KNOWLES CORPORATION The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a market leader and global provider of advanced micro-acoustic
microphones and speakers, audio processing, and precision device solutions,
serving the consumer electronics, communications, medtech, defense, electric
vehicle, and industrial markets. We use our leading position in SiSonic™
micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in
audio processing technologies to optimize audio systems and improve the user
experience in mobile, ear, and Internet of Things ("IoT") applications. We are
also a leader in acoustic components, high-end capacitors, and radio frequency
("RF") solutions for a diverse set of markets. Our focus on the customer,
combined with unique technology, proprietary manufacturing techniques, rigorous
testing, and global scale, enables us to deliver innovative solutions that
optimize the user experience. References to "Knowles," the "Company," "we,"
"our," or "us" refer to Knowles Corporation and its consolidated subsidiaries,
unless the context otherwise requires.
We are organized into two reportable segments based on how management analyzes
performance, allocates capital, and makes strategic and operational decisions.
These segments were determined in accordance with Financial Accounting Standards
Board Accounting Standards Codification 280 - Segment Reporting and are
comprised of (i) Audio and (ii) Precision Devices ("PD"). The segments are
aligned around similar product applications serving our key end markets, to
enhance focus on end market growth strategies.
•Audio Segment
Our Audio group designs and manufactures innovative audio products, including
microphones, balanced armature speakers, and audio processors used in
applications that serve the mobile, hearing health, True Wireless Stereo
("TWS"), IoT, and computing markets. Locations include the sales, support, and
engineering facilities in North America , Europe , and Asia , as well as
manufacturing facilities in Asia .
•PD Segment
Our PD group specializes in the design and delivery of high performance
capacitor products and RF solutions for technically demanding applications. Our
high performance capacitor products are used in applications such as power
supplies and medical implants, which sell to a diverse set of customers for
mission critical applications across the communications, medtech, defense,
electric vehicle, and industrial markets. Our RF solutions solve a broad range
of frequency filtering challenges for our military customers, who use them in
their satellite communication and radar systems, as well as our
telecommunications infrastructure customers deploying mmWave 5G base stations.
Locations include the sales, support, engineering, and manufacturing facilities
in North America , Europe , and Asia .
We sell our products directly to original equipment manufacturers ("OEMs") and
to their contract manufacturers and suppliers and to a lesser extent through
distributors worldwide.
IMC Acquisition
On
COVID-19 Impact
During 2020 and continuing into 2021, COVID-19, the most recently discovered coronavirus, spread throughout areas of the world where we operate. InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. This has resulted in global business disruption, which has impacted our business operations, results of operations, customer demand, and the productivity of our facilities, particularly inChina ,Malaysia , andthe Philippines . We took various steps to minimize the negative impact of the COVID-19 pandemic on our business and to protect the health and safety of our employees. Such steps included, but were not limited to, significantly reducing employee travel; having office workers work remotely; suspending our share repurchase program; suspending annual wage increases; temporarily reducing salaries of employees, including the CEO and executive team; and reducing the cash compensation of our board of directors. Most restrictions have been lifted at our facilities and the majority of our office workers have now returned to working on-site. In locations where public health protocols have accommodated returning to work at our facilities, we implemented additional safety measures, including increased frequency in cleaning and disinfecting as well as hygiene and social distancing practices. During the third quarter of 2020, as our end markets began to show signs of recovery and we generated better than expected operating cash flow, we reinstated employee salaries including executive management salaries. We also restored the cash compensation for our board of directors and resumed the share repurchase program in the fourth quarter of 2020. The situation related to COVID-19 continues to be complex and rapidly evolving. We cannot reasonably estimate the duration of the pandemic or fully ascertain its impact to our future results. As the COVID-19 pandemic evolves, we will continue to actively monitor developments and business conditions and may take further actions that alter business operations as may be required by applicable authorities or that we determine are in the best interests of our employees, customers, suppliers, stockholders, and communities. It is not clear what potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
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.
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Results of Operations for the Three Months Ended
Three Months Ended June
30,
(in millions, except per share amounts) 2021 2020 Revenues$ 199.8 $ 152.2 Gross profit $ 83.7$ 47.8 Non-GAAP gross profit $ 84.8$ 49.1
Earnings (loss) from continuing operations before interest and income taxes
$ 22.9 $ (14.3)
Adjusted earnings from continuing operations before interest
and income taxes $ 35.8 $ 0.6
Provision for income taxes $ 1.4 $ 1.1
Non-GAAP provision for (benefit from) income taxes $ 3.6 $ (0.5)
Earnings (loss) from continuing operations $ 17.4 $ (19.5)
Non-GAAP net earnings (loss) from continuing operations $ 30.1 $ (1.2) Earnings (loss) per share from continuing operations - diluted
$ 0.18 $ (0.21)
Non-GAAP diluted earnings (loss) per share from continuing
operations $ 0.31 $ (0.01)
Revenues
Revenues for the second quarter of 2021 were $199.8 million , compared with
$152.2 million for the second quarter of 2020, an increase of $47.6 million or
31.3%. Audio revenues increased $45.3 million , primarily due to higher shipping
volumes as market conditions have improved from 2020, which was negatively
impacted by the COVID-19 pandemic. The higher volumes were driven by hearing
health returning to pre-pandemic levels and increased MEMS microphones shipments
into the IoT, TWS, and computing markets. The computing market has benefited
from the work-from-home and remote-learning trends, while the IoT market has
returned to pre-pandemic levels. The increased demand was partially offset by
lower average pricing on mature products. PD revenues increased $2.3 million
primarily due to higher demand from the industrial, medtech, and electric
vehicle markets and our acquisition of IMC, partially offset by decreased demand
in the communications and defense markets.
Cost of Goods Sold
Cost of goods sold ("COGS") for the second quarter of 2021 was
Restructuring Charges
During the second quarter of 2021, there were no restructuring charges recorded within Gross profit. We recorded restructuring charges of$0.1 million within Operating expenses. During the second quarter of 2020, we restructured our Intelligent Audio product line, which is included within our Audio segment. This resulted in a reduction in workforce and the refocusing of certain research and development activities. As a result, we recorded restructuring charges of$0.1 million within Gross profit, primarily for fixed asset write-off costs directly associated with the product line. In addition, we recorded restructuring charges of$4.8 million within Operating expenses, primarily for rationalizing the research and development workforce and contract termination costs associated with the product line. 25
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Also, during the second quarter of 2020, we recorded restructuring charges of$0.8 million within Gross profit, primarily for actions to rationalize the remainder of the Audio segment workforce, as a direct result of the lower demand we experienced from the COVID-19 pandemic for our remaining Audio products. We also recorded restructuring charges of$1.7 million within Operating expenses, primarily for actions associated with rationalizing the remaining Audio research and development workforce.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the second quarter of 2021 was$83.7 million , compared with$47.8 million for the second quarter of 2020, an increase of$35.9 million or 75.1%. Gross profit margin (gross profit as a percentage of revenues) for the second quarter of 2021 was 41.9%, compared with 31.4% for the second quarter of 2020. The increases were primarily due to higher shipping volumes, higher factory capacity utilization, favorable mix, product cost reductions, and the benefit of lower inventory reserve charges, partially offset by unfavorable foreign currency exchange rate changes and lower average pricing on mature products. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Non-GAAP gross profit for the second quarter of 2021 was$84.8 million , compared with$49.1 million for the second quarter of 2020, an increase of$35.7 million or 72.7%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the second quarter of 2021 was 42.4%, compared with 32.3% for the second quarter of 2020. The increases were primarily due to higher shipping volumes, higher factory capacity utilization, favorable mix, product cost reductions, and the benefit of lower inventory reserve charges, partially offset by unfavorable foreign currency exchange rate changes and lower average pricing on mature products. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
Research and Development Expenses
Research and development expenses for the second quarter of 2021 were$24.6 million , compared with$22.6 million for the second quarter of 2020, an increase of$2.0 million or 8.8%. Research and development expenses as a percentage of revenues for the second quarter of 2021 and 2020 were 12.3% and 14.8%, respectively. The increase in expenses was primarily driven by higher incentive compensation costs and increased development activities in MEMS microphones, precision devices, and hearing health products, partially offset by lower investment in our Intelligent Audio product line as a result of our prior year restructuring actions. The decrease in expenses as a percentage of revenues was due to the increase in our revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the second quarter of 2021 were$36.7 million , compared with$31.1 million for the second quarter of 2020, an increase of$5.6 million or 18.0%. Selling and administrative expenses as a percentage of revenues for the second quarter of 2021 and 2020 were 18.4% and 20.4%, respectively. The increase in expenses was primarily driven by stock-based compensation, incentive compensation, and our acquisition of IMC. Due to the impacts of the COVID-19 pandemic, stock-based compensation in 2021 increased due to certain modifications made to previously granted performance share units ("PSUs"), while stock-based compensation in 2020 was lowered due to a change in estimated attainment of certain performance targets. For additional information on stock-based compensation, refer to Note 12. Equity Incentive Program to our Consolidated Financial Statements. The increase in selling and administrative expenses was partially offset by a decrease in our legal expenses. Legal expenses decreased due to reduced activity related to the protection of our intellectual property. The decrease in expenses as a percentage of revenues was due to the increase in our revenues.
Interest Expense, net
Interest expense for the second quarter of 2021 was$4.1 million , consistent with the second quarter of 2020. For additional information on borrowings and interest expense, refer to Note 9. Borrowings to our Consolidated Financial Statements. 26
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Other (Income) Expense, net
Other income for the second quarter of 2021 was
The effective tax rate ("ETR") from continuing operations for the second quarter
of 2021 was a 7.4% provision, compared with a 6.0% provision for the second
quarter of 2020. The ETR from continuing operations for the second quarter of
2021 was impacted by a net discrete benefit totaling $1.2 million , primarily
related to an increase in foreign deferred tax assets due to enacted tax rate
changes. Absent the discrete items, the ETR from continuing operations for the
second quarter of 2021 was a 13.8% provision. The Company accrues taxes in
various countries where it generates income and applies a valuation allowance in
other jurisdictions (primarily the U.S. ), which resulted in the provision for
both the second quarter of 2021 and 2020. 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 from continuing operations for the second quarter of 2021 was a
10.7% provision, compared with a 29.4% benefit for the second quarter of
2020. The non-GAAP ETR from continuing operations for the second quarter of 2021
was impacted by a net discrete benefit totaling $0.9 million , primarily related
to an increase in foreign deferred tax assets due to enacted tax rate changes.
Absent the discrete items, the non-GAAP ETR from continuing operations was a
13.4% provision. The change in the non-GAAP ETR was due to the mix of earnings
and losses by taxing jurisdictions and net discrete items.
The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax
rate, mainly due to the taxing jurisdictions where we generate taxable income or
loss, the favorable impact of our significant tax holidays in Malaysia , and
judgments as to the realizability of our deferred tax assets. A significant
portion of our pre-tax income is subject to a lower tax rate as a result of our
Malaysian tax holidays, subject to our annual satisfaction of certain conditions
we expect to continue to satisfy. Unless extended or renegotiated, our existing
significant tax holiday in Malaysia will expire on December 31, 2021 . For
additional information on these tax holidays, refer to Note 11. Income Taxes to
our Consolidated Financial Statements.
Earnings (Loss) from Continuing Operations
Earnings from continuing operations for the second quarter of 2021 was$17.4 million , compared with a$19.5 million loss for the second quarter of 2020, an increase of$36.9 million . As described above, the increase is primarily due to increased revenues, higher gross profit margin, lower restructuring charges, and reduced legal spending, partially offset by higher incentive and stock-based compensation.
Earnings (Loss) and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes ("EBIT") from continuing operations
for the second quarter of 2021 was $22.9 million , compared with a $14.3 million
loss before interest and income taxes from continuing operations for the second
quarter of 2020, an increase of $37.2 million . The increase in EBIT was
primarily due to increased revenues, higher gross profit margin, lower
restructuring charges, and reduced legal spending, partially offset by higher
incentive and stock-based compensation.
Adjusted earnings before interest and income taxes ("Adjusted EBIT") from
continuing operations for the second quarter of 2021 was $35.8 million , compared
with $0.6 million for the second quarter of 2020, an increase of $35.2 million .
Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage
of revenues) for the second quarter of 2021 was 17.9%, compared with 0.4% for
the second quarter of 2020. The increases in Adjusted EBIT and Adjusted EBIT
margin were primarily due to increased revenues, higher non-GAAP gross profit
margin, and reduced legal spending, partially offset with higher incentive
compensation.
Earnings from Discontinued Operations, net
Earnings from discontinued operations for the second quarter of 2021 was$0.2 million , compared with no activity in the second quarter of 2020. We recorded a tax benefit during the second quarter of 2021 related to the Speaker and Receiver Product Line. 27
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Diluted Earnings (Loss) per Share from Continuing Operations and Non-GAAP Diluted Earnings (Loss) per Share from Continuing Operations
Diluted earnings per share from continuing operations was$0.18 for the second quarter of 2021, compared with a$0.21 loss per share for the second quarter of 2020, an increase of$0.39 . As described above, the increase is primarily due to increased revenues, higher gross profit margin, lower restructuring charges, and reduced legal spending, partially offset by higher incentive and stock-based compensation. Non-GAAP diluted earnings per share from continuing operations was$0.31 for the second quarter of 2021, compared with a loss of$0.01 for the second quarter of 2020, an increase of$0.32 . As described above, the increase is primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset with higher incentive compensation.
Results of Operations for the Six Months Ended
Six Months Ended June 30,
(in millions, except per share amounts) 2021 2020
Revenues $ 400.8 $ 315.3
Gross profit $ 161.7 $ 104.0
Non-GAAP gross profit $ 163.2 $ 107.3
Earnings (loss) from continuing operations before
interest and income taxes $ 42.1 $ (21.2) Adjusted earnings from continuing operations before interest and income taxes
$ 70.1 $ 6.1
Provision for income taxes $ 4.1 $ 3.3
Non-GAAP provision for (benefit from) income taxes $ 8.0 $ (0.1)
Earnings (loss) from continuing operations $ 29.9 $ (32.3)
Non-GAAP net earnings from continuing operations $ 57.9 $ 2.0 Earnings (loss) per share from continuing operations - diluted
$ 0.31 $ (0.35)
Non-GAAP diluted earnings per share from continuing
operations $ 0.60 $ 0.02
Revenues
Revenues for the six months ended June 30, 2021 were $400.8 million , compared
with $315.3 million for the six months ended June 30, 2020 , an increase of $85.5
million or 27.1%. Audio revenues increased $88.3 million , primarily due to
higher shipping volumes as market conditions have improved from 2020, which was
negatively impacted by the COVID-19 pandemic. The higher volumes were driven by
MEMS microphones in the computing and IoT markets. The computing market has
benefited from the work-from-home and remote-learning trends, while the IoT
market has returned to pre-pandemic levels. Hearing health demand has also
returned to pre-pandemic levels. The increased demand is partially offset by
lower average pricing on mature products. PD revenues decreased $2.8 million
primarily due to lower demand from the defense and communications markets,
partially offset by increased demand in the industrial and electric vehicle
markets, and revenues related to our acquisition of IMC.
Cost of Goods Sold
COGS for the six months endedJune 30, 2021 was$239.1 million , compared with$209.0 million for the six months endedJune 30, 2020 , an increase of$30.1 million or 14.4%. This increase was primarily the result of higher shipping volumes and unfavorable foreign currency exchange rate changes, partially offset by product cost reductions, higher factory capacity utilization, and the benefit of lower inventory reserve charges within the Intelligent Audio product line. 28
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Restructuring Charges
During the six months endedJune 30, 2021 , there were no restructuring charges recorded within Gross profit. We recorded restructuring charges of$0.3 million within Operating expenses. During the six months endedJune 30, 2020 , we restructured our Intelligent Audio product line, which is included within our Audio segment. This resulted in a reduction in workforce and the refocusing of certain research and development activities. As a result, we recorded restructuring charges of$1.5 million within Gross profit, primarily for fixed asset write-off costs directly associated with the product line. In addition, we recorded restructuring charges of$6.8 million within Operating expenses, primarily for rationalizing the research and development workforce and contract termination costs associated with the product line. Also, during the six months endedJune 30, 2020 , we recorded restructuring charges of$0.8 million within Gross profit, primarily for actions to rationalize the remainder of the Audio segment workforce, as a direct result of the lower demand we experienced from the COVID-19 pandemic for our remaining Audio products. In addition, we recorded restructuring charges of$3.6 million within Operating expenses, primarily for actions associated with rationalizing the remaining Audio workforce.
Gross Profit and Non-GAAP Gross Profit
Gross profit for the six months endedJune 30, 2021 was$161.7 million , compared with$104.0 million for the six months endedJune 30, 2020 , an increase of$57.7 million or 55.5%. Gross profit margin for the six months endedJune 30, 2021 was 40.3%, compared with 33.0% for the six months endedJune 30, 2020 . The increases were primarily due to higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and lower inventory reserve charges, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Non-GAAP gross profit for the six months endedJune 30, 2021 was$163.2 million , compared with$107.3 million for the six months endedJune 30, 2020 , an increase of$55.9 million or 52.1%. Non-GAAP gross profit margin for the six months endedJune 30, 2021 and 2020 was 40.7% and 34.0%, respectively. The increases were primarily due to higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and lower inventory reserve charges, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.
Research and Development Expenses
Research and development expenses for the six months endedJune 30, 2021 were$47.9 million , compared with$48.3 million for the six months endedJune 30, 2020 , a decrease of$0.4 million or 0.8%. Research and development expenses as a percentage of revenues for the six months endedJune 30, 2021 and 2020 were 12.0% and 15.3%, respectively. The decrease in expenses was primarily driven by lower operating costs in our Audio segment as a result of prior year restructuring actions in our Intelligent Audio product line, partially offset by higher incentive compensation, along with increased development activities in MEMS microphones, precision devices, and hearing health products. The decrease in expenses as a percentage of revenues was primarily due to the increase in our revenues.
Selling and Administrative Expenses
Selling and administrative expenses for the six months endedJune 30, 2021 were$72.9 million , compared with$67.3 million for the six months endedJune 30, 2020 , an increase of$5.6 million or 8.3%. Selling and administrative expenses as a percentage of revenues for the six months endedJune 30, 2021 and 2020 were 18.2% and 21.3%, respectively. The increase in expenses was primarily driven by stock-based compensation, incentive compensation, and our acquisition of IMC. Due to the impacts of the COVID-19 pandemic, stock-based compensation in 2021 increased due to certain modifications made to previously granted PSUs, while stock-based compensation in 2020 was lowered due to a change in estimated attainment of certain performance targets. For additional information on stock-based compensation, refer to Note 12. Equity Incentive Program to our Consolidated Financial Statements. The increase in selling and administrative expenses was partially offset by decreases in our legal, compensation, and travel expenses. Legal expenses decreased due to reduced activity related to the protection of our intellectual property. The decrease in compensation and travel expenses was primarily driven by operating cost reduction efforts and our prior year restructuring actions, which were implemented to minimize the negative impact of the COVID-19 pandemic. The decrease in expenses as a percentage of revenues was due to the increase in our revenues. 29
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Table of Contents Interest Expense, net Interest expense for the six months endedJune 30, 2021 was$8.1 million , compared with$7.8 million for the six months endedJune 30, 2020 , an increase of$0.3 million . The increase in interest expense is primarily due to higher amortization of debt discount and issuance costs. For additional information on borrowings and interest expense, refer to Note 9. Borrowings to our Consolidated Financial Statements. Other Income, net Other income for the six months endedJune 30, 2021 was$1.5 million , compared with income of$0.8 million for the six months endedJune 30, 2020 , a change of$0.7 million . The increase is primarily due to appreciation in our investment balances.
Provision for Income Taxes and Non-GAAP Provision for (Benefit from) Income Taxes
The ETR from continuing operations for the six months endedJune 30, 2021 was a 12.1% provision, compared with an 11.4% provision for the six months endedJune 30, 2020 . The ETR from continuing operations for the six months endedJune 30, 2021 was impacted by a net discrete benefit totaling$1.3 million , primarily related to an increase in foreign deferred tax assets due to enacted tax rate changes. Absent the discrete items, the ETR from continuing operations for the six months endedJune 30, 2021 was a 15.9% provision. The Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions (primarily theU.S. ), which resulted in the provision for both the six months endedJune 30, 2021 and 2020. 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 from continuing operations for the six months endedJune 30, 2021 was a 12.1% provision, compared with a 5.3% benefit for the six months endedJune 30, 2020 . The non-GAAP ETR from continuing operations for the six months endedJune 30, 2021 was impacted by a net discrete benefit totaling$1.0 million , primarily related to an increase in foreign deferred tax assets due to enacted tax rate changes. The non-GAAP ETR from continuing operations for the six months endedJune 30, 2020 was impacted by a net discrete benefit totaling$0.5 million due to a change in the indefinite reinvestment assertion related to a portion of undistributed earnings of our Malaysian subsidiary. Absent the discrete items, the non-GAAP ETR from continuing operations for the six months endedJune 30, 2021 was a 13.7% provision, compared to a 21.1% provision for the six months endedJune 30, 2020 . The change in the non-GAAP ETR was due to the mix of earnings and losses by taxing jurisdictions and net discrete items. The ETR and non-GAAP ETR deviate from the statutoryU.S. federal income tax rate, mainly due to the taxing jurisdictions where we generate taxable income or loss, the favorable impact of our significant tax holidays inMalaysia , and judgments as to the realizability of our deferred tax assets. A significant portion of our pre-tax income is subject to a lower tax rate as a result of our Malaysian tax holidays, subject to our annual satisfaction of certain conditions we expect to continue to satisfy. Unless extended or renegotiated, our existing significant tax holiday inMalaysia will expire onDecember 31, 2021 . For additional information on these tax holidays, refer to Note 11. Income Taxes to our Consolidated Financial Statements.
Earnings (Loss) from Continuing Operations
Earnings from continuing operations for the six months endedJune 30, 2021 were$29.9 million , compared with a loss of$32.3 million for the six months endedJune 30, 2020 , an increase of$62.2 million . As described above, the increase is primarily due to higher revenues, higher gross profit margin, lower restructuring charges, and reduced legal spending, partially offset by higher stock-based and incentive compensation.
Earnings (Loss) and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings before interest and income taxes from continuing operations for the six months endedJune 30, 2021 were$42.1 million , compared with a loss of$21.2 million for the six months endedJune 30, 2020 , an increase of$63.3 million . The increase in EBIT is primarily due to higher revenues, higher gross profit margin, lower restructuring charges, and reduced legal spending, partially offset by higher stock-based and incentive compensation. 30
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Adjusted EBIT from continuing operations for the six months endedJune 30, 2021 was$70.1 million , compared with$6.1 million for the six months endedJune 30, 2020 , an increase of$64.0 million . Adjusted EBIT margin for the six months endedJune 30, 2021 was 17.5%, compared with 1.9% for the six months endedJune 30, 2020 . The increases in Adjusted EBIT and Adjusted EBIT margin were primarily due to higher revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by higher incentive compensation.
Earnings from Discontinued Operations, net
Earnings from discontinued operations was$0.2 million in the six months endedJune 30, 2021 , compared with$3.7 million for the six months endedJune 30, 2020 . We recorded a tax benefit during the second quarter of 2021 related to the Speaker and Receiver Product Line. We recorded a tax benefit for a refund received during the first quarter of 2020 related to the Timing Device Business.
Diluted Earnings (Loss) per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share from Continuing Operations
Diluted earnings per share from continuing operations was$0.31 for the six months endedJune 30, 2021 , compared with a loss of$0.35 for the six months endedJune 30, 2020 , an increase of$0.66 . As described above, the increase is primarily due to higher gross profit, lower restructuring charges, and reduced legal spending, partially offset by higher stock-based and incentive compensation. Non-GAAP diluted earnings per share from continuing operations was$0.60 for the six months endedJune 30, 2021 , compared with$0.02 for the six months endedJune 30, 2020 , an increase of$0.58 . As described above, the increase is primarily due to higher non-GAAP gross profit and reduced legal spending, partially offset by higher incentive compensation. 31
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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1)
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except share and per share
amounts) 2021 2020 2021 2020
Gross profit $ 83.7
0.4 0.4 0.8 0.9
Restructuring charges - 0.9 - 2.3
Production transfer costs (2) - - - 0.1
Other (3) 0.7 - 0.7 -
Non-GAAP gross profit $ 84.8 $ 49.1 $ 163.2 $ 107.3 Earnings (loss) from continuing operations
$ (19.5) $ 29.9 $ (32.3) Interest expense, net 4.1 4.1 8.1 7.8 Provision for income taxes 1.4 1.1 4.1 3.3 Earnings (loss) from continuing operations before interest and income taxes 22.9 (14.3) 42.1 (21.2) Stock-based compensation expense 7.4 4.1 18.5 7.6 Intangibles amortization expense 3.9 3.2 7.2 6.5 Restructuring charges 0.1 7.4 0.3 12.7 Production transfer costs (2) - - - 0.1 Other (3) 1.5 0.2 2.0 0.4 Adjusted earnings from continuing operations before interest and income taxes$ 35.8
Interest expense, net $ 4.1$ 4.1 $ 8.1$ 7.8 Interest expense, net non-GAAP reconciling adjustments (4) 2.0 1.8 3.9 3.6 Non-GAAP interest expense $ 2.1$ 2.3 $ 4.2$ 4.2 Provision for income taxes $ 1.4
2.2 (1.6) 3.9 (3.4)
Non-GAAP provision for (benefit from) income
taxes $ 3.6
Earnings (loss) from continuing operations
12.9 14.9 28.0 27.3
Interest expense, net non-GAAP reconciling
adjustments (4) 2.0 1.8 3.9 3.6
Income tax effects of non-GAAP reconciling
adjustments (5) 2.2 (1.6) 3.9 (3.4)
Non-GAAP net earnings (loss) from continuing
operations $ 30.1 Diluted earnings (loss) per share from continuing operations$ 0.18
0.13 0.20 0.29 0.37
Non-GAAP diluted earnings (loss) per share
from continuing operations $ 0.31
Diluted average shares outstanding 94,905,503 91,589,156 95,048,241 91,721,440
Non-GAAP adjustment (7) 1,054,755 - 769,327 2,922,435
Non-GAAP diluted average shares outstanding
(7) 95,960,258 91,589,156 95,817,568 94,643,875
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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 inAsia . These amounts are included in the corresponding Gross profit and Earnings (loss) from continuing operations before interest and income taxes for each period presented. (3) In 2021, Other expenses represent the ongoing net lease cost (income) related to facilities not used in operations and expenses related to the acquisition of IMC by the PD segment. In 2020, Other expenses represent expenses related to shareholder activism. (4) Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) upon conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's nonconvertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the Company's$172.5 million of convertible senior notes due 2021 that were issued in a private placement inMay 2016 . The imputed interest rate is 8.12% for the convertible notes due 2021, while the actual coupon interest rate of the notes was 3.25%. The difference between the imputed interest expense and the coupon interest expense is excluded from management's assessment of the Company's operating performance because management believes that this non-cash expense is not indicative of its core, ongoing operating performance. (5) Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments. (6) The non-GAAP reconciling adjustments are those adjustments made to reconcile Earnings (loss) from continuing operations before interest and income taxes to Adjusted earnings from continuing operations before interest and income taxes. (7) The number of shares used in the diluted per share calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method. In addition, the Company entered into convertible note hedge transactions to offset any potential dilution from the convertible notes. Although the anti-dilutive impact of the convertible note hedges is not reflected under GAAP, the Company includes the anti-dilutive impact of the convertible note hedges in non-GAAP diluted average shares outstanding, if applicable. 33
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Segment Results of Operations for the Three Months Ended
The following is a summary of the results of operations of our two reportable segments: Audio and Precision Devices.
See Note 15. Segment Information to the Consolidated Financial Statements for
(i) a reconciliation of segment revenues to our consolidated revenues and (ii) a
reconciliation of segment earnings (loss) from continuing operations before
interest and income taxes to our consolidated earnings (loss) from continuing
operations.
Audio
Three Months Ended June 30,
(in millions) 2021 Percent of Revenues 2020 Percent of Revenues
Revenues $ 149.8 $ 104.5
Earnings (loss) from continuing operations before
interest and income taxes $ 28.0 18.7% $ (12.2) NM (2)
Stock-based compensation expense 2.6 2.8
Intangibles amortization expense 2.6 2.7
Restructuring charges 0.1 6.9
Other (1) 0.5 -Adjusted earnings from continuing operations before interest and income taxes
$ 33.8 22.6%$ 0.2 0.2%
(1) Other represents the ongoing net lease cost (income) related to facilities not used in operations. (2) Not meaningful.
Revenues Revenues were$149.8 million for the second quarter of 2021, compared with$104.5 million for the second quarter of 2020, an increase of$45.3 million or 43.3%. Revenues increased primarily due to higher shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by hearing health returning to pre-pandemic levels and increased MEMS microphones shipments into the IoT, TWS, and computing markets. The computing market has benefited from the work-from-home and remote-learning trends, while the IoT market has returned to pre-pandemic levels. The increased demand was partially offset by lower average pricing on mature products.
Earnings (Loss) and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
EBIT was$28.0 million for the second quarter of 2021, compared with a loss of$12.2 million for the second quarter of 2020, an increase of$40.2 million . The increases were primarily due to higher revenues, higher gross profit margin, a reduction in restructuring charges, and lower legal expenses in connection with the protection of our intellectual property. The gross profit margin increase was driven by higher shipping volumes, higher factory capacity utilization, favorable mix, product cost reductions and lower inventory reserve charges within the Intelligent Audio product line, partially offset by unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Adjusted EBIT was$33.8 million for the second quarter of 2021, compared with$0.2 million for the second quarter of 2020, an increase of$33.6 million . Adjusted EBIT margin for the second quarter of 2021 was 22.6%, compared to 0.2% for the second quarter of 2020. The increases were primarily due to higher revenues, higher gross profit margin, and lower legal expenses in connection with the protection of our intellectual property. The gross profit margin increase was driven by higher shipping volumes, higher factory capacity utilization, favorable mix, product cost reductions, and lower inventory reserve charges within the Intelligent Audio product line, partially offset by unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. 34
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Precision Devices
Three Months Ended June 30,
(in millions) 2021 Percent of Revenues 2020 Percent of Revenues
Revenues $ 50.0 $ 47.7 Earnings from continuing operations before interest and income taxes
$ 9.8 19.6%$ 11.1 23.3% Stock-based compensation expense 0.6 0.2 Intangibles amortization expense 1.3 0.5 Other (1) 0.7 -
Adjusted earnings from continuing operations before interest and income taxes
$ 12.4 24.8%$ 11.8 24.7%
(1) Expenses related to the acquisition of IMC.
Revenues
Revenues were$50.0 million for the second quarter of 2021, compared with$47.7 million for the second quarter of 2020, an increase of$2.3 million or 4.8%. Revenues increased primarily due to higher demand and pricing from the industrial, medtech, and electric vehicle markets and our acquisition of IMC, partially offset by decreased demand in the communications and defense markets.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
EBIT was$9.8 million for the second quarter of 2021, compared with$11.1 million for the second quarter of 2020, a decrease of$1.3 million . EBIT margin for the second quarter of 2021 was 19.6%, compared to 23.3% for the second quarter of 2020. The decreases were primarily driven by higher precious metal pricing, increased intangible amortization, other expenses related to our acquisition of IMC, unfavorable foreign currency exchange rate changes, and stock-based compensation, partially offset by the benefits of productivity initiatives, favorable mix, higher pricing, and higher factory utilization. Adjusted EBIT was$12.4 million for the second quarter of 2021, compared with$11.8 million for the second quarter of 2020, an increase of$0.6 million . Adjusted EBIT margin for the second quarter of 2021 was 24.8%, compared with 24.7% for the second quarter of 2020. The increases were primarily driven by the benefits of productivity initiatives, favorable mix, higher pricing, and higher factory utilization, partially offset by higher precious metal pricing and unfavorable foreign currency exchange rate changes. 35
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Segment Results of Operations for the Six Months Ended
Audio
Six Months Ended June 30,
(in millions) 2021 Percent of Revenues 2020 Percent of Revenues
Revenues $ 312.9 $ 224.6
Earnings (loss) from continuing operations before
interest and income taxes $ 58.4 18.7% $ (18.3) NM (2)
Stock-based compensation expense 5.7 6.2
Intangibles amortization expense 5.4 5.3
Restructuring charges 0.3 11.0
Other (1) 0.9 -Adjusted earnings from continuing operations before interest and income taxes
$ 70.7 22.6%$ 4.2 1.9%
(1) Other represents the ongoing net lease cost (income) related to facilities not used in operations. (2) Not meaningful.
Revenues Revenues were$312.9 million for the six months endedJune 30, 2021 , compared with$224.6 million for the six months endedJune 30, 2020 , an increase of$88.3 million or 39.3%. Revenues increased primarily due to higher shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by MEMS microphones in the computing and IoT markets. The computing market has benefited from the work-from-home and remote-learning trends, while the IoT market has returned to pre-pandemic levels. Hearing health demand has also returned to pre-pandemic levels. The increased demand is partially offset by lower average pricing on mature products.
Earnings (Loss) and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
Earnings from continuing operations before interest and income taxes were$58.4 million for the six months endedJune 30, 2021 , compared with a loss from continuing operations before interest and income taxes of$18.3 million for the six months endedJune 30, 2020 , an increase of$76.7 million . The increases were primarily due to higher revenues, higher gross profit margin, a reduction in restructuring charges, lower legal expenses in connection with the protection of our intellectual property, and lower operating costs. The gross profit margin increase was driven by higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and lower inventory reserve charges within the Intelligent Audio product line, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line. Adjusted EBIT was$70.7 million for the six months endedJune 30, 2021 , compared with$4.2 million for the six months endedJune 30, 2020 , an increase of$66.5 million . Adjusted EBIT margin for the six months endedJune 30, 2021 was 22.6%, compared to 1.9% for the six months endedJune 30, 2020 . The increases were primarily due to higher revenues, higher gross profit margin, lower legal expenses in connection with the protection of our intellectual property, and lower operating costs. The gross profit margin increase was driven by higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and lower inventory reserve charges within the Intelligent Audio product line, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line. 36
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Precision Devices
Six Months Ended June 30,
(in millions) 2021 Percent of Revenues 2020 Percent of Revenues
Revenues $ 87.9 $ 90.7 Earnings from continuing operations before interest and income taxes
$ 14.3 16.3%$ 18.2 20.1% Stock-based compensation expense 1.4 0.3 Intangibles amortization expense 1.8 1.2 Production transfer costs (1) - 0.1 Other (2) 0.7 -
Adjusted earnings from continuing operations before interest and income taxes
$ 18.2 20.7%$ 19.8 21.8%
(1) Production transfer costs represent duplicate costs incurred to migrate manufacturing to existing facilities. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented. (2) Expenses related to the acquisition of IMC.
Revenues
Revenues were$87.9 million for the six months endedJune 30, 2021 , compared with$90.7 million for the six months endedJune 30, 2020 , a decrease of$2.8 million or 3.1%. Revenues decreased primarily due to lower demand from the defense and communications markets, partially offset by increased demand in the industrial and electric vehicle markets, and revenues related to our acquisition of IMC.
Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes
EBIT was$14.3 million for the six months endedJune 30, 2021 , compared with$18.2 million for the six months endedJune 30, 2020 , a decrease of$3.9 million . EBIT margin for the six months endedJune 30, 2021 was 16.3%, compared to 20.1% for the six months endedJune 30, 2020 . The decreases were primarily driven by lower revenues, higher stock-based compensation, other expenses related to our acquisition of IMC, increased intangible amortization, unfavorable foreign currency exchange rate changes, and higher precious metal pricing, partially offset by the benefits of productivity initiatives and higher pricing. Adjusted EBIT was$18.2 million for the six months endedJune 30, 2021 , compared with$19.8 million for the six months endedJune 30, 2020 , a decrease of$1.6 million . Adjusted EBIT margin for the six months endedJune 30, 2021 was 20.7%, compared with 21.8% for the six months endedJune 30, 2020 . The decreases were primarily driven by lower revenues, higher precious metal pricing, and unfavorable foreign currency exchange rate changes, partially offset by the benefits of productivity initiatives and higher pricing. 37
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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 inthe 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 theU.S. debt or bank markets. InMay 2016 , we sold$172.5 million aggregate principal amount of 3.25% convertible senior notes dueNovember 1, 2021 ("the Notes") and concurrently entered into convertible note hedge transactions with respect to our common stock to minimize the potential dilution upon conversion of the Notes. The Company's current intent is to settle the principal amount of the Notes in cash at maturity. In addition, we entered into warrant transactions whereby we sold warrants to acquire shares of our common stock at a strike price of$21.1050 per share. The Notes will mature in 2021, unless earlier converted. The Notes are unsecured, senior obligations and interest is payable semi-annually in arrears. The Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election. We have primarily used the net proceeds to reduce borrowings outstanding. For additional information, refer to Note 9. Borrowings to our Consolidated Financial Statements. OnFebruary 24, 2020 , we announced that our Board of Directors had authorized a share repurchase program of up to$100 million of our common stock. 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 six months endedJune 30, 2021 , we repurchased 1,011,124 shares of common stock for a total of$20.0 million . OnSeptember 4, 2020 , we entered into a new Credit Agreement (the "New Credit Agreement"). The New Credit Agreement provides for a senior secured revolving credit facility (the "New Credit Facility") with borrowings in an aggregate principal amount at any time outstanding not to exceed$400.0 million . For additional information, refer to Note 9. Borrowings to our Consolidated Financial Statements.
On
Our ability to make payments on and to refinance our indebtedness, as well as any debt that we may incur in the future, will depend on our ability in the future to generate cash from operations and financings. Due to the global nature of our operations, a significant portion of our cash is generated and typically held outsidethe United States . Our cash and cash equivalents totaled$94.2 million and$147.8 million atJune 30, 2021 andDecember 31, 2020 , respectively. Of these amounts, cash held by our non-U.S. operations totaled$81.1 million and$101.4 million as ofJune 30, 2021 andDecember 31, 2020 , respectively.
To the extent we repatriate these funds to the
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