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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
March 31, 2024
.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number:
001-36102
Knowles Corporation
(Exact name of registrant as specified in its charter)
Delaware 90-1002689
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1151 Maplewood Drive,
Itasca,
IL
(Address of Principal Executive Offices)
60143
(Zip Code)
(630)
250-5100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common stock, $0.01 par value per share KN New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T ((s)232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
No
The number of shares outstanding of the registrant's common stock as of
April 29, 2024 was
89,744,345
.
-------------------------------------------------------------------------------
Table of Contents
Knowles Corporation
Form 10-Q
Table of Contents
Page
PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Statements of Earnings (unaudited) for the three 1
months ended
March
3
1
, 202
4
and 202
3
Consolidated Statements of Comprehensive 2
Earnings (unaudited) for the thre
e
months ended
March
3
1
, 202
4
and 20
23
Consolidated Balance Sheets (unaudited) at 3
March
3
1
, 202
4
and December 31, 202
3
Consolidated Statements of Stockholders' 4
Equity (unaudited) for the three
months ended
March
3
1
, 202
4
and 202
3
Consolidated Statements of Cash Flows (unaudited) for the 5
three
months ended
March
3
1
, 202
4
and 202
3
Notes to Consolidated Financial Statements (unaudited) 6
Forward-Looking Statements 19
Item 2. Management's Discussion and Analysis of 20
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative 32
Disclosures About Market Risk
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION 32
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity 33
Securities and Use of Proceeds
Item 5. Other Information 33
Item 6. Exhibits 33
SIGNATURES 34
-------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share amounts)
(unaudited)
Three Months Ended March 31,
2024 2023
Revenues $ 196.4 $ 144.3
Cost of goods sold 125.5 90.4
Restructuring charges - cost of goods sold 1.0 0.1
Gross profit 69.9 53.8
Research and development expenses 20.6 20.0
Selling and administrative expenses 43.5 33.8
Restructuring charges 1.5 1.0
Operating expenses 65.6 54.8
Operating earnings (loss) 4.3 (
1.0
)
Interest expense, net 4.4 0.8
Other (income) expense, net ( 2.3
0.4
)
Gain on sale of asset, net ( -
5.4
)
Earnings (loss) before income taxes 5.7 (
4.1
)
Provision for income taxes 3.2 1.1
Net earnings (loss) $ 2.5 $ (
5.2
)
Net earnings (loss) per share:
Basic $ 0.03 $ (
0.06
)
Diluted $ 0.03 $ (
0.06
)
Weighted-average common shares outstanding:
Basic 89.6 91.4
Diluted 90.5 91.4
See accompanying Notes to Consolidated Financial Statements
1
-------------------------------------------------------------------------------
Table of Contents
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions)
(unaudited)
Three Months Ended March 31,
2024 2023
Net earnings (loss) $ 2.5 $ (
5.2
)
Other comprehensive (loss) earnings, net of tax
Foreign currency translation ( 3.6
3.4
)
Employee benefit plans:
Amortization or settlement of actuarial losses and prior service costs 0.1 0.2
Net change in employee benefit plans 0.1 0.2
Changes in fair value of cash flow hedges:
Unrealized net (losses) gains arising during period ( 0.1
1.3
)
Net losses reclassified into earnings 1.0 0.1
Total cash flow hedges ( 0.2
0.3
)
Other comprehensive (loss) earnings, net of tax ( 4.0
3.6
)
Comprehensive loss $ ( $ (
1.1 1.2
) )
See accompanying Notes to Consolidated Financial Statements
2
-------------------------------------------------------------------------------
Table of Contents
KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)
March 31, 2024 December 31, 2023
Current assets:
Cash and cash equivalents $ 122.1 $ 87.3
Receivables, net of allowances of $ 130.8 135.3
0.2
Inventories, net 203.4 196.4
Prepaid and other current assets 11.6 9.8
Total current assets 467.9 428.8
Property, plant, and equipment, net 166.3 175.4
Goodwill 540.5 540.7
Intangible assets, net 183.0 189.4
Operating lease right-of-use assets 11.3 13.1
Other assets and deferred charges 114.4 115.4
Total assets $ 1,483.4 $ 1,462.8
Current liabilities:
Current maturities of long-term debt $ 48.0 $ 47.1
Accounts payable 67.8 51.3
Accrued compensation and employee benefits 25.3 33.0
Operating lease liabilities 4.5 5.1
Other accrued expenses 22.7 25.0
Federal and other taxes on income 2.0 3.1
Total current liabilities 170.3 164.6
Long-term debt 245.2 224.1
Deferred income taxes 0.7 0.7
Long-term operating lease liabilities 7.3 8.2
Other liabilities 26.0 31.1
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock - $ - -
0.01
par value;
10,000,000
shares authorized;
none
issued
Common stock - $ 1.0 1.0
0.01
par value;
400,000,000
shares authorized;
97,949,177
and
89,744,345
shares issued and outstanding at March 31, 2024, respectively, and
97,297,703
and
89,092,871
shares issued and outstanding at December 31, 2023, respectively
Treasury stock - at cost; ( (
8,204,832 151.2 151.2
shares at March 31, 2024 and December 31, 2023 ) )
Additional paid-in capital 1,690.8 1,689.9
Accumulated deficit ( (
373.3 375.8
) )
Accumulated other comprehensive loss ( (
133.4 129.8
) )
Total stockholders' equity 1,033.9 1,034.1
Total liabilities and stockholders' equity $ 1,483.4 $ 1,462.8
See accompanying Notes to Consolidated Financial Statements
3
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Table of Contents
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except share amounts)
(unaudited)
Common Stock Treasury Stock Additional Accumulated Deficit Accum
Paid-In Capital Compr
Shares Issued Amount Shares Amount
Balance 97,297,703 $ 1.0 ( $ ( $ 1,689.9 $ ( $ ( $ 1,034.1
at 8,204,832 151.2 375.8 129.8
December ) ) ) )
31, 2023
Net earnings - - - - - 2.5 - 2.5
Other - - - - - - ( (
comprehensive 3.6 3.6
loss, net ) )
of tax
Stock-based - - - - 6.7 - - 6.7
compensation
expense
Restricted and 651,474 - - - ( - - (
performance 5.8 5.8
stock ) )
unit
settlement,
net of tax
Balance 97,949,177 $ 1.0 ( $ ( $ 1,690.8 $ ( $ ( $ 1,033.9
at 8,204,832 151.2 373.3 133.4
March ) ) ) )
31,
2024
Common Stock Treasury Stock Additional Accumulated Deficit Accum
Paid-In Capital Compr
Shares Issued Amount Shares Amount
Balance 96,431,604 $ 1.0 ( $ ( $ 1,665.5 $ ( $ ( $ 992.9
at 5,353,228 103.3 448.2 122.1
December ) ) ) )
31, 2022
Net loss - - - - - ( - (
5.2 5.2
) )
Other - - - - - - 4.0 4.0
comprehensive
earnings,
net of tax
Repurchase of - - ( ( - - - (
common stock 433,759 7.5 7.5
) ) )
Stock-based - - - - 7.8 - - 7.8
compensation
expense
Exercise of 182,736 - - - 1.4 - - 1.4
stock options
Restricted and 532,147 - - - ( - - (
performance 6.0 6.0
stock ) )
unit
settlement,
net of tax
Balance 97,146,487 $ 1.0 ( $ ( $ 1,668.7 $ ( $ ( $ 987.4
at 5,786,987 110.8 453.4 118.1
March ) ) ) )
31,
2023
ulated Other Total Stockholders'
ehensive Loss Equity
ulated Other Total Stockholders'
ehensive Loss Equity
See accompanying Notes to Consolidated Financial Statements
4
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Table of Contents
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended March 31,
2024 2023
Operating Activities
Net earnings (loss) $ 2.5 $ (
5.2
)
Adjustments to reconcile net earnings (loss) to cash from operating activities:
Depreciation and amortization 14.0 12.1
Stock-based compensation 6.7 7.8
Deferred income taxes 3.3 4.1
Non-cash interest expense and amortization of debt issuance costs 2.1 0.3
Gain on sale of asset ( -
7.2
)
Non-cash restructuring charges 0.4 -
Other, net ( 1.8
0.2
)
Changes in assets and liabilities (excluding effects of foreign exchange):
Receivables, net 4.4 25.3
Inventories, net ( (
9.3 38.0
) )
Prepaid and other current assets ( (
1.3 2.7
) )
Accounts payable 17.2 27.8
Accrued compensation and employee benefits ( (
7.6 5.9
) )
Other accrued expenses ( (
1.7 3.8
) )
Accrued taxes ( (
0.1 0.7
) )
Other non-current assets and non-current liabilities ( (
5.9 1.0
) )
Net cash provided by operating activities 17.3 21.9
Investing Activities
Proceeds from the sale of asset 7.2 -
Capital expenditures ( (
3.4 3.9
) )
Purchase of investments ( -
0.5
)
Proceeds from the sale of investments 0.5 -
Net cash provided by (used in) investing activities 3.8 (
3.9
)
Financing Activities
Payments under revolving credit facility ( -
20.0
)
Borrowings under revolving credit facility 40.0 -
Repurchase of common stock - (
7.5
)
Tax on restricted and performance stock unit vesting and stock option exercises ( (
5.8 6.0
) )
Payments of debt issuance costs - (
1.6
)
Payments of finance lease obligations ( (
0.6 0.6
) )
Proceeds from exercise of stock options - 1.4
Net cash provided by (used in) financing activities 13.6 (
14.3
)
Effect of exchange rate changes on cash and cash equivalents 0.1 0.1
Net increase in cash and cash equivalents 34.8 3.8
Cash and cash equivalents at beginning of period 87.3 48.2
Cash and cash equivalents at end of period $ 122.1 $ 52.0
Supplemental information - cash paid for:
Income taxes $ 2.6 $ 4.3
Interest $ 3.4 $ 0.9
See accompanying Notes to Consolidated Financial Statements
5
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
Background
- Knowles Corporation (NYSE:KN) is a market leader and global provider of high
performance capacitors and radio frequency ("RF") products, balanced armature
speakers, advanced micro-acoustic microphones, and audio solutions, serving
the medtech, defense, electric vehicle, industrial, communications, and
consumer electronics markets. The Company uses its leading position in SiSonic
TM
micro-electro-mechanical systems ("MEMS") microphones and strong capabilities
in audio processing technologies to optimize audio systems and improve the
user experience across consumer applications. Knowles is also a leader in
hearing health acoustics, high performance capacitors, and RF solutions for a
diverse set of markets. The Company's focus on the customer, combined with its
unique technology, proprietary manufacturing techniques, and global
operational expertise, enable the Company to deliver innovative solutions
across multiple applications. References to "Knowles," "the Company," "we,"
"our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.
Financial Statement Presentation -
The accompanying unaudited interim Consolidated Financial Statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for quarterly reports on Form 10-Q and do not include all
of the information and note disclosures required by U.S. generally accepted
accounting principles ("GAAP" or "U.S. GAAP") for complete financial
statements. These unaudited interim Consolidated Financial Statements should
therefore be read in conjunction with the Consolidated Financial Statements
and Notes thereto for the year ended December 31, 2023 included in the
Company's Annual Report on Form 10-K.
The accompanying unaudited interim Consolidated Financial Statements have been
prepared in accordance with U.S. GAAP, which requires management to make
estimates and assumptions that affect amounts reported in the Consolidated
Financial Statements and accompanying disclosures. Although these estimates
are based on management's best knowledge of current events and actions that
the Company may undertake in the future, actual results may differ from those
estimates. Management uses historical experience and all available information
to make these estimates. The unaudited interim Consolidated Financial
Statements reflect all adjustments of a normal, recurring nature that are, in
the opinion of management, necessary for a fair statement of results for these
interim periods.
Share Repurchase Program -
On February 24, 2020, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $
100.0
million of the Company's common stock. On April 28, 2022, the Company
announced that its Board of Directors had increased the authorization by up to
$
150.0
million in additional aggregate value. The timing and amount of any shares
repurchased will be determined by the Company based on its evaluation of
market conditions and other factors, and will be made in accordance with
applicable securities laws in either the open market or in privately
negotiated transactions. The Company is not obligated to purchase any shares
under the program, and the program may be suspended or discontinued at any
time. The actual timing, number, and share price of shares repurchased will
depend on a number of factors, including the market price of the Company's
common stock, general market and economic conditions, and applicable legal
requirements. Any shares repurchased will be held as treasury stock. During
the three months ended March 31, 2023, the Company repurchased
433,759
shares of common stock for a total of $
7.5
million. The Company did
not
repurchase any shares of its common stock during the three months ended March
31, 2024.
Non-cash Investing Activities
- Purchases of property, plant, and equipment included in accounts payable at
March 31, 2024 and 2023 were $
0.7
million and $
2.3
million, respectively. These non-cash amounts are not reflected as "Capital
expenditures" within Investing Activities on the Consolidated Statements of
Cash Flows for the respective periods.
Operating lease liabilities arising from obtaining right-of-use assets for the
three months ended March 31, 2023 were $
1.1
million.
6
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Recent Accounting Standards
In November 2023, the FASB issued ASU 2023-07 to expand reportable segment
disclosure requirements. This guidance requires that a public entity disclose,
on an annual and interim basis, significant segment expenses that are
regularly provided to the chief operating decision maker ("CODM") and included
within each reported measure of segment profit or loss. All annual disclosures
about a reportable segment's profit or loss and assets currently required by
ASC 280 must also be disclosed in interim periods. Additionally, this standard
requires that a public entity disclose the title and position of the CODM and
an explanation of how the CODM uses the reported measure(s) of segment profit
or loss in assessing segment performance and deciding how to allocate
resources. This standard is effective for the Company beginning with its
annual reporting for the year ended December 31, 2024 and its interim
reporting for the three months ended March 31, 2025. Early adoption is
permitted. The standard requires adoption on a retrospective basis for all
prior periods presented in the financial statements. The Company does not
expect the adoption of this standard to have a significant impact upon the
financial statements.
In December 2023, the FASB issued ASU 2023-09 to enhance the transparency of
income tax disclosures. This guidance requires that public business entities
disclose, on an annual basis, specific categories in the rate reconciliation
and provide additional information for reconciling items that meet a
quantitative threshold. A public business entity is required to provide an
explanation, if not otherwise evident, of the individual reconciling items
disclosed, such as the nature, effect, and underlying causes and the judgment
used in categorizing the reconciling items. This guidance also requires that
all entities disclose, on an annual basis, the amount of income taxes paid
(net of refunds received) disaggregated by federal, state, and foreign taxes
and the amount of income taxes paid (net of refunds received) disaggregated by
those individual jurisdictions equal to or greater than 5 percent of the
total. This standard is effective for the Company for its annual reporting for
the year ended December 31, 2025. Early adoption is permitted. The standard
requires adoption on a prospective basis, although retrospective adoption is
permitted. The Company does not expect the adoption of this standard to have a
significant impact upon the financial statements.
3. Acquisition
On November 1, 2023, the Company acquired (i) all the issued and outstanding
shares of Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier
Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier" or "CD")
for aggregate consideration of $
259.8
million, which equated to a total fair value of consideration transferred of $
246.8
million. This purchase price of $
246.8
million consisted of $
136.9
million in cash payments and an interest-free seller note (the "Seller Note")
with a fair value of $
109.9
million. The Seller Note consists of aggregate principal amounts of $
122.9
million with $
50.0
million maturing on November 1, 2024 and $
72.9
million maturing on November 1, 2025 and is secured by certain assets
(including equity interests) acquired in connection with the acquisition (see
also Note 8. Borrowings).
CD is a manufacturer of film, electrolytic, and mica capacitors used in
medtech, defense, and industrial electrification applications. The transaction
was accounted for as a business combination under Accounting Standards
Codification 805. The Company has substantially completed the purchase price
allocation for the acquisition of CD and has recorded certain measurement
period adjustments to the purchase price allocation during the three months
ended March 31, 2024. As additional information is obtained about the net
assets acquired within the measurement period (not to exceed one year from the
date of acquisition), including finalization of asset appraisals, the Company
will refine its estimates of the purchase price allocation.
7
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The table below represents a preliminary allocation of the purchase price to
net assets acquired as of November 1, 2023:
(in millions)
Receivables $ 13.4
Inventories 40.1
Property, plant, and equipment 30.7
Customer relationships 82.5
Developed technology 19.1
Trademarks 14.0
Operating lease right-of-use assets 3.4
Other assets and deferred charges 3.6
Goodwill 69.4
Current liabilities assumed (
10.9
)
Deferred income taxes (
15.8
)
Long-term operating lease liabilities (
2.7
)
Total purchase price $ 246.8
The following unaudited pro-forma summary presents consolidated financial
information as if CD had been acquired on January 1, 2022. The unaudited
pro-forma financial information is based on historical results of operations
and financial positions of the Company and CD. The pro-forma earnings are
adjusted to reflect the comparable impact of depreciation and amortization
expense resulting from the fair value measurement of tangible and intangible
assets, nonrecurring deal-related costs, employee retention, inventory step-up
charges, and interest expense on borrowings to fund the acquisition.
The unaudited pro-forma financial information does not necessarily represent
the results that would have occurred had the acquisition occurred on January
1, 2022. In addition, the unaudited pro-forma information should not be deemed
to be indicative of future results.
Three Months Ended March 31,
(in millions) 2024 2023
Revenues:
As reported $ 196.4 $ 144.3
Pro-forma 196.4 181.5
Net earnings (loss):
As reported $ 2.5 $ (
5.2
)
Pro-forma 6.3 (
6.7
)
Basic earnings (loss) per share:
As reported $ 0.03 $ (
0.06
)
Pro-forma 0.07 (
0.07
)
Diluted earnings (loss) per share:
As reported $ 0.03 $ (
0.06
)
Pro-forma 0.07 (
0.07
)
8
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Inventories, net
The following table details the major components of inventories, net:
(in millions) March 31, 2024 December 31, 2023
Raw materials $ 147.5 $ 140.3
Work in progress 36.8 36.7
Finished goods 65.1 63.0
Subtotal 249.4 240.0
Less reserves ( (
46.0 43.6
) )
Total $ 203.4 $ 196.4
5. Property, Plant, and Equipment, net
The following table details the major components of property, plant, and
equipment, net:
(in millions) March 31, 2024 December 31, 2023
Land $ 14.2 $ 14.3
Buildings and improvements 121.6 122.5
Machinery, equipment, and other 512.6 518.2
Subtotal 648.4 655.0
Less accumulated depreciation ( (
482.1 479.6
) )
Total $ 166.3 $ 175.4
Depreciation expense totaled $
8.1
million and $
9.2
million for the three months ended March 31, 2024 and 2023, respectively.
6. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill by reportable segment for the
three months ended March 31, 2024 are as follows:
(in millions) Precision Devices MedTech & Specialty Audio Consumer MEMS Microphones Total
Gross value at December 31, 2023 $ 132.8 $ 137.7 $ 741.1 $ 1,011.6
Accumulated impairment loss - - ( (
470.9 470.9
) )
Net carrying value at December 31, 2023 132.8 137.7 270.2 540.7
Measurement period adjustments ( - - (
0.2 0.2
) )
Net carrying value at March 31, 2024 $ 132.6 $ 137.7 $ 270.2 $ 540.5
The Company recorded measurement period adjustments totaling $
0.2
million to goodwill during the three months ended March 31, 2024 related to
the 2023 acquisition of CD.
9
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Other Intangible Assets
The gross carrying value and accumulated amortization for each major class of
intangible assets are as follows:
March 31, 2024 December 31, 2023
(in millions) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Trademarks $ 16.0 $ 1.5 $ 16.0 $ 1.2
Customer relationships 120.6 19.4 121.1 16.0
Developed technology 64.5 29.6 64.5 27.4
Other 2.4 2.0 2.4 2.0
Total 203.5 52.5 204.0 46.6
Unamortized intangible assets:
Trademarks 32.0 32.0
Total intangible assets, net $ 183.0 $ 189.4
During the three months ended March 31, 2024, the Company sold certain
technology related to the CMM segment to a third party for total proceeds of $
7.2
million. After transaction costs of $
1.8
million, the Company recognized a net gain on the sale of this asset of $
5.4
million during the three months ended March 31, 2024.
The Company recorded measurement period adjustments totaling $
0.5
million to customer relationships during three months ended March 31, 2024
related to acquisitions completed in 2023.
Amortization expense totaled $
5.9
million and $
2.9
million for the three months ended March 31, 2024 and 2023, respectively.
Amortization expense for the next five years, based on current definite-lived
intangible balances, is estimated to be as follows:
(in millions)
Q2-Q4 2024 $ 17.1
2025 22.4
2026 16.5
2027 16.5
2028 15.8
2029 and thereafter 62.7
Total $ 151.0
7. 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.
The Company recorded restructuring charges of $
1.8
million during the three months ended March 31, 2024 related to headcount
reductions and $
0.7
million for costs associated with transferring certain capacitors
manufacturing to existing facilities to further optimize operations, all
within the PD segment. The Company recorded charges of $
1.0
million within Gross profit and the remaining $
1.5
million within Operating expenses for the three months ended March 31, 2024.
During the three months ended March 31, 2023, the Company recorded
restructuring charges of $
0.8
million to rationalize the MEMS Microphones product line, which is included
within the Consumer MEMS Microphones segment, and $
0.3
million for other costs. Restructuring charges of $
0.1
million are reflected within Gross profit and $
1.0
million are reflected within Operating expenses for the three months ended
March 31, 2023.
10
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table details restructuring charges incurred by reportable
segment for the periods presented:
Three Months Ended March 31,
(in millions) 2024 2023
Precision Devices $ 2.5 $ -
Consumer MEMS Microphones - 0.8
Corporate - 0.3
Total $ 2.5 $ 1.1
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
(1) (2)
Balance at December 31, 2023 $ 2.4 $ 16.8 $ 19.2
Restructuring charges 2.1 0.4 2.5
Payments ( ( (
1.6 5.7 7.3
) ) )
Other, including foreign currency - ( (
1.4 1.4
) )
Balance at March 31, 2024 $ 2.9 $ 10.1 $ 13.0
(1)
All accruals for Severance Pay and Benefits are reflected within Other accrued
expenses on the Consolidated Balance Sheet.
(2)
Accruals for Contract Termination and Other Costs of $5.1 million and $6.1
million were reflected within Other accrued expenses on the Consolidated
Balance Sheet at March 31, 2024 and December 31, 2023, respectively. The
remaining balances are reflected within Other liabilities.
The severance and restructuring accruals are recorded in the following line
item on the Consolidated Balance Sheets:
(in millions) March 31, 2024 December 31, 2023
Other accrued expenses $ 8.0 $ 8.5
Other liabilities 5.0 10.7
Total $ 13.0 $ 19.2
8. Borrowings
Revolving credit facility borrowings consist of the following:
(in millions) March 31, 2024 December 31, 2023
$400.0 million Revolving Credit Facility $ 180.0 $ 160.0
Seller Note 113.2 111.2
Total 293.2 271.2
Less current maturities of Seller Note 48.0 47.1
Total long-term debt $ 245.2 $ 224.1
Total debt principal payments over the next five years are as follows:
(in millions)
Q2-Q4 2024 $ 50.0
2025 72.9
2026 -
2027 -
2028 180.0
11
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Facility
On February 8, 2023, the Company entered into an Amended and Restated Credit
Agreement (the "A&R Credit Agreement") that amends and restates the prior
Credit Agreement, dated September 4, 2020, and provides for a senior secured
revolving credit facility with borrowings in an aggregate principal amount at
any time outstanding not to exceed $
400.0
million (the "Credit Facility"). The A&R Credit Agreement, among other things,
extends the maturity date of the Credit Facility from January 2, 2024 to
February 8, 2028, replaces the London Inter-Bank Offered Rate ("LIBOR") with
the Term Secured Overnight Financing Rate ("Term SOFR") as a reference rate
available for borrowings, amends the minimum Interest Coverage Ratio, and
amends certain other financial covenants with which the Company must comply,
as described below.
On September 25, 2023, the Company amended its A&R Credit Agreement to, among
other things, (a) permit the Company in connection with the acquisition of CD,
to incur senior priority seller financing indebtedness (the "Seller Note") in
an aggregate principal amount of $
122.9
million secured by certain assets (including equity interests) acquired in
connection with such acquisition and the capital stock of Cornell Dubilier,
LLC (the "Acquisition Assets"), which shall mature two years after the
effective date of such Seller Note (the "Seller Note Maturity Date"), (b)
extends the requirement to pledge the Acquisition Assets that would otherwise
constitute collateral under the Credit Agreement to the date that is 90 days
after the Seller Note Maturity Date, and (c) restricts, until the Seller Note
Maturity Date, the amount of dispositions and investments from the Company and
certain of its subsidiaries into Cornell Dubilier, LLC and the acquired
subsidiaries that constitute Acquisition Assets from exceeding $
80.0
million in the aggregate. All other terms remain the same as the A&R Credit
Agreement dated February 8, 2023.
Up to $
100.0
million of the Credit Facility will be available in Euro, Pounds Sterling, and
other currencies requested by the Company and up to $
50.0
million of the Credit Facility will be made available in the form of letters
of credit. Undrawn amounts under the Credit Facility accrue a commitment fee
at a per annum rate of
0.225
% to
0.350
%, based on a leverage ratio grid.
At any time during the term of the Credit Facility, the Company will be
permitted to increase the commitments under the Credit Facility or to
establish one or more incremental term loan facilities under the Credit
Facility in an aggregate principal amount not to exceed the sum of $
200.0
million, plus additional amounts, so long as the senior secured leverage ratio
does not exceed
2.00
to 1.00.
The A&R Credit Agreement includes requirements, to be tested quarterly, that
the Company maintains (i) a minimum ratio of Consolidated EBITDA to
consolidated cash interest expense of
3.00
to 1.00, (the "Interest Coverage Ratio"), (ii) a ratio of total indebtedness,
minus netted cash in an aggregate amount not to exceed $50.0 million, to
Consolidated EBITDA of
3.75
to 1.00 (the "Total Net Leverage Ratio"), and (iii) a maximum ratio of senior
net secured indebtedness to Consolidated EBITDA of
3.25
to 1.00 (the "Senior Secured Net Leverage Ratio"). For these ratios,
Consolidated EBITDA and consolidated interest expense are calculated using the
most recent four consecutive fiscal quarters in a manner defined in the A&R
Credit Agreement. At March 31, 2024, the Company was in compliance with these
covenants and it expects to remain in compliance with all of its debt
covenants over the next twelve months.
The interest rates under the Credit Facility will be, at the Borrowers' option
(1) (A) in the case of borrowings denominated in U.S. dollars Term SOFR, (B)
in the case of borrowings denominated in Sterling, Daily Simple Sonia, or (C)
for borrowings denominated in Euro, EURIBOR, in each case, plus the rates per
annum determined from time to time based on the total net leverage ratio of
the Company as of the end of and for the most recent period of four fiscal
quarters for which financial statements have been delivered (the "Applicable
Margin"); or (2) in the case of borrowings denominated in U.S. dollars,
alternate base rate ("ABR") (as defined in the A&R Credit Agreement) plus the
Applicable Margin. The Applicable Margin for Term SOFR, Daily Simple Sonia, or
EURIBOR could range from
1.50
% to
2.50
% while the Applicable Margin for ABR could range from
0.50
% to
1.50
%.
The weighted-average interest rate on the Company's borrowings under the
Credit Facility and the 2020 credit facility was
7.03
% and
6.01
% for the three months ended March 31, 2024 and 2023, respectively. The
weighted-average commitment fee on the revolving line of credit was
0.24
% and
0.23
% for the three months ended March 31, 2024 and 2023, respectively.
12
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Seller Note
On November 1, 2023, the Company completed the acquisition of CD for a total
purchase price of $
246.8
million. This acquisition was funded by borrowings on the Revolving Credit
Facility and an interest-free note from the seller with aggregate principal
payments of $
122.9
million (the "Seller Note"). The Seller Note is due and payable in cash with $
50.0
million maturing on November 1, 2024 and $
72.9
million maturing on November 1, 2025. On the acquisition date, the Company
recorded the Seller Note at its present value of $
109.9
million by discounting the future principal payments using an imputed rate of
interest of approximately
7.1
% in accordance with accounting guidance in ASC 835, Interest. The Company
recognized imputed interest expense on the Seller Note of approximately $
2.0
million for the three months ended March 31, 2024.
The Seller Note is secured by certain assets (including equity interest)
acquired in connection with the acquisition. The Seller Note includes Knowles
Capital Holdings, Inc. and Knowles Intermediate PD Holdings, LLC as borrowers,
which jointly and severally agree to pay James P. Kaplan, as representative of
the sellers of Cornell Dubilier, the principal amount of $
122.9
million as described above. The Seller Note is not interest-bearing except at
such time as an event of default has occurred, upon which and during the
continuance of an event of default, all overdue principal will accrue interest
at 2.0% per annum plus the SOFR-based rate otherwise applicable under the
Company's existing credit facility. The Seller Note is subject to customary
conditions and events of default and the secured nature of the Seller Note is
supported by a Security Agreement.
9. Other Comprehensive Earnings
The amounts recognized in other comprehensive (loss) earnings were as follows::
Three Months Ended Three Months Ended
March 31, 2024 March 31, 2023
(in millions) Pre-tax Tax Net of tax Pre-tax Tax Net of tax
Foreign currency translation $ ( $ - $ ( $ 3.6 $ - $ 3.6
3.4 3.4
) )
Employee benefit plans 0.1 - 0.1 0.2 - 0.2
Changes in fair value of cash flow hedges ( 0.3 ( ( 0.3 0.2
0.6 0.3 0.1
) ) )
Total other comprehensive (loss) earnings $ ( $ 0.3 $ ( $ 3.7 $ 0.3 $ 4.0
3.9 3.6
) )
The following tables summarize the changes in balances of each component of
accumulated other comprehensive loss, net of tax during the three months ended
March 31, 2024 and 2023:
(in millions) Cash flow hedges Employee benefit plans Cumulative foreign currency Total
translation adjustments
Balance at $ ( $ ( $ ( $ (
December 31, 2023 0.7 16.2 112.9 129.8
) ) ) )
Other comprehensive (loss) ( 0.1 ( (
earnings, net of tax 0.3 3.4 3.6
) ) )
Balance at $ ( $ ( $ ( $ (
March 31, 2024 1.0 16.1 116.3 133.4
) ) ) )
(in millions) Cash flow hedges Employee benefit plans Cumulative foreign currency Total
translation adjustments
Balance at $ 1.0 $ ( $ ( $ (
December 31, 2022 16.3 106.8 122.1
) ) )
Other comprehensive 0.2 0.2 3.6 4.0
earnings, net of tax
Balance at $ 1.2 $ ( $ ( $ (
March 31, 2023 16.1 103.2 118.1
) ) )
13
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following tables summarize the amounts reclassified from accumulated other
comprehensive loss to earnings:
Three Months Ended March 31,
(in millions) Statement of Earnings Line 2024 2023
Pension and post-retirement benefit plans:
Amortization or settlement of actuarial losses and prior service costs Other (income) expense, net $ 0.1 $ 0.2
Tax Provision for income taxes - -
Net of tax $ 0.1 $ 0.2
Cash flow hedges:
Net losses reclassified into earnings Cost of goods sold $ 1.3 $ 0.1
Tax Provision for income taxes ( -
0.3
)
Net of tax $ 1.0 $ 0.1
10. Income Taxes
Income taxes for the interim periods presented have been included in the
accompanying Consolidated Financial Statements on the basis of an estimated
annual effective tax rate ("ETR"). The determination of the consolidated
provision for income taxes requires management to make certain judgments and
estimates. Changes in the estimated level of annual pre-tax earnings or loss,
tax laws, and changes resulting from tax audits can affect the overall ETR,
which impacts the level of income tax expense or benefit and net income or
loss. Judgments and estimates related to the Company's projections and
assumptions are inherently uncertain and therefore, actual results could
differ materially from projections.
The Company's ETR for the three months ended March 31, 2024 and 2023 was
56.1
% and (
26.8
)%, respectively. The ETR includes discrete items totaling $
0.8
million and $
0.6
million of tax expense for the three months ended March 31, 2024 and 2023,
respectively. The discrete items impacting the tax provision for the three
months ended March 31, 2024 and 2023 were primarily attributable to
stock-based compensation. Absent the discrete items, the ETR for the three
months ended March 31, 2024 and 2023 was
42.1
% and (
12.2
)%, respectively. The Company accrues taxes in various countries where it
generates income and applies a valuation allowance in other jurisdictions,
which resulted in the provisions for the three months ended March 31, 2024 and
2023.
11. Equity Incentive Program
The following table summarizes the stock-based compensation expense recognized
by the Company for the periods presented:
Three Months Ended March 31,
(in millions) 2024 2023
Total pre-tax stock-based compensation expense $ 6.7 $ 7.8
Tax benefit 2.7 2.9
Total stock-based compensation expense, net of tax $ 4.0 $ 4.9
14
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock Options
No stock options were granted during the three months ended March 31, 2024 and
2023.
The following table summarizes the Company's stock option activity for the
three months ended March 31, 2024:
Stock Options
Number of Shares Weighted-Average Aggregate Intrinsic Value Weighted-Average Remaining
Exercise Price Contractual Term (Years)
(in millions, except share and per share amounts)
Outstanding at December 31, 2023 2,104,356 $ 17.15
Expired ( 19.28
328,414
)
Outstanding at 1,775,942 $ 16.76 $ 0.8 2.3
March 31, 2024
Exercisable at 1,719,549 $ 16.61 $ 0.8 2.3
March 31, 2024
At March 31, 2024, unrecognized compensation expense related to stock options
not yet exercisable of $
0.3
million is expected to be recognized over a weighted-average period of
0.9
years.
RSUs
The following table summarizes the Company's restricted stock unit ("RSU")
activity for the three months ended March 31, 2024:
Share units Weighted-average grant date fair value
Unvested at December 31, 2023 2,075,007 $ 19.49
Granted 1,332,814 16.75
Vested ( 20.10
(1) 823,639
)
Forfeited ( 18.17
41,607
)
Unvested at March 31, 2024 2,542,575 $ 17.88
(1)
The number of RSUs vested includes shares that the Company withheld on behalf
of employees to satisfy statutory tax withholding requirements.
At March 31, 2024, $
35.8
million of unrecognized compensation expense related to RSUs is expected to be
recognized over a weighted-average period of
2.2
years.
PSUs
The Company grants performance share units ("PSUs") to senior management. In
each case, the awards will cliff vest three years following the grant date.
PSUs will be settled in shares of the Company's common stock. Depending on the
Company's overall performance relative to the applicable measures, the size of
the PSU awards are subject to adjustment, up or down, resulting in awards at
the end of the performance period that can range from
0
% to
225
% of target. The Company will ratably recognize the expense over the
applicable service period for each grant of PSUs and adjust the expense for
the expected achievement of performance conditions as appropriate. The fair
value of PSUs is determined by using a Monte Carlo simulation. For the awards
granted in February 2024, 2023, and 2022, the number of PSUs that may be
earned and vest is based on total shareholder return ("TSR") relative to the
component companies of the Russell 2000 Index over a three-year performance
period..
15
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the Company's PSU activity for the three months
ended March 31, 2024:
Share units Weighted-average grant date fair value
Unvested at December 31, 2023 864,749 $ 29.28
Granted 393,734 24.09
Vested ( 28.49
(1) 258,680
)
Unvested at March 31, 2024 999,803 $ 26.79
(1)
The number of PSUs vested includes shares that the Company withheld on behalf
of employees to satisfy statutory tax withholding requirements.
At March 31, 2024, $
17.3
million of unrecognized compensation expense related to PSUs is expected to be
recognized over a weighted-average period of
2.0
years.
12. Earnings per Share
Basic and diluted earnings per share were computed as follows:
Three Months Ended March 31,
(in millions, except per share amounts) 2024 2023
Net earnings (loss) $ 2.5 $ (
5.2
)
Basic:
Net earnings (loss) per share $ 0.03 $ (
0.06
)
Weighted-average shares outstanding 89.6 91.4
Diluted:
Net earnings (loss) per share $ 0.03 $ (
0.06
)
Weighted-average shares outstanding 90.5 91.4
For the three months ended March 31, 2024 and 2023, the weighted-average
number of anti-dilutive potential common shares for stock-based awards
excluded from the diluted earnings per share calculation above was
2.1
million and
2.9
million, respectively.
13. Commitments and Contingent Liabilities
From time to time, the Company is involved in various legal proceedings and
claims arising in the ordinary course of its business. The majority of these
claims and proceedings relate to commercial, warranty, employment, and
intellectual property matters. Although the ultimate outcome of any legal
proceeding or claim cannot be predicted with certainty, based on present
information, including management's assessment of the merits of the particular
claim, the Company believes that the disposition of these legal proceedings or
claims, individually or in the aggregate, after taking into account recorded
accruals and the availability and limits of insurance coverage, will not have
a material adverse effect on its cash flow, results of operations, or
financial condition.
The Company owns many patents and other intellectual property pertaining to
its products, technology, and manufacturing processes. Some of the Company's
patents have been and may continue to be infringed upon or challenged by
others. In appropriate cases, the Company has taken and will take steps to
protect and defend its patents and other intellectual property, including
through the use of legal proceedings in various jurisdictions around the
world. Such steps have resulted in and may continue to result in retaliatory
legal proceedings, including litigation or other legal proceedings in various
jurisdictions and forums around the world alleging infringement by the Company
of patents owned by others. The costs of investigations and legal proceedings
relating to the enforcement and defense of the Company's intellectual property
may be substantial. Additionally, in multi-forum disputes, the Company may
incur adverse judgments with regard to certain claims in certain jurisdictions
and forums while still contesting other related claims against the same
opposing party in other jurisdictions and forums.
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 March 31, 2024 and
December 31, 2023.
14. Segment Information
The Company's
three
reportable segments are Precision Devices, MedTech & Specialty Audio, and
Consumer MEMS Microphones. Information regarding the Company's reportable
segments is as follows
:
Three Months Ended March 31,
(in millions) 2024 2023
Revenues:
Precision Devices $ 74.3 $ 53.7
MedTech & Specialty Audio 57.1 45.5
Consumer MEMS Microphones 65.0 45.1
Total revenues $ 196.4 $ 144.3
Earnings (loss) before interest and income taxes:
Precision Devices $ ( $ 10.7
2.1
)
MedTech & Specialty Audio 22.7 11.4
Consumer MEMS Microphones 5.3 (
(1) 8.2
)
Total segments 25.9 13.9
Corporate expense / other 15.8 17.2
Interest expense, net 4.4 0.8
Earnings (loss) before income taxes 5.7 (
4.1
)
Provision for income taxes 3.2 1.1
Net earnings (loss) $ 2.5 $ (
5.2
)
(1)
Includes Gain on sale of asset, net of $
5.4
million for the three months ended March 31, 2024. See Note 6. Goodwill and
Other Intangible Assets.
Information regarding assets of the Company's reportable segments:
Total Assets
(in millions) March 31, 2024 December 31, 2023
Precision Devices $ 596.1 $ 577.9
MedTech & Specialty Audio 351.9 351.1
Consumer MEMS Microphones 531.9 530.0
Corporate / eliminations 3.5 3.8
Total $ 1,483.4 $ 1,462.8
17
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Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table details revenues by geographic location. Revenues are
attributed to regions based on the location of the Company's direct customer,
which in some instances is an intermediary and not necessarily the end user.
The Company's businesses are based primarily in Asia, North America, and
Europe.
Three Months Ended March 31,
(in millions) 2024 2023
Asia $ 105.7 $ 80.0
United States 58.1 35.3
Europe 26.2 24.1
Other Americas 2.8 2.1
Other 3.6 2.8
Total $ 196.4 $ 144.3
Receivables, net from contracts with customers were $
120.6
million and $
129.2
million as of March 31, 2024 and December 31, 2023, respectively. As of March
31, 2024 and December 31, 2023, our total remaining performance obligations
were immaterial.
18
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Table of Contents
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934 relating to our operations, results of
operations, our continued business operations, and other matters that are
based on our current expectations, estimates, assumptions, and projections.
Words such as "believe," "expect," "anticipate," "project," "estimate,"
"budget," "continue," "could," "intend," "may," "plan," "potential,"
"predict," "seek," "should," "will," "would," "objective," "forecast," "goal,"
"guidance," "outlook," "effort," "target," and similar expressions, among
others, generally identify forward-looking statements, which speak only as of
the date the statements were made. The statements in this Quarterly Report on
Form 10-Q, including those statements related to our expectations regarding
the acquisition of Cornell Dubilier and the evaluation of strategic
alternatives for the CMM business, are based on currently available
information and the current expectations, forecasts, and assumptions of our
management concerning risks and uncertainties that could cause actual outcomes
or results to differ materially from those outcomes or results that are
projected, anticipated, or implied in these statements. Other risks and
uncertainties include, but are not limited to:
o incurrence of additional impairment charges and a significant charge to earnings due
to future events or factors, such as the outcome of our strategic alternatives review
of the CMM segment (which could result in either a sale or a restructuring of our CMM
segment), or changes to the underlying assumptions used to calculate fair value;
o a significant reduction in MEMS microphone sales due
to any weakening in demand, loss of market share,
or other factors adversely affecting our levels
and the timing of our sale of MEMS microphones;
o our ongoing ability to execute our strategy
to diversify our end markets and customers;
o our ability to stem or overcome price erosion in our segments;
o difficulties or delays in and/or the Company's inability
to realize expected synergies from its acquisitions;
o fluctuations in our stock's market price;
o fluctuations in operating results and cash flows;
o our ability to prevent or identify quality issues in our products
or to promptly remedy any such issues that are identified;
o the timing of OEM product launches;
o risks associated with increasing our inventories
in advance of anticipated orders by customers;
o global economic instability, including due to
inflation, rising interest rates, negative impacts
caused by pandemics and public health crises,
or the impacts of geopolitical uncertainties;
o the impact of changes to laws and
regulations that affect the Company's
ability to offer products or services
to customers in different regions;
o our ability to achieve reductions in our operating expenses;
o the ability to qualify our products and facilities with customers;
o our ability to obtain, enforce, defend, or
monetize our intellectual property rights;
o disruption caused by a cybersecurity incident, including a cyber
attack, cyber breach, theft, or other unauthorized access;
o increases in the costs of critical raw materials and components;
o availability of raw materials and components;
o managing new product ramps and introductions for our customers;
o our dependence on a limited number of large customers;
o our ability to maintain and expand our existing relationships
with leading OEMs in order to maintain and increase our revenue;
o increasing competition and new entrants
in the market for our products;
o our ability to develop new or enhanced products or technologies
in a timely manner that achieve market acceptance;
o our reliance on third parties to manufacture,
assemble, and test our products and sub-components;
o escalating international trade tensions, new or
increased tariffs, and trade wars among countries;
o financial risks, including risks
relating to currency fluctuations,
credit risks, and fluctuations in the market value of the Company;
o a sustained decline in our stock
price and market capitalization may
result in the impairment of certain
intangible or long-lived assets;
o market risk associated with fluctuations in commodity prices, particularly
for various precious metals used in our manufacturing operation,
o changes in tax laws, changes in tax rates,
and exposure to additional tax liabilities.
A more complete description of these risks, uncertainties, and other factors
can be found under the heading "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2023. We do not undertake to update or
revise our forward-looking statements as a result of new information, future
events, or otherwise, except as required by law.
19
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and related Notes included elsewhere in this
Quarterly Report on Form 10-Q.
Overview
We are a market leader and global provider of high performance capacitors and
radio frequency ("RF") filtering products, balanced armature speakers,
advanced micro-acoustic microphones, and audio solutions, serving the medtech,
defense, electric vehicle, industrial, communications, and consumer
electronics markets. Our focus on the customer, combined with unique
technology, proprietary manufacturing techniques, and global operational
expertise, enables us to deliver innovative solutions across multiple
applications. References to "Knowles," the "Company," "we," "our," or "us"
refer to Knowles Corporation and its consolidated subsidiaries, unless the
context otherwise requires.
We sell our products directly to original equipment manufacturers ("OEMs") and
to their contract manufacturers and suppliers and through distributors
worldwide.
Recent Developments
On September 18, 2023, we announced that we are reviewing strategic
alternatives for the CMM business. This includes a range of possibilities,
such as: a potential sale, restructuring the business, as well as continuing
to operate the business as is. No assurance can be given that any transaction
or other strategic outcomes will result from the review. Further, there can be
no assurance that the outcome of the strategic alternative review will result
in our being able to recover the carrying value of the CMM segment. While the
review is progressing, we have not set a timetable for the conclusion of the
strategic review and do not intend to comment on or provide updates regarding
these matters unless and until we determine that further disclosure is
appropriate or required.
On November 1, 2023, we acquired (i) all the issued and outstanding shares of
Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier
Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier" or "CD")
for aggregate consideration of $259.8 million, which equated to a total fair
value of consideration transferred of $246.8 million. The acquired business is
a manufacturer of film, electrolytic, and mica capacitors used in medtech,
defense, and industrial electrification applications. The acquisition's
operations are included in the PD segment. For additional information, refer
to Note 3. Acquisition to our Consolidated Financial Statements under Part I,
Item 1, "Financial Statements."
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.
20
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Table of Contents
Results of Operations for the Three Months Ended March 31, 2024 compared with
the Three Months Ended March 31, 2023
Three Months Ended March 31,
(in millions, except per share amounts) 2024 2023
Revenues $ 196.4 $ 144.3
Gross profit $ 69.9 $ 53.8
Non-GAAP gross profit $ 74.7 $ 54.4
Earnings (loss) before interest and income taxes $ 10.1 $ (3.3)
Adjusted earnings before interest and income taxes $ 25.7 $ 8.1
Provision for income taxes $ 3.2 $ 1.1
Non-GAAP provision for income taxes $ 2.7 $ 2.2
Net earnings (loss) $ 2.5 $ (5.2)
Non-GAAP net earnings $ 18.6 $ 5.1
Diluted earnings (loss) per share $ 0.03 $ (0.06)
Non-GAAP diluted earnings per share $ 0.20 $ 0.05
Revenues
Revenues for the first quarter of 2024 were $196.4 million, compared with
$144.3 million for the first quarter of 2023, an increase of $52.1 million or
36.1%.
PD revenues increased
$20.6 million due to our acquisition of the CD business, partially offset by
lower demand from the medtech, industrial, and communication markets in our
legacy PD business as a result of continued demand weakness associated with
excess customer and channel inventory. CMM revenues increased $19.9 million,
primarily due to higher demand in the ear, mobile, and computing markets,
partially offset by lower average pricing on mature products. MSA revenues
increased $11.6 million, primarily due to higher shipping volumes of hearing
health products driven by stronger end market demand. In addition, revenues in
the first quarter of 2023 were unfavorably impacted by financial incentives
offered to customers in the fourth quarter of 2022, which resulted in higher
shipping volumes in the fourth quarter of 2022 and lower revenues in the first
quarter of 2023.
Cost of Goods Sold
Cost of goods sold ("COGS") for the first quarter of 2024 was $125.5 million,
compared with $90.4 million for the first quarter of 2023, an increase of
$35.1 million or 38.8%. This increase was primarily due to our acquisition of
CD, higher shipping volumes, and lower factory capacity utilization in our
legacy PD business, partially offset by product cost reductions and fa
vorable foreign currency changes
.
Restructuring Charges
During the first quarter of 2024, we recorded restructuring charges of $1.8
million related to headcount reductions and $0.7 million for costs associated
with transferring certain capacitors manufacturing to existing facilities to
further optimize operations, all within our PD segment. For additional
information, refer to Note 7. Restructuring and Related Activities to our
Consolidated Financial Statements.
21
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Table of Contents
During the first quarter of 2023, we recorded restructuring charges of $0.8
million related to headcount reductions in our CMM segment and $0.3 million
for other costs. For additional information, refer to Note 7. Restructuring
and Related Activities to our Consolidated Financial Statements.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the first quarter of 2024 was $69.9 million, compared with
$53.8 million for the first quarter of 2023, an increase of $16.1 million or
29.9%. Gross profit margin (gross profit as a percentage of revenues) for the
first quarter of 2024 was 35.6%, compared with 37.3% for the first quarter of
2023. The increase in gross profit was primarily due to higher shipping
volumes, product cost reductions, our acquisition of CD, favorable foreign
currency changes, and higher factory capacity utilization in our CMM segment,
partially offset by lower average pricing on mature products shipped into the
mobile market, lower factory capacity utilization in our legacy PD business,
our acquisition-related costs of CD, and increased restructuring charges. The
decrease in gross profit margin was primarily due to lower average pricing on
mature products shipped into the mobile market, lower factory capacity
utilization in our legacy PD business, our acquisition-related costs of CD,
and increased restructuring charges, partially offset by product cost
reductions, favorable foreign currency changes, and higher factory capacity
utilization in our CMM segment.
Non-GAAP gross profit for the first quarter of 2024 was $74.7 million,
compared with $54.4 million for the first quarter of 2023, an increase of
$20.3 million or 37.3%. Non-GAAP gross profit margin (non-GAAP gross profit as
a percentage of revenues) for the first quarter of 2024 was 38.0%, compared
with 37.7% for the first quarter of 2023. The increase in non-GAAP gross
profit was primarily due to higher shipping volumes, product cost reductions,
our acquisition of CD, favorable foreign currency changes, and higher factory
capacity utilization in our CMM segment, partially offset by lower average
pricing on mature products shipped into the mobile market and lower factory
capacity utilization in our legacy PD business. The increase in non-GAAP gross
profit margin was primarily due to product cost reductions, favorable foreign
currency changes, and higher factory capacity utilization in our CMM segment,
partially offset by lower average pricing on mature products shipped into the
mobile market and lower factory capacity utilization in our legacy PD business.
Research and Development Expenses
Research and development expenses for the first quarter of 2024 were $20.6
million, compared with $20.0 million for the first quarter of 2023, an
increase of $0.6 million or 3.0%. Research and development expenses as a
percentage of revenues for the first quarter of 2024 and 2023 were 10.5% and
13.9%, respectively. The increase in expenses was primarily driven by our
acquisition of the CD business that increased expenses in our PD segment and
additional development activities in our MSA segment, partially offset by
reduced spending in our CMM segment driven by the benefits of prior year
restructuring actions as we continue to shift our focus and spending to our
higher margin businesses. The decrease in expenses as a percentage of revenues
was driven by our higher revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the first quarter of 2024 were $43.5
million, compared with $33.8 million for the first quarter of 2023, an
increase of $9.7 million or 28.7%. Selling and administrative expenses as a
percentage of revenues for the first quarter of 2024 and 2023 were 22.1% and
23.4%, respectively. The increase in expenses was primarily driven by our
acquisition of CD. The decrease in expenses as a percentage of revenues was
driven by higher revenues.
Interest Expense, net
Interest expense for the first quarter of 2024 was $4.4 million, compared with
$0.8 million for the first quarter of 2023, an increase of $3.6 million. The
increase is primarily due to imputed interest expense on our Seller Note from
the CD acquisition, a higher outstanding revolving credit facility balance,
and higher interest rates during the first quarter of 2024. For additional
information on borrowings and interest expense, refer to Note 8. Borrowings to
our Consolidated Financial Statements.
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Table of Contents
Other (Income) Expense, net
Other income for the first quarter of 2024 was $0.4 million, compared with
expense of $2.3 million for the first quarter of 2023, a change of $2.7
million. Income in 2024 primarily represents unrealized gains in our
investment balances. Expense in 2023 primarily represents unfavorable impacts
from foreign currency exchange rate changes, partially offset by the
unrealized gains in our investment balances.
Gain on Sale of Asset, net
The gain on sale of asset of $5.4 million is related to the sale of
intellectual property previously used in the Intelligent Audio product line,
which is included the CMM segment. For additional information, refer to Note
6. Goodwill and Other Intangible Assets.
Provision for Income Taxes and Non-GAAP Provision for Income Taxes
The effective tax rate ("ETR") for the first quarter of 2024 and 2023 was
56.1% and (26.8)%, respectively. The ETR for the first quarter of 2024 and
2023 includes discrete items totaling $0.8 million and $0.6 million of tax
expense, respectively. The discrete items impacting the tax provision for 2024
and 2023 are primarily attributable to stock-based compensation. Absent the
discrete items, the ETR for the first quarter of 2024 and 2023 was 42.1% and
(12.2)%, respectively. The Company accrues taxes in various countries where it
generates income and applies a valuation allowance in other jurisdictions,
which resulted in the provision for the first quarter of 2024 and 2023,
respectively. The change in the ETR was due to the mix of earnings and losses
by taxing jurisdictions and net discrete items.
The non-GAAP ETR for the first quarter of 2024 and 2023 was 12.7% and 30.1%,
respectively. The non-GAAP ETR includes discrete items totaling $0.7 million
and $0.9 million of tax expense for the first quarter of 2024 and 2023,
respectively. Absent the discrete items, the non-GAAP ETR for the first
quarter of 2024 and 2023 was 9.4% and 17.8%, respectively. The change in the
non-GAAP ETR was primarily due to increased utilization of foreign tax credits
compared to the prior year.
Net Earnings (Loss)
Net earnings for the first quarter of 2024 were $2.5 million, compared with a
$5.2 million loss for the first quarter of 2023, an increase of $7.7 million.
As described above, the increase is primarily due to higher gross profit and
the gain on sale of asset, partially offset by higher operating expenses and
interest expense.
Earnings (Loss) and Adjusted Earnings Before Interest and Income Taxes
Earnings before interest and income taxes ("EBIT") for the first quarter of
2024 was $10.1 million, compared with a $3.3 million loss for the first
quarter of 2023, an increase of $13.4 million. EBIT margin (EBIT as a
percentage of revenues) for the first quarter of 2024 was 5.1%, compared with
(2.3)% for the first quarter of 2023. The change is primarily due to higher
gross profit and the gain on sale of asset, partially offset by higher
operating expenses.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") for the
first quarter of 2024 was $25.7 million, compared with $8.1 million for the
first quarter of 2023, an increase of $17.6 million. Adjusted EBIT margin
(Adjusted EBIT as a percentage of revenues) for the first quarter of 2024 was
13.1%, compared with 5.6% for the first quarter of 2023. The increases were
primarily due to higher non-GAAP gross profit, partially offset by higher
non-GAAP operating expenses.
Diluted Earnings (Loss) per Share and Non-GAAP Diluted Earnings per Share
Diluted earnings per share was $0.03 for the first quarter of 2024, compared
with loss per share of $0.06 for the first quarter of 2023, an increase of
$0.09. As described above, the increase is primarily due to higher gross
profit and the gain on sale of asset, partially offset by operating expenses
and interest expense.
Non-GAAP diluted earnings per share was $0.20 for the first quarter of 2024,
compared with $0.05 for the first quarter of 2023, an increase of $0.15. As
described above, the increase was primarily due to higher non-GAAP gross
profit partially offset by higher non-GAAP operating expenses and interest
expense.
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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(1)
Three Months Ended
March 31,
(in millions, except per share amounts) 2024 2023
Gross profit $ 69.9 $ 53.8
Stock-based compensation expense 0.5 0.5
Restructuring charges 1.0 0.1
Production transfer costs 0.8 -
(2)
Acquisition-related costs 1.4 -
(3)
Other 1.1 -
(4)
Non-GAAP gross profit $ 74.7 $ 54.4
Net earnings (loss) $ 2.5 $ (5.2)
Interest expense, net 4.4 0.8
Provision for income taxes 3.2 1.1
Earnings (loss) before interest and income taxes 10.1 (3.3)
Stock-based compensation expense 6.7 7.8
Intangibles amortization expense 5.9 2.9
Restructuring charges 2.5 1.1
Production transfer costs 0.8 -
(2)
Acquisition-related costs 4.2 -
(3)
Gain on sale of asset (5.4) -
(5)
Other 0.9 (0.4)
(4)
Adjusted earnings before interest and income taxes $ 25.7 $ 8.1
Provision for income taxes $ 3.2 $ 1.1
Income tax effects of non-GAAP reconciling adjustments (0.5) 1.1
(6)
Non-GAAP provision for income taxes $ 2.7 $ 2.2
Net earnings (loss) $ 2.5 $ (5.2)
Non-GAAP reconciling adjustments 15.6 11.4
(7)
Income tax effects of non-GAAP reconciling adjustments (0.5) 1.1
(6)
Non-GAAP net earnings $ 18.6 $ 5.1
Diluted earnings (loss) per share $ 0.03 $ (0.06)
Earnings per share non-GAAP reconciling adjustment 0.17 0.11
Non-GAAP diluted earnings per share $ 0.20 $ 0.05
Diluted average shares outstanding 90.5 91.4
Non-GAAP adjustment 2.2 3.3
(8)
Non-GAAP diluted average shares outstanding 92.7 94.7
(8)
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(1)
In addition to the GAAP financial measures included herein, Knowles has
presented certain non-GAAP financial measures that exclude certain amounts
that are included in the most directly comparable GAAP measures. Knowles
believes that non-GAAP measures are useful as supplements to its GAAP results
of operations 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 within the United States. These amounts
are included in the corresponding Gross profit and Earnings (loss) before
interest and income taxes for each period presented.
(3)
These expenses are related to the acquisition of CD by the PD segment. These
expenses include ongoing costs to facilitate integration, the amortization of
fair value adjustments to inventory, and costs incurred by the Company to
carry out this transaction.
(4)
Other expenses include non-recurring professional service fees related to an
execution of various reorganization projects, foreign currency exchange rate
impacts on restructuring balances, and the ongoing net lease cost (income)
related to facilities not used in operations.
(5)
This gain is related to the sale of intellectual property previously used in
the Intelligent Audio product line, which is included within the CMM segment.
(6)
Income tax effects of non-GAAP reconciling adjustments are calculated using
the applicable tax rates in the jurisdictions of the underlying adjustments.
(7)
The non-GAAP reconciling adjustments are those adjustments made to reconcile
Earnings (loss) before interest and income taxes to Adjusted earnings before
interest and income taxes
.
(8)
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.
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Segment Results of Operations for the Three Months Ended March 31, 2024
compared with the Three Months Ended
March 31, 2023
The following is a summary of the results of operations of our three
reportable segments: Precision Devices, Medtech & Specialty Audio, and
Consumer MEMS Microphones.
See Note 14. Segment Information to the Consolidated Financial Statements for
(i) a reconciliation of segment revenues to our consolidated revenues and (ii)
a reconciliation of segment earnings before interest and income taxes to our
consolidated earnings.
Precision Devices
Three Months Ended March 31,
(in millions) 2024 Percent of Revenues 2023 Percent of Revenues
Revenues $ 74.3 $ 53.7
(Loss) earnings before interest and income taxes $ (2.1) (2.8)% $ 10.7 19.9%
Stock-based compensation expense 0.1 0.9
Intangibles amortization expense 4.4 1.4
Restructuring charges 2.5 -
Production transfer costs 0.8 -
(1)
Acquisition-related costs 3.6 -
(2)
Other 0.5 -
Adjusted earnings before interest and income taxes $ 9.8 13.2% $ 13.0 24.2%
(1)
Production transfer costs represent costs incurred to migrate manufacturing to existing facilities.
(2)
These expenses are related to the acquisition of CD. These expenses include ongoing costs to facilitate integration and the
amortization of fair value adjustments to inventory.
Revenues
PD revenues were $74.3 million for the first quarter of 2024, compared with
$53.7 million for the first quarter of 2023, an increase of $20.6 million or
38.4%. Revenues increased due to our acquisition of the CD business, partially
offset by lower demand from the medtech, industrial, and communication markets
in our legacy PD business as a result of continued demand weakness associated
with excess customer and channel inventory.
(Loss) Earnings and Adjusted Earnings Before Interest and Income Taxes
PD loss before interest and income taxes was $2.1 million for the first
quarter of 2024, compared with earnings of $10.7 million for the first quarter
of 2023, a decrease of $12.8 million. EBIT margin for the first quarter of
2024 was (2.8)%, compared to 19.9% for the first quarter of 2023. The
decreases were primarily due to lower gross profit margin and increased
operating expenses, partially offset by higher revenues. The gross profit
margin decrease was primarily driven by lower factory capacity utilization in
our legacy PD business, higher restructuring charges, and the acquisition of
CD. In addition, gross profit margins decreased as a result of acquisition-relat
ed and production transfer costs associated with the CD business. The increase
in operating expenses was primarily driven by the acquisition of the CD
business, which includes higher intangible amortization expenses.
PD Adjusted EBIT was $9.8 million for the first quarter of 2024, compared with
$13.0 million for the first quarter of 2023, a decrease of $3.2 million.
Adjusted EBIT margin for the first quarter of 2024 was 13.2%, compared with
24.2% for the first quarter of 2023. The decreases were primarily due to lower
non-GAAP gross profit margin, partially offset by higher revenues. The
non-GAAP gross profit margin decrease was primarily driven by lower factory
capacity utilization in our legacy PD business and the acquisition of CD.
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MedTech & Specialty Audio
Three Months Ended March 31,
(in millions) 2024 Percent of Revenues 2023 Percent of Revenues
Revenues $ 57.1 $ 45.5
Earnings before interest and income taxes $ 22.7 39.8% $ 11.4 25.1%
Stock-based compensation expense 1.0 0.9
Adjusted earnings before interest and income taxes $ 23.7 41.5% $ 12.3 27.0%
Revenues
MSA revenues were $57.1 million for the first quarter of 2024, compared with
$45.5 million for the first quarter of 2023, an increase of $11.6 million or
25.5%. Revenues increased primarily due to higher shipping volumes of hearing
health products driven by stronger end market demand. In addition, revenues in
first quarter of 2023 were unfavorably impacted by financial incentives
offered to customers in the fourth quarter of 2022 which resulted in higher
shipping volumes in the fourth quarter of 2022 and lower revenues in the first
quarter of 2023.
Earnings and Adjusted Earnings Before Interest and Income Taxes
MSA EBIT was $22.7 million for the first quarter of 2024, compared with $11.4
million for the first quarter of 2023, an increase of $11.3 million or 99.1%.
EBIT margin for the first quarter of 2024 was 39.8%, compared with 25.1% for
the first quarter of 2023. The increases were primarily due to higher revenues
and gross profit margins. The higher gross profit margin was driven by
favorable product mix and product cost reductions.
MSA Adjusted EBIT was $23.7 million for the first quarter of 2024, compared
with $12.3 million for the first quarter of 2023, an increase of $11.4
million. Adjusted EBIT margin for the first quarter of 2024 was 41.5%,
compared to 27.0% for the first quarter of 2023. The increases were primarily
due to higher revenues and non-GAAP gross profit margins. The higher non-GAAP
gross profit margin was driven by favorable product mix and product cost
reductions.
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Consumer MEMS Microphones
Three Months Ended March 31,
(in millions) 2024 Percent of Revenues 2023 Percent of Revenues
Revenues $ 65.0 $ 45.1
Earnings (loss) before interest and income taxes $ 5.3 8.2% $ (8.2) (18.2)%
Stock-based compensation expense 1.6 1.7
Intangibles amortization expense 1.5 1.5
Restructuring charges - 0.8
Gain on sale of asset, net (5.4) -
Other - (0.4)
(1)
Adjusted earnings (loss) before interest and income taxes $ 3.0 4.6% $ (4.6) (10.2)%
(1)
Other represents the ongoing net lease income related to facilities not used in operations.
Revenues
CMM revenues were $65.0 million for the first quarter of 2024, compared with
$45.1 million for the first quarter of 2023, an increase of $19.9 million or
44.1%. Revenues increased primarily due to higher demand in the ear, mobile,
and computing markets, partially offset by lower average pricing on mature
products.
Earnings (Loss) and Adjusted Earnings (Loss) Before Interest and Income Taxes
CMM EBIT was $5.3 million for the first quarter of 2024, compared with a $8.2
million loss for the first quarter of 2023, an increase of $13.5 million. EBIT
margin for the first quarter of 2024 was 8.2%, compared with (18.2)% for the
first quarter of 2023. The increase was primarily due to higher revenues, the
gain on sale of asset, and higher gross profit margins. The higher gross
profit margin was driven by product cost reductions, favorable foreign
currency changes, and increased factory capacity utilization, partially offset
by lower average pricing on mature products shipped into the mobile market and
unfavorable product mix.
CMM Adjusted EBIT was $3.0 million for the first quarter of 2024, compared
with a $4.6 million loss for the first quarter of 2023, an increase of $7.6
million. Adjusted EBIT margin for the first quarter of 2024 was 4.6%, compared
to (10.2)% for the first quarter of 2023. The increases in Adjusted EBIT were
primarily due to higher revenues and higher non-GAAP gross profit margins. The
higher non-GAAP gross profit margin was driven by product cost reductions,
favorable foreign currency changes, and increased factory capacity
utilization, partially offset by lower average pricing on mature products
shipped into the mobile market and unfavorable product mix.
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Liquidity and Capital Resources
Historically, we have generated and expect to continue to generate positive
cash flow from operations. Our ability to fund our operations and capital
needs will depend on our ongoing ability to generate cash from operations and
access to capital markets. We believe that our future cash flow from
operations and access to capital markets will provide adequate resources to
fund our working capital needs, capital expenditures, strategic investments,
and share repurchases. We have secured a revolving line of credit in the
United States from a syndicate of commercial banks to provide additional
liquidity. Furthermore, if we were to require additional cash above and beyond
our cash on the balance sheet, the free cash flow generated by the business,
and availability under our revolving credit facility, we would most likely
seek to raise long-term financing through the U.S. debt or bank markets.
Due to the global nature of our operations, a significant portion of our cash
is generated and typically held outside the United States. Our cash and cash
equivalents totaled $122.1 million and $87.3 million at March 31, 2024 and
December 31, 2023, respectively. Of these amounts, cash held by our non-U.S.
operations totaled
$88.1 million
and $71.8 million as of March 31, 2024 and December 31, 2023, 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. We expect to reduce our cash balance in the second half of the
year, primarily driven by the payment of the Seller Note related to the CD
acquisition, share repurchases, and debt reduction, partially offset by cash
generated from operations.
On November 1, 2023, we acquired (i) all the issued and outstanding shares of
Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier
Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier" or "CD")
for aggregate consideration of $259.8 million, which equated to a total fair
value of consideration transferred of $246.8 million. This acquisition's
operations are included in the PD segment. For additional information, refer
to Note 3. Acquisitions to our Consolidated Financial Statements.
On September 25, 2023, the Company amended its Amended and Restated Credit
Agreement (the "A&R Credit Agreement") to, among other things, (a) permit the
Company in connection with the acquisition of Cornell Dubilier, to incur
senior priority seller financing indebtedness (the "Seller Note") in an
aggregate principal amount of $122.9 million secured by certain assets
(including equity interests) acquired in connection with such acquisition and
the capital stock of Cornell Dubilier, LLC (the "Acquisition Assets"), which
shall mature two years after the effective date of such Seller Note (the
"Seller Note Maturity Date"), (b) extends the requirement to pledge the
Acquisition Assets that would otherwise constitute collateral under the Credit
Agreement to the date that is 90 days after the Seller Note Maturity Date, and
(c) restricts, until the Seller Note Maturity Date, the amount of dispositions
and investments from the Company and certain of its subsidiaries into Cornell
Dubilier, LLC and the acquired subsidiaries that constitute Acquisition Assets
from exceeding $80.0 million the aggregate. All other terms remain the same as
the A&R Credit Agreement dated February 8, 2023.
On February 8, 2023, we entered into the A&R Credit Agreement that amends and
restates the prior Credit Agreement (the "2020 Credit Agreement"), which
provides for a senior secured revolving credit facility with borrowings in an
aggregate principal amount at any time outstanding not to exceed $400.0
million. As of March 31, 2024, outstanding borrowings under the Credit
Facility were $180.0 million. At any time during the term of the Credit
Facility, we will be permitted to increase the commitments under the Credit
Facility or to establish one or more incremental term loan facilities under
the New Credit Facility in an aggregate principal amount not to exceed $200.0
million for all such incremental facilities. Commitments under the Credit
Facility will terminate, and loans outstanding thereunder will mature, on
February 8, 2028. For additional information, refer to Note 8. Borrowings to
our Consolidated Financial Statements.
On February 24, 2020, we announced that our Board of Directors had authorized
a share repurchase program of up to $100 million of our common stock. On April
28, 2022, we announced that our Board of Directors had increased the
authorization by up to $150 million in additional aggregate value. At March
31, 2024, we have $97.7 million remaining that may yet be repurchased under
our share repurchase program. The timing and amount of any shares repurchased
will be determined by us based on our evaluation of market conditions and
other factors, and will be made in accordance with applicable securities laws
in either the open market or in privately negotiated transactions. We are not
obligated to purchase any shares under the program, and the program may be
suspended or discontinued at any time. The actual timing, number, and share
price of shares repurchased will depend on a number of factors, including the
market price of our common stock, general market and economic conditions, and
applicable legal requirements. Any shares repurchased will be held as treasury
stock. During the three months ended March 31, 2023, the Company repurchased
433,759 shares of common stock for a total of $7.5 million. The Company did
not repurchase any shares of its common stock during the three months ended
March 31, 2024.
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Cash flows from operating, investing, and financing activities as reflected in
our Consolidated Statements of Cash Flows are summarized in the following
table:
Three Months Ended March 31,
(in millions) 2024 2023
Net cash flows provided by (used in):
Operating activities $ 17.3 $ 21.9
Investing activities 3.8 (3.9)
Financing activities 13.6 (14.3)
Effect of exchange rate changes on cash and cash equivalents 0.1 0.1
Net increase in cash and cash equivalents $ 34.8 $ 3.8
Operating Activities
Cash provided by operating activities adjusts net earnings for certain
non-cash items, including impairment charges, depreciation expense,
amortization of intangible assets, stock-based compensation, changes in
deferred income taxes, and the effects of changes in operating assets and
liabilities. The decrease in cash provided by operating activities in 2024 as
compared to 2023 is primarily due to higher incentive compensation and
restructuring payments in 2024.
Investing Activities
The cash provided by investing activities during 2024 was primarily driven by
proceeds from the sale of intellectual property. In addition, capital
expenditures were lower in 2024 as compared to 2023. The cash used in
investing activities during 2023 was primarily driven by capital expenditures
to support product innovation and cost savings.
In 2024, we expect capital expenditures to be in the range o
f 3.0% to 4.0% of revenue
s.
Financing Activities
Cash provided by financing activities during 2024 was primarily related to the
$20.0 million net borrowing of revolving credit facility, partially offset by
the $5.8 million payment of taxes related to net share settlement of equity
awards. Cash used in financing activities during 2023 was primarily related to
the $7.5 million of repurchases of common stock, the $6.0 million payment of
taxes related to net share settlement of equity awards, and the $1.6 million
payment of debt issuance costs, partially offset by proceeds of $1.4 million
from the exercise of options.
Contingent Obligations
We are involved in various legal proceedings, claims, and investigations
arising in the ordinary course of business. Legal contingencies are discussed
in Note 13. Commitments and Contingent Liabilities to our Consolidated
Financial Statements.
Critical Accounting Estimates
This discussion and analysis of results of operations and financial condition
is based on our Consolidated Financial Statements, which have been prepared in
conformity with U.S. GAAP. The preparation of these financial statements
requires the use of estimates and assumptions related to the reporting of
assets, liabilities, revenues, expenses, and related disclosures. In preparing
these financial statements, we have made our best estimates and judgments of
certain amounts included in the financial statements. Estimates are revised
periodically. Actual results could differ from these estimates.
The information concerning our critical accounting estimates can be found
under Management's Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended December
31, 2023 filed with the Securities and Exchange Commission on February 21,
2024. The issuance of recent accounting standards, as included in Note 2.
Recent Accounting Standards to our Consolidated Financial Statements, is not
expected to have a significant impact on our revenue, earnings, or liquidity.
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Recent Accounting Standards
The issuance of recent accounting standards, as included in Note 2. Recent
Accounting Standards to our Consolidated Financial Statements, is not expected
to have a significant impact on our revenue, earnings, or liquidity.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the three months ended March 31, 2024,
there were no material changes to the information on market risk exposure
disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2023. For a discussion of our
exposure to market risk as of December 31, 2023, refer to Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, contained in our
Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4
.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation
of our chief executive officer ("CEO") and chief financial officer ("CFO"),
the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on that evaluation, our CEO and CFO have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in our Exchange Act reports is (1) recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (2) accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that
occurred during the first quarter of 2024 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. The Company is in the process of reviewing the internal control
structure of an acquired business and, if necessary, will make appropriate
changes as we incorporate our controls and procedures into the recently
acquired business.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure
controls or our internal control over financial reporting will prevent or
detect all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. The design of a control system must
reflect the fact that the benefits of controls must be considered relative to
their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, will be detected. These inherent limitations
include the realities that judgments in decision making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by intentionally
falsified documentation, by collusion of two or more individuals within
Knowles or third parties, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of contingencies related to legal proceedings, see Note 13.
Commitments and Contingent Liabilities to our Consolidated Financial
Statements, which is incorporated herein by reference.
Except as otherwise noted above, there have been no material developments in
legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed
under the heading "Risk Factors" in our Annual Report on Form 10-K for the
year ended December 31, 2023.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On February 24, 2020, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $100.0 million of the Company's
common stock. On April 28, 2022, the Company announced that its Board of
Directors had increased the authorization by up to $150.0 million in
additional aggregate value. The timing and amount of any shares repurchased
will be determined by the Company based on its evaluation of market conditions
and other factors, and will be made in accordance with applicable securities
laws in either the open market or in privately negotiated transactions. The
Company is not obligated to purchase any shares under the program, and the
program may be suspended or discontinued at any time. The actual timing,
number, and share price of shares repurchased will depend on a number of
factors, including the market price of the Company's common stock, general
market and economic conditions, and applicable legal requirements. Any shares
repurchased will be held as treasury stock.
The Company did not repurchase any shares of its common stock during the three
months ended March 31, 2024. As of March 31, 2024, the remaining amount
authorized for share repurchases was $97.7 million.
Item 5. Other Information
Director and Officer Trading Plans and Arrangements
During the quarter ended March 31, 2024, no director or officer
adopted
or
terminated
any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer
pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Joint Certification of the Chief Executive
Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101 The following financial information from Knowles Corporation's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2024 formatted in Inline XBRL: (i) Consolidated Statements of Earnings
(Unaudited) for the three months ended March 31, 2024 and 2023, (ii) Consolidated Statements of Comprehensive
Earnings (Unaudited) for the three months ended March 31, 2024 and 2023, (iii) Consolidated Balance
Sheets (Unaudited) as of March 31, 2024 and December 31, 2023, (iv) Consolidated Statements of Stockholders'
Equity (Unaudited) for the three months ended March 31, 2024 and 2023, (v) Consolidated Statements
of Cash Flows (Unaudited) for the three months ended March 31, 2024 and 2023, and (vi) the Notes to the
Consolidated Financial Statements (Unaudited) tagged as blocks of text and including detailed tags.
104 The cover page from the Company's Quarterly
Report on Form 10-Q for the quarter
ended March 31, 2024, formatted in Inline
XBRL and contained in Exhibit 101.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOWLES CORPORATION
Date: May 1, 2024 /s/ John S. Anderson
John S. Anderson
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
34
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jeffrey S. Niew, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Knowles Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
Annual Report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5.
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 1, 2024
/s/ JEFFREY S. NIEW
Name: Jeffrey S. Niew
Title: President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, John S. Anderson, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Knowles Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
Annual Report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5.
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 1, 2024
/s/ JOHN S. ANDERSON
Name: John S. Anderson
Title: Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
JOINT CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Knowles Corporation (the "Company")
on Form 10-Q for the quarter ended March 31, 2024 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, Jeffrey S. Niew
and John S. Anderson, the Principal Executive and Financial Officers of the
Company, certify, pursuant to and for purposes of 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ JEFFREY S. NIEW
Name: Jeffrey S. Niew
Title: President and Chief Executive Officer
(Principal Executive Officer)
Date: May 1, 2024
/s/ JOHN S. ANDERSON
Name: John S. Anderson
Title: Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
Date: May 1, 2024
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