to distribute cash from this subsidiary to the U.S. should not result in a material amount of U.S. or foreign taxes as the majority of the Company's $1.4 billion historical undistributed earnings have been previously taxed in the U.S. under the Tax Reform Act.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Unrecognized Tax Benefits
The Company records interest and penalties associated with unrecognized tax benefits as a component of income tax expense. During the year ended December 31, 2019, the Company recorded no potential interest benefit or expense. For the years ended December 31, 2018 and 2017, the Company recorded a potential interest benefit of $0.3 million and $1.1 million, respectively. There was no accrued interest at December 31, 2019 and 2018. Total accrued interest at December 31, 2017 of $0.4 million was included in Other liabilities on the Consolidated Balance Sheets. There was no recorded potential penalty expense during the year ended December 31, 2019. During the years ended December 31, 2018 and 2017, the Company recorded potential penalty expense of $0.1 million and $0.2 million, respectively. Total accrued penalties at December 31, 2019, 2018, and 2017 of $0.3 million, $0.3 million, and $0.2 million, respectively, were included in Other liabilities on the Consolidated Balance Sheets.
The Company's tax returns are routinely audited by the tax authorities in the relevant jurisdictions. For tax years before 2017, excluding 2015, the Company is no longer subject to U.S. federal income tax examination. For tax years before 2015, the Company’s Malaysian principal subsidiary is no longer subject to examination. Included in the balance of total unrecognized tax benefits at December 31, 2019 are potential benefits of $3.9 million, which if recognized, would affect the effective rate on earnings from continuing operations. Given the Company's current valuation allowance position, no benefit is expected to result from the reversal of any uncertain tax position associated with the acquired attributes.
|
|
|
|
|
Unrecognized tax benefits at January 1, 2017
|
$
|
11.8
|
|
Additions based on tax positions related to the current year
|
2.6
|
|
Additions for tax positions of prior years
|
0.6
|
|
Reductions for tax positions of prior years due to lapsed statutes of limitations
|
(1.3
|
)
|
Tax reform
|
(1.5
|
)
|
Foreign exchange fluctuations
|
0.3
|
|
Unrecognized tax benefits at December 31, 2017
|
$
|
12.5
|
|
Additions based on tax positions related to the current year
|
0.1
|
|
Additions for tax positions of prior years
|
0.3
|
|
Reductions for tax positions due to lapsed statutes of limitations
|
(2.5
|
)
|
Settlements
|
(0.3
|
)
|
Unrecognized tax benefits at December 31, 2018
|
$
|
10.1
|
|
Additions for tax positions of prior years
|
2.8
|
|
Reductions for tax positions of prior years
|
(0.1
|
)
|
Settlements
|
(0.1
|
)
|
Unrecognized tax benefits at December 31, 2019
|
$
|
12.7
|
|
14. Equity Incentive Program
The following table summarizes the stock-based compensation expense recognized by the Company for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Pre-tax stock-based compensation expense
|
|
|
|
|
|
Cost of goods sold
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
Research and development expenses
|
7.7
|
|
|
7.8
|
|
|
6.1
|
|
Selling and administrative expenses
|
16.0
|
|
|
17.6
|
|
|
16.8
|
|
Total pre-tax stock-based compensation expense
|
25.2
|
|
|
27.0
|
|
|
24.7
|
|
Tax benefit
|
—
|
|
|
—
|
|
|
—
|
|
Total stock-based compensation expense, net of tax
|
$
|
25.2
|
|
|
$
|
27.0
|
|
|
$
|
24.7
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Compensation expense for stock-based awards is measured based on the fair value of the awards as of the date the stock-based awards are granted and adjusted to the estimated number of awards that are expected to vest. Forfeitures are estimated based on historical experience at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Compensation costs for stock-based awards are amortized over their service period.
Stock Options and SSARs
The fair value of stock options granted by the Company was estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
1.55%
|
to
|
2.44%
|
|
2.59%
|
|
1.73%
|
to
|
1.93%
|
Dividend yield
|
—%
|
|
—%
|
|
—%
|
Expected life (years)
|
4.5
|
|
4.5
|
|
4.5
|
Volatility
|
40.0%
|
to
|
42.9%
|
|
41.2%
|
|
33.2%
|
to
|
38.8%
|
Fair value at date of grant
|
$6.22
|
to
|
$7.45
|
|
$4.83
|
to
|
$6.59
|
|
$5.02
|
to
|
$6.73
|
Expected volatilities for the year ended December 31, 2019 are based on the historical volatility of the Company’s common stock. Prior to the year ended December 31, 2019, the determination of expected volatility was based on a blended peer group volatility for companies in similar industries, stage of life, and with similar market capitalization since there was not sufficient historical volatility data for Knowles common stock over the period commensurate with the expected term of its stock options. The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The expected term is the period over which our employees are expected to hold their options. It is based on the simplified method from the SEC’s safe harbor guidelines. The Company does not currently anticipate paying dividends over the expected term.
The exercise price per share for the stock options granted by the Company was equal to the closing price of Knowles' stock on the NYSE on the date of the grant. The period during which options granted by the Company were exercisable was fixed by Knowles' Compensation Committee of the Board of Directors at the time of grant. Generally, stock options vest one-third on each of the first three anniversaries of the grant date and expire 7 years from the grant date.
The following table summarizes the Company's SSAR and stock option activity for the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs
|
|
Stock Options
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-Average Remaining Contractual Term (Years)
|
(in millions, except share and per share amounts)
|
Outstanding at December 31, 2018
|
781,995
|
|
|
$
|
21.85
|
|
|
|
|
|
|
5,471,493
|
|
|
$
|
17.64
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
906,966
|
|
|
16.34
|
|
|
|
|
|
Exercised
|
(78,470
|
)
|
|
14.28
|
|
|
|
|
|
|
(623,951
|
)
|
|
15.68
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
|
(266,296
|
)
|
|
15.86
|
|
|
|
|
|
Expired
|
(106,988
|
)
|
|
22.54
|
|
|
|
|
|
|
(111,064
|
)
|
|
28.71
|
|
|
|
|
|
Outstanding at December 31, 2019
|
596,537
|
|
|
$
|
22.72
|
|
|
$
|
—
|
|
|
2.3
|
|
5,377,148
|
|
|
$
|
17.51
|
|
|
$
|
27.0
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
596,537
|
|
|
$
|
22.72
|
|
|
$
|
—
|
|
|
2.3
|
|
3,870,484
|
|
|
$
|
18.08
|
|
|
$
|
19.3
|
|
|
2.7
|
The aggregate intrinsic value in the table above represents the difference between the Company's closing stock price on December 31, 2019 and the exercise price of each SSAR and stock option, multiplied by the number of in-the-money awards.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
There was no unrecognized compensation expense related to SSARs at December 31, 2019. Unrecognized compensation expense related to stock options not yet exercisable at December 31, 2019 was $5.5 million. This cost is expected to be recognized over a weighted-average period of 1.4 years.
Other information regarding the exercise of SSARs and stock options is listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
SSARs
|
|
|
|
|
|
Fair value of SSARs that are exercisable
|
$
|
1.5
|
|
|
$
|
1.8
|
|
|
$
|
1.9
|
|
Aggregate intrinsic value of SSARs exercised
|
0.4
|
|
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
|
|
Cash received by Knowles for exercise of stock options
|
9.8
|
|
|
0.5
|
|
|
3.3
|
|
Aggregate intrinsic value of options exercised
|
2.7
|
|
|
0.2
|
|
|
1.1
|
|
RSUs
The following table summarizes the Company's RSU activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Share units
|
|
Weighted-average grant date fair value
|
Unvested at December 31, 2018
|
2,446,431
|
|
|
$
|
15.12
|
|
Granted
|
1,518,148
|
|
|
16.27
|
|
Vested (1)
|
(1,183,420
|
)
|
|
14.72
|
|
Forfeited
|
(520,045
|
)
|
|
15.59
|
|
Unvested at December 31, 2019
|
2,261,114
|
|
|
$
|
15.99
|
|
(1) The number of RSUs vested includes shares that the Company withheld on behalf of employees to satisfy statutory tax withholding requirements.
RSUs generally vest based on the passage of time. RSUs have a three year vesting schedule and vest one-third on each of the first three anniversaries of the grant date. The fair value of RSUs vested during the year ended December 31, 2019 was $17.4 million. At December 31, 2019, $21.9 million of unrecognized compensation expense related to RSUs is expected to be recognized over a weighted-average period of 1.3 years.
PSUs
The Company grants PSUs to senior management. In each case, the awards will cliff vest three years following the grant date. For the awards granted in February 2018 and 2017, the number of PSUs that may be earned and vest is based on the Company's revenues and stock price performance over a three year performance period. For the awards granted in February 2019, the number of PSUs that may be earned and vest is based on the Company's revenues and total shareholder return relative to the S&P Semiconductor Select Industry Index over a three year performance period. PSUs will be settled in shares of the Company's common stock. Depending on the Company's overall performance relative to the applicable performance metrics, the size of the PSU awards are subject to adjustment, up or down, resulting in awards at the end of the performance period that can range from 0% to 225% of the initial grant value. The Company will ratably recognize the expense over the applicable service period for each grant of PSUs and adjust the expense as appropriate. The fair value of the PSUs is determined by using a Monte Carlo simulation.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The following table summarizes the Company's PSU activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Share units
|
|
Weighted-average grant date fair value
|
Unvested at December 31, 2018
|
557,967
|
|
|
$
|
14.27
|
|
Granted
|
326,756
|
|
|
18.67
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(39,934
|
)
|
|
15.65
|
|
Unvested at December 31, 2019
|
844,789
|
|
|
$
|
15.90
|
|
At December 31, 2019, $6.3 million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted-average period of 1.8 years.
15. Commitments and Contingent Liabilities
From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of its business. The majority of these claims and proceedings relate to commercial, warranty, employment, and intellectual property matters. Although the ultimate outcome of any legal proceeding or claim cannot be predicted with certainty, based on present information, including management’s assessment of the merits of the particular claim, the Company does not believe that the disposition of these legal proceedings or claims, individually or in the aggregate, after taking into account recorded accruals and the availability and limits of insurance coverage, will have a material adverse effect on its cash flow, results of operations, or financial condition. The Company owns many patents and other intellectual property pertaining to its products, technology, and manufacturing processes. Some of the Company's patents have been and may continue to be infringed upon or challenged by others. In appropriate cases, the Company has taken and will take steps to protect and defend its patents and other intellectual property, including through the use of legal proceedings in various jurisdictions around the world. Such steps have resulted in and may continue to result in retaliatory legal proceedings, including litigation or other legal proceedings in various jurisdictions and forums around the world alleging infringement by the Company of patents owned by others. The costs of investigations and legal proceedings relating to the enforcement and defense of the Company’s intellectual property may be substantial. Additionally, in multi-forum disputes, the Company may incur adverse judgments with regard to certain claims in certain jurisdictions and forums while still contesting other related claims against the same opposing party in other jurisdictions and forums.
Intellectual Property Infringement Claims
The Company may, on a limited customer specific basis, provide contractual indemnities for certain losses that arise out of claims that its products infringe on the intellectual property of others. It is not possible to determine the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Historically, the Company has not made significant payments under such indemnity arrangements. The Company’s legal accruals associated with these indemnity arrangements were not significant at December 31, 2019 and 2018.
16. Employee Benefit Plans
Knowles sponsors its own defined contribution plan. The Company's expense relating to the defined contribution plan was $7.2 million, $6.8 million, and $6.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Knowles sponsors four defined benefit pension plans to certain non-U.S. employees. The two plans in the U.K. and the plan in Taiwan are closed to new participants; however, all active participants in these plans continue to accrue benefits. The balance for the plan in the Philippines, which is open to new participants, has been included as of December 31, 2018. These plans are considered direct obligations of the Company and have been recorded within the accompanying Consolidated Financial Statements.
The Company does not have any other post-retirement employee benefit plans other than the plans mentioned above and the non-qualified supplemental retirement plan discussed below.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Non-U.S. Defined Benefit Pension Plans
Obligations and Funded Status
The following tables summarize the balance sheet impact, including the benefit obligations, assets, and funded status associated with the Company's four defined benefit plans for non-U.S. participants at December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
53.7
|
|
|
$
|
57.9
|
|
Service cost
|
0.3
|
|
|
0.4
|
|
Interest cost
|
1.5
|
|
|
1.3
|
|
Benefits paid
|
(2.0
|
)
|
|
(1.5
|
)
|
Actuarial loss (gain) (1)
|
7.7
|
|
|
(3.8
|
)
|
Plan amendments (2)
|
—
|
|
|
1.0
|
|
Currency translation and other (3)
|
2.9
|
|
|
(1.6
|
)
|
Benefit obligation at end of year
|
64.1
|
|
|
53.7
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
47.8
|
|
|
51.8
|
|
Actual return on plan assets
|
6.5
|
|
|
(1.2
|
)
|
Company contributions
|
3.4
|
|
|
1.9
|
|
Benefits paid
|
(2.0
|
)
|
|
(1.5
|
)
|
Currency translation and other
|
2.5
|
|
|
(3.2
|
)
|
Fair value of plan assets at end of year
|
58.2
|
|
|
47.8
|
|
Funded status
|
$
|
(5.9
|
)
|
|
$
|
(5.9
|
)
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
Other assets and deferred charges
|
$
|
0.8
|
|
|
$
|
1.0
|
|
Other liabilities
|
(6.7
|
)
|
|
(6.9
|
)
|
Funded status
|
$
|
(5.9
|
)
|
|
$
|
(5.9
|
)
|
|
|
|
|
Accumulated other comprehensive loss:
|
|
|
|
Net actuarial losses
|
$
|
21.2
|
|
|
$
|
18.0
|
|
Prior service cost
|
1.2
|
|
|
1.3
|
|
Deferred taxes
|
(3.8
|
)
|
|
(3.8
|
)
|
Total accumulated other comprehensive loss, net of tax
|
18.6
|
|
|
15.5
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
62.9
|
|
|
$
|
52.6
|
|
(1) The net actuarial loss during the year ended December 31, 2019 primarily related to a decrease in the discount rates for the U.K. plans. The net actuarial gain during the year ended December 31, 2018 primarily related to changes in key actuarial assumptions for the U.K plans, including an increase in the discount rates and updated mortality table assumptions.
(2) On October 26, 2018, the U.K. High Court of Justice issued a ruling in a case related to equalization of pension plan participant benefits for the gender effects of Guaranteed Minimum Pensions. As a result of this ruling, the Company recorded an estimated increase to benefit obligations for its U.K defined benefit pension plans of $1.0 million during the year ended December 31, 2018.
(3) The Company recorded an increase in liabilities of $1.3 million related to pre-spin-off pension obligations during the year ended December 31, 2018.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Pension plans with projected benefit obligations in excess of plan assets consisted of the following at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
Projected benefit obligation
|
$
|
39.6
|
|
|
$
|
33.3
|
|
Fair value of plan assets
|
32.9
|
|
|
26.4
|
|
Pension plans with accumulated benefit obligations in excess of plan assets consisted of the following at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
Accumulated benefit obligation
|
$
|
37.1
|
|
|
$
|
31.0
|
|
Fair value of plan assets
|
31.0
|
|
|
24.7
|
|
Net Periodic Benefit Cost (Income)
Components of the net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
0.3
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
Interest cost
|
1.5
|
|
|
1.3
|
|
|
1.5
|
|
Expected return on plan assets
|
(2.4
|
)
|
|
(2.8
|
)
|
|
(2.7
|
)
|
Amortization of prior service cost
|
0.1
|
|
|
—
|
|
|
—
|
|
Amortization of recognized actuarial loss
|
0.4
|
|
|
0.5
|
|
|
0.5
|
|
Other (1)
|
0.1
|
|
|
1.3
|
|
|
—
|
|
Total net periodic benefit cost (income)
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
(0.4
|
)
|
(1) The Company recorded an adjustment related to pre-spin-off pension obligations during the year ended December 31, 2018.
The components of net periodic benefit cost (income) other than service cost are presented in the Other expense (income), net line on the Consolidated Statements of Earnings. The service cost comp is presented within the Cost of goods sold, Research and development expenses, and Selling and administrative expenses lines on the Consolidated Statements of Earnings based on the nature of services performed by the related employees.
Assumptions
The Company determines actuarial assumptions on an annual basis. The actuarial assumptions used for the Company’s four defined benefit plans for non-U.S. participants will vary depending on the applicable country and as such, the tables below include these assumptions by country, as well as in total.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The assumptions used in determining the benefit obligations were as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Discount rate
|
|
|
|
Philippines
|
5.00
|
%
|
|
8.25
|
%
|
Taiwan
|
0.75
|
%
|
|
1.25
|
%
|
United Kingdom
|
2.00
|
%
|
|
2.80
|
%
|
Weighted-average
|
1.97
|
%
|
|
2.78
|
%
|
Average wage increase
|
|
|
|
Philippines
|
5.00
|
%
|
|
6.00
|
%
|
Taiwan
|
4.00
|
%
|
|
4.25
|
%
|
United Kingdom
|
4.25
|
%
|
|
4.40
|
%
|
Weighted-average
|
4.24
|
%
|
|
4.41
|
%
|
The assumptions used in determining the net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
|
|
|
|
|
Philippines
|
8.25
|
%
|
|
—
|
|
|
—
|
|
Taiwan
|
1.25
|
%
|
|
1.25
|
%
|
|
1.50
|
%
|
United Kingdom
|
2.80
|
%
|
|
2.44
|
%
|
|
2.64
|
%
|
Weighted-average
|
2.78
|
%
|
|
2.40
|
%
|
|
2.60
|
%
|
Average wage increase
|
|
|
|
|
|
Philippines
|
6.00
|
%
|
|
—
|
|
|
—
|
|
Taiwan
|
4.25
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
United Kingdom
|
4.40
|
%
|
|
4.50
|
%
|
|
4.60
|
%
|
Weighted-average
|
4.41
|
%
|
|
4.46
|
%
|
|
4.55
|
%
|
Expected return on plan assets
|
|
|
|
|
|
Taiwan
|
2.00
|
%
|
|
1.50
|
%
|
|
1.75
|
%
|
United Kingdom
|
4.82
|
%
|
|
5.75
|
%
|
|
5.90
|
%
|
Weighted-average
|
4.72
|
%
|
|
5.64
|
%
|
|
5.80
|
%
|
The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates.
Plan Assets
The primary financial objective of the plans is to secure participant retirement benefits. Accordingly, the key objective in the plans’ financial management is to promote stability and, to the extent appropriate, growth in the funded status. Related and supporting financial objectives are established in conjunction with a review of current and projected plan financial requirements.
As it relates to the funded defined benefit pension plans, the Company’s funding policy is consistent with the funding requirements of applicable local non-U.S. laws. The Company is responsible for overseeing the management of the investments of the plans’ assets and otherwise ensuring that the plans’ investment programs are in compliance with applicable local law, other relevant legislation, and related plan documents. Where relevant, the Company has retained professional investment managers to manage the plans’ assets and implement the investment process. The investment managers, in implementing their investment processes, have the authority and responsibility to select appropriate investments in the asset classes specified by the terms of their applicable prospectus or investment manager agreements with the plans.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The assets of the plans are invested to achieve an appropriate return for the plans consistent with a prudent level of risk. The asset return objective is to achieve, as a minimum over time, the passively managed return earned by market index funds, weighted in the proportions outlined by the asset class exposures identified in the plans’ strategic allocation. The expected return on assets assumption used for pension expense is developed through analysis of historical market returns, statistical analysis, current market conditions, and the past experience of plan asset investments.
Fair Value Measurements
The fair values of plan assets by asset category within the ASC 820 hierarchy were as follows at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income investments
|
$
|
2.4
|
|
|
$
|
21.9
|
|
|
$
|
—
|
|
|
$
|
24.3
|
|
|
$
|
1.9
|
|
|
$
|
18.5
|
|
|
$
|
—
|
|
|
$
|
20.4
|
|
Common stock funds
|
—
|
|
|
17.7
|
|
|
—
|
|
|
17.7
|
|
|
—
|
|
|
13.4
|
|
|
—
|
|
|
13.4
|
|
Real estate funds
|
—
|
|
|
4.0
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
3.6
|
|
|
—
|
|
|
3.6
|
|
Cash and equivalents
|
0.4
|
|
|
0.8
|
|
|
—
|
|
|
1.2
|
|
|
0.3
|
|
|
0.8
|
|
|
—
|
|
|
1.1
|
|
Other
|
6.7
|
|
|
4.3
|
|
|
—
|
|
|
11.0
|
|
|
5.7
|
|
|
3.6
|
|
|
—
|
|
|
9.3
|
|
Total
|
$
|
9.5
|
|
|
$
|
48.7
|
|
|
$
|
—
|
|
|
$
|
58.2
|
|
|
$
|
7.9
|
|
|
$
|
39.9
|
|
|
$
|
—
|
|
|
$
|
47.8
|
|
See Note 11. Hedging Transactions and Derivative Instruments for additional information on the fair value hierarchy. There were no significant transfers between Level 1 and Level 2 assets during the years ended December 31, 2019 and 2018.
Fixed income investments include government and municipal securities and corporate bonds, which are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Common stock funds consist of mutual funds and collective trusts. Mutual funds are valued by obtaining quoted prices from nationally recognized securities exchanges. Collective trusts are valued using Net Asset Value (the "NAV") as of the last business day of the year. The NAV is based on the underlying value of the assets owned by the fund minus its liabilities and then divided by the number of shares outstanding. The value of the underlying assets is based on quoted prices in active markets.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Future Estimates
Benefit Payments
Estimated future benefit payments to retirees, which reflect expected future service, are as follows:
|
|
|
|
|
(in millions)
|
|
2020
|
$
|
2.0
|
|
2021
|
1.7
|
|
2022
|
1.9
|
|
2023
|
1.9
|
|
2024
|
2.1
|
|
2025-2029
|
12.7
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Contributions
Generally, annual contributions are made at such times and in such amounts as required by law and agreed with the trustees of the non-U.S. defined benefit plans. The Company estimates it will pay $1.6 million during the year ended December 31, 2020 related to contributions to these plans. This amount may vary based on updated funding agreements with the Trustees of these plans.
Non-qualified Supplemental Retirement Plan
Knowles provides to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law. Effective December 31, 2013, the Company's participants no longer accrue benefits. The net amounts recognized on the balance sheet at December 31, 2019 and 2018 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
Accrued compensation and employee benefits
|
$
|
(0.5
|
)
|
|
$
|
(0.9
|
)
|
Other liabilities
|
(0.8
|
)
|
|
(0.8
|
)
|
Total accumulated other comprehensive loss, net of tax
|
0.1
|
|
|
—
|
|
Net amount recognized
|
$
|
(1.2
|
)
|
|
$
|
(1.7
|
)
|
The actuarial loss arising during the year ended December 31, 2019 was $0.2 million ($0.2 million net of tax). The amortization of prior service cost included in net periodic pension cost (income) during the year ended December 31, 2019 was $0.1 million ($0.1 million net of tax).
17. Other Comprehensive Earnings
The amounts recognized in other comprehensive (loss) earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(in millions)
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
Employee benefit plans
|
(3.2
|
)
|
|
—
|
|
|
(3.2
|
)
|
Changes in fair value of cash flow hedges
|
1.1
|
|
|
(0.2
|
)
|
|
0.9
|
|
Total other comprehensive loss
|
$
|
(0.8
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(1.0
|
)
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in millions)
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation
|
$
|
(9.9
|
)
|
|
$
|
—
|
|
|
$
|
(9.9
|
)
|
Employee benefit plans
|
(0.4
|
)
|
|
0.2
|
|
|
(0.2
|
)
|
Changes in fair value of cash flow hedges
|
(1.0
|
)
|
|
0.1
|
|
|
(0.9
|
)
|
Total other comprehensive loss
|
$
|
(11.3
|
)
|
|
$
|
0.3
|
|
|
$
|
(11.0
|
)
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
(in millions)
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Foreign currency translation
|
$
|
27.1
|
|
|
$
|
—
|
|
|
$
|
27.1
|
|
Employee benefit plans
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Changes in fair value of cash flow hedges
|
4.4
|
|
|
(0.7
|
)
|
|
3.7
|
|
Total other comprehensive earnings
|
$
|
32.8
|
|
|
$
|
(0.7
|
)
|
|
$
|
32.1
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax during the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Cash flow hedges
|
|
Employee benefit plans
|
|
Cumulative foreign currency translation adjustments
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
0.5
|
|
|
$
|
(15.3
|
)
|
|
$
|
(85.2
|
)
|
|
$
|
(100.0
|
)
|
Other comprehensive loss, net of tax
|
|
(0.9
|
)
|
|
(0.2
|
)
|
|
(9.9
|
)
|
|
(11.0
|
)
|
Balance at December 31, 2018
|
|
(0.4
|
)
|
|
(15.5
|
)
|
|
(95.1
|
)
|
|
(111.0
|
)
|
Other comprehensive earnings (loss), net of tax
|
|
0.9
|
|
|
(3.2
|
)
|
|
1.3
|
|
|
(1.0
|
)
|
Balance at December 31, 2019
|
|
$
|
0.5
|
|
|
$
|
(18.7
|
)
|
|
$
|
(93.8
|
)
|
|
$
|
(112.0
|
)
|
The following table summarizes the amounts reclassified from accumulated other comprehensive loss to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
Statement of Earnings Line
|
2019
|
|
2018
|
|
2017
|
Pension and post-retirement benefit plans:
|
|
|
|
|
|
|
Amortization or settlement of actuarial losses and prior service costs
|
Other expense (income), net
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Tax
|
Provision for (benefit from) income taxes
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
Net of tax
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Net losses reclassified into earnings
|
Various (1)
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
$
|
0.5
|
|
Tax
|
Provision for (benefit from) income taxes
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
Net of tax
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
|
$
|
0.3
|
|
(1) See Note 11. Hedging Transactions and Derivative Instruments for additional information.
18. Segment Information
In January 2017, the Company changed its allocation of resources and internal reporting structure to facilitate delivering growth in its core business. The Company’s operating segments engage in business activities from which they earn revenues and incur expenses, have discrete financial information available, and whose financial results are regularly reviewed and used by the chief operating decision maker to evaluate segment performance, allocate resources, and determine management incentive compensation. The Audio segment aggregates two operating segments into one reportable segment based on similar product applications serving our key end markets. The PD segment has one operating segment, which equals its reportable segment. The realignment did not change the composition of the Company’s reporting units for goodwill impairment testing purposes. Following these changes, the Company's two reportable segments are as follows:
• Audio Segment
Our Audio group designs and manufactures innovative audio products, including microphones and balanced armature speakers, audio processors, and software and algorithms used in applications that serve the mobile, ear, and IoT markets. Locations include the sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.
• PD Segment
Our PD group specializes in the design and delivery of high performance capacitor products and mmWave RF solutions for technically demanding applications. Our high performance capacitor products are used in applications such as power supplies and medical implants, which sell to a diverse set of customers for mission critical applications across the communications, medtech, defense, automotive, and industrial markets. Our mmWave RF solutions primarily solve high 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 base stations. Locations include the sales, support, engineering, and manufacturing facilities in North America, Europe, and Asia.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The Company organizes its reportable segments based on how management analyzes performance, allocates capital, and makes strategic and operational decisions. These segments were determined in accordance with ASC 280, Segment Reporting. The segments are aligned around similar product applications serving our key end markets, to enhance focus on end market growth strategies.
Information regarding the Company's reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
Audio
|
$
|
682.8
|
|
|
$
|
682.2
|
|
|
$
|
637.4
|
|
Precision Devices
|
172.0
|
|
|
144.7
|
|
|
106.8
|
|
Total revenues
|
$
|
854.8
|
|
|
$
|
826.9
|
|
|
$
|
744.2
|
|
|
|
|
|
|
|
Earnings from continuing operations before interest and income taxes:
|
|
|
|
|
|
Audio
|
$
|
107.3
|
|
|
$
|
105.7
|
|
|
$
|
76.1
|
|
Precision Devices
|
30.4
|
|
|
27.5
|
|
|
19.2
|
|
Total segments
|
137.7
|
|
|
133.2
|
|
|
95.3
|
|
Corporate expense / other
|
56.9
|
|
|
56.1
|
|
|
55.3
|
|
Interest expense, net
|
14.5
|
|
|
16.0
|
|
|
20.6
|
|
Earnings before income taxes and discontinued operations
|
66.3
|
|
|
61.1
|
|
|
19.4
|
|
Provision for (benefit from) income taxes
|
16.6
|
|
|
(4.5
|
)
|
|
12.9
|
|
Earnings from continuing operations
|
$
|
49.7
|
|
|
$
|
65.6
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Audio
|
$
|
41.3
|
|
|
$
|
41.5
|
|
|
$
|
45.2
|
|
Precision Devices
|
9.9
|
|
|
7.8
|
|
|
5.6
|
|
Corporate
|
3.2
|
|
|
3.1
|
|
|
3.0
|
|
Total
|
$
|
54.4
|
|
|
$
|
52.4
|
|
|
$
|
53.8
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Audio
|
$
|
24.0
|
|
|
$
|
68.2
|
|
|
$
|
43.6
|
|
Precision Devices
|
16.5
|
|
|
10.8
|
|
|
5.4
|
|
Corporate
|
0.7
|
|
|
1.1
|
|
|
0.5
|
|
Total
|
$
|
41.2
|
|
|
$
|
80.1
|
|
|
$
|
49.5
|
|
|
|
|
|
|
|
Research and development:
|
|
|
|
|
|
Audio
|
$
|
90.8
|
|
|
$
|
94.5
|
|
|
$
|
89.0
|
|
Precision Devices
|
5.8
|
|
|
5.8
|
|
|
4.2
|
|
Corporate
|
0.2
|
|
|
0.3
|
|
|
0.2
|
|
Total
|
$
|
96.8
|
|
|
$
|
100.6
|
|
|
$
|
93.4
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Information regarding assets of the Company's reportable segments:
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
Audio
|
$
|
1,487.6
|
|
|
$
|
1,409.1
|
|
Precision Devices
|
162.0
|
|
|
136.9
|
|
Corporate / eliminations
|
5.0
|
|
|
1.9
|
|
Total
|
$
|
1,654.6
|
|
|
$
|
1,547.9
|
|
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. Long-lived assets are comprised of net property, plant, and equipment and operating lease right-of-use assets. These assets have been classified based on the geographic location of where they reside. The Company's businesses are based primarily in Asia, North America, and Europe.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Long-Lived Assets
|
|
Years Ended December 31,
|
|
December 31,
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
Asia
|
$
|
614.7
|
|
|
$
|
605.4
|
|
|
$
|
560.8
|
|
|
$
|
157.9
|
|
|
$
|
160.9
|
|
United States
|
130.4
|
|
|
126.6
|
|
|
101.3
|
|
|
78.5
|
|
|
49.8
|
|
Europe
|
97.4
|
|
|
85.8
|
|
|
72.3
|
|
|
2.5
|
|
|
0.9
|
|
Other Americas
|
6.3
|
|
|
3.6
|
|
|
4.4
|
|
|
1.2
|
|
|
0.1
|
|
Other
|
6.0
|
|
|
5.5
|
|
|
5.4
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
854.8
|
|
|
$
|
826.9
|
|
|
$
|
744.2
|
|
|
$
|
240.1
|
|
|
$
|
211.7
|
|
The Company's customers that accounted for 10% or more of total revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Apple Inc.
|
22
|
%
|
|
19
|
%
|
|
19
|
%
|
Samsung Electronics Co., Ltd.
|
*
|
|
|
*
|
|
|
10
|
%
|
* Less than 10% of total revenues.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
19. Earnings per Share
Basic and diluted earnings per share was computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except share and per share amounts)
|
2019
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
$
|
49.7
|
|
|
$
|
65.6
|
|
|
$
|
6.5
|
|
(Loss) earnings from discontinued operations, net
|
(0.6
|
)
|
|
2.1
|
|
|
61.8
|
|
Net earnings
|
$
|
49.1
|
|
|
$
|
67.7
|
|
|
$
|
68.3
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.55
|
|
|
$
|
0.73
|
|
|
$
|
0.07
|
|
(Loss) earnings from discontinued operations, net
|
(0.01
|
)
|
|
0.02
|
|
|
0.69
|
|
Net earnings
|
$
|
0.54
|
|
|
$
|
0.75
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
91,156,124
|
|
|
90,050,051
|
|
|
89,329,794
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.07
|
|
(Loss) earnings from discontinued operations, net
|
—
|
|
|
0.02
|
|
|
0.68
|
|
Net earnings
|
$
|
0.53
|
|
|
$
|
0.74
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
93,439,023
|
|
|
91,194,747
|
|
|
90,490,007
|
|
As the Company intends to settle the principal amount of the Notes in cash, the treasury stock method was used to calculate any potential dilutive effect of the conversion option on diluted earnings per share, if applicable. For the years ended December 31, 2019, 2018, and 2017, the weighted-average number of anti-dilutive potential common shares excluded from the calculation of diluted earnings per share above was 2,764,092, 4,346,400, and 3,944,160, respectively.
20. Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
Continuing Operations
|
|
Net Earnings (Loss)
|
Quarter
|
Revenues
|
|
Gross Profit
|
|
Earnings (Loss)
|
|
Per Share - Basic
|
|
Per Share - Diluted
|
|
Earnings (Loss)
|
|
Per Share - Basic
|
|
Per Share - Diluted
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
$
|
179.8
|
|
|
$
|
68.5
|
|
|
$
|
(2.7
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Second
|
205.2
|
|
|
76.4
|
|
|
5.9
|
|
|
0.06
|
|
|
0.06
|
|
|
5.9
|
|
|
0.06
|
|
|
0.06
|
|
Third
|
235.9
|
|
|
93.5
|
|
|
25.4
|
|
|
0.28
|
|
|
0.27
|
|
|
25.4
|
|
|
0.28
|
|
|
0.27
|
|
Fourth
|
233.9
|
|
|
89.6
|
|
|
21.1
|
|
|
0.23
|
|
|
0.22
|
|
|
20.5
|
|
|
0.22
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
$
|
178.5
|
|
|
$
|
65.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Second
|
188.4
|
|
|
73.2
|
|
|
4.4
|
|
|
0.05
|
|
|
0.05
|
|
|
4.6
|
|
|
0.05
|
|
|
0.05
|
|
Third
|
236.2
|
|
|
89.8
|
|
|
(17.8
|
)
|
|
(0.20
|
)
|
|
(0.20
|
)
|
|
(16.2
|
)
|
|
(0.18
|
)
|
|
(0.18
|
)
|
Fourth
|
223.8
|
|
|
94.3
|
|
|
79.4
|
|
|
0.88
|
|
|
0.87
|
|
|
79.6
|
|
|
0.88
|
|
|
0.87
|
|