10-Q 1 kn-20220331.htm 10-Q kn-20220331
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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, 2022.


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)
Delaware90-1002689
(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 classTrading symbolName of each exchange on which registered
Common stock, $0.01 par value per shareKNNew 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 (§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 filerAccelerated filer
Non-accelerated filerSmaller 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 26, 2022 was 91,754,530.



Knowles Corporation
Form 10-Q
Table of Contents
Page



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,
 20222021
Revenues$201.4 $201.0 
Cost of goods sold118.1 123.0 
Gross profit83.3 78.0 
Research and development expenses23.1 23.3 
Selling and administrative expenses32.3 36.2 
Restructuring charges6.6 0.2 
Operating expenses62.0 59.7 
Operating earnings21.3 18.3 
Interest expense, net0.8 4.0 
Other income, net(0.5)(0.9)
Earnings before income taxes21.0 15.2 
Provision for income taxes2.9 2.7 
Net earnings$18.1 $12.5 
Net earnings per share:
Basic$0.20 $0.14 
Diluted$0.19 $0.13 
Weighted-average common shares outstanding:
Basic92.3 92.3 
Diluted94.3 95.0 

See accompanying Notes to Consolidated Financial Statements
1

KNOWLES CORPORATION 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions)
(unaudited)
 Three Months Ended March 31,
 20222021
Net earnings$18.1 $12.5 
Other comprehensive loss, net of tax
Foreign currency translation(2.2)(3.6)
Employee benefit plans:
Amortization or settlement of actuarial losses and prior service costs
0.1 0.2 
Net change in employee benefit plans0.1 0.2 
Changes in fair value of cash flow hedges:
Unrealized net losses arising during period
 (0.8)
Net gains reclassified into earnings(0.3)(1.0)
Total cash flow hedges(0.3)(1.8)
Other comprehensive loss, net of tax(2.4)(5.2)
Comprehensive earnings$15.7 $7.3 

See accompanying Notes to Consolidated Financial Statements

2

KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)
 March 31, 2022December 31, 2021
Current assets:  
Cash and cash equivalents$50.7 $68.9 
Receivables, net of allowances of $0.2
143.1 146.6 
Inventories, net177.0 153.1 
Prepaid and other current assets13.1 11.7 
Total current assets383.9 380.3 
Property, plant, and equipment, net191.7 200.8 
Goodwill942.0 941.3 
Intangible assets, net94.2 97.3 
Operating lease right-of-use assets15.9 17.4 
Other assets and deferred charges91.0 94.5 
Total assets$1,718.7 $1,731.6 
Current liabilities:  
Accounts payable$81.3 $90.9 
Accrued compensation and employee benefits24.4 42.8 
Operating lease liabilities9.8 11.4 
Other accrued expenses23.7 19.4 
Federal and other taxes on income3.8 1.7 
Total current liabilities143.0 166.2 
Long-term debt70.0 70.0 
Deferred income taxes0.6 0.6 
Long-term operating lease liabilities12.5 14.7 
Other liabilities18.5 20.6 
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued
  
Common stock - $0.01 par value; 400,000,000 shares authorized; 96,018,208 and 92,690,630 shares issued and outstanding at March 31, 2022, respectively, and 95,112,778 and 91,894,980 shares issued and outstanding at December 31, 2021, respectively
1.0 1.0 
Treasury stock - at cost; 3,327,578 and 3,217,798 shares at March 31, 2022 and December 31, 2021, respectively
(66.1)(62.4)
Additional paid-in capital1,642.0 1,639.4 
Accumulated deficit (18.1)
Accumulated other comprehensive loss(102.8)(100.4)
Total stockholders' equity1,474.1 1,459.5 
Total liabilities and stockholders' equity$1,718.7 $1,731.6 

See accompanying Notes to Consolidated Financial Statements


3

KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except share amounts)
(unaudited)
Common StockTreasury StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholders' Equity
 Shares IssuedAmountSharesAmount
Balance at December 31, 202195,112,778$1.0 (3,217,798)$(62.4)$1,639.4 $(18.1)$(100.4)$1,459.5 
Net earnings— — — 18.1 — 18.1 
Other comprehensive loss, net of tax— — — — (2.4)(2.4)
Repurchase of common stock— (313,395)(6.8)— — — (6.8)
Stock-based compensation expense— — 7.6 — — 7.6 
Exercise of stock options332,336 — 4.2 — — 4.2 
Exercise of warrants— 203,6153.1 (3.1)— —  
Restricted and performance stock unit settlement, net of tax573,094— — (6.1)— — (6.1)
Balance at March 31, 202296,018,208 $1.0 (3,327,578)$(66.1)$1,642.0 $ $(102.8)$1,474.1 
Common StockTreasury StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholders' Equity
Shares IssuedAmountSharesAmount
Balance at December 31, 202092,689,912 $0.9 (1,078,363)$(16.2)$1,587.8 $(168.5)$(100.5)$1,303.5 
Net earnings— — — — — 12.5 — 12.5 
Other comprehensive loss, net of tax— — — — — — (5.2)(5.2)
Stock-based compensation expense— — — — 11.1 — — 11.1 
Exercise of stock options524,864  — — 8.4 — — 8.4 
Restricted and performance stock unit settlement, net of tax622,894 — — — (6.6)— — (6.6)
Balance at March 31, 202193,837,670 $0.9 (1,078,363)$(16.2)$1,600.7 $(156.0)$(105.7)$1,323.7 


See accompanying Notes to Consolidated Financial Statements
4

KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 Three Months Ended March 31,
20222021
Operating Activities  
Net earnings$18.1 $12.5 
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization14.8 15.1 
Stock-based compensation7.6 11.1 
Non-cash interest expense and amortization of debt issuance costs0.2 2.3 
Gain on disposal of fixed assets (0.3)
Deferred income taxes2.9  
Other, net0.6 (1.5)
Changes in assets and liabilities (excluding effects of foreign exchange):
Receivables, net3.4 16.6 
Inventories, net(24.6)(12.9)
Prepaid and other current assets(1.7)(3.3)
Accounts payable(7.1)10.8 
Accrued compensation and employee benefits(18.2)(7.7)
Other accrued expenses4.5 0.1 
Accrued taxes2.0 (0.9)
Other non-current assets and non-current liabilities(1.7)(2.2)
Net cash provided by operating activities0.8 39.7 
Investing Activities  
Capital expenditures(6.8)(5.2)
Purchase of investments (2.1)
Proceeds from the sale of property, plant, and equipment 0.3 
Net cash used in investing activities(6.8)(7.0)
Financing Activities  
Repurchase of common stock(6.8) 
Tax on restricted and performance stock unit vesting(6.1)(6.6)
Payments of finance lease obligations(3.0)(0.6)
Proceeds from exercise of stock options3.9 8.4 
Net cash (used in) provided by financing activities(12.0)1.2 
Effect of exchange rate changes on cash and cash equivalents(0.2)(0.1)
Net (decrease) increase in cash and cash equivalents(18.2)33.8 
Cash and cash equivalents at beginning of period68.9 147.8 
Cash and cash equivalents at end of period$50.7 $181.6 
Supplemental information - cash paid for:
Income taxes$1.5 $4.5 
Interest$0.7 $0.4 

See accompanying Notes to Consolidated Financial Statements
5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

Description of Business - Knowles Corporation (NYSE:KN) is a market leader and global provider of advanced micro-acoustic microphones and balanced armature speakers, audio solutions, and high performance capacitors and radio frequency ("RF") products, serving the consumer electronics, medtech, defense, electric vehicle, industrial, and communications markets. The Company uses its leading position in SiSonicTM micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience across consumer applications. Knowles is also a leader in hearing health acoustics, high performance capacitors, and RF solutions for a diverse set of markets. The Company's focus on the customer, combined with its unique technology, proprietary manufacturing techniques, and global operational expertise, enable the Company to deliver innovative solutions across multiple applications. References to "Knowles," "the Company," "we," "our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.

Financial Statement Presentation - The accompanying unaudited interim Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”) for complete financial statements. These unaudited interim Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2021 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, including considerations for the impact of the COVID-19 pandemic on the macroeconomic environment. The situation related to the COVID-19 pandemic continues to be complex and dynamic. The Company cannot reasonably estimate the duration of the COVID-19 pandemic or fully ascertain its impact on the Company’s future results and market capitalization, which could adversely impact estimates such as the recoverability of goodwill and long-lived assets and the realizability of deferred tax assets. 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 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 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, 2022, the Company repurchased 313,395 shares of common stock for a total of $6.8 million. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2021.

Non-cash Investing Activities - Purchases of property, plant, and equipment included in accounts payable at March 31, 2022 and 2021 were $3.2 million and $2.5 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.

6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Recent Accounting Standards

Recently Adopted Accounting Standards

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. The standard eliminates certain accounting models that separated embedded conversion features from host contracts for convertible instruments, requiring bifurcation only if the convertible feature qualifies as a derivative under Accounting Standards Codification ("ASC") 815 or for convertible instruments issued at a substantial premium. In addition, the guidance requires the if-converted method of calculating diluted earnings per share for convertible instruments, which eliminates the use of the treasury stock method for instruments that may be settled in cash or shares. The standard can be adopted on a modified retrospective basis to transactions outstanding as of the adoption date or on a fully retrospective basis to all periods presented. The Company adopted the standard using the modified retrospective method on January 1, 2022. Adoption of the standard did not impact the Consolidated Financial Statements as all of the Company’s convertible instruments were settled prior to the adoption date. See Note 8. Borrowings for detail on the Company's convertible instruments that matured on November 1, 2021.

3. Acquisition

On May 3, 2021, the Company acquired all of the outstanding shares of common stock of Integrated Microwave Corporation ("IMC") for $81.4 million. During the three months ended March 31, 2022, the Company recorded a purchase price adjustment of $0.7 million that will be paid in the second quarter of 2022 and is recorded in the Other accrued expenses line on the Consolidated Balance Sheets. The adjustment, which did not impact the Consolidated Statements of Earnings, resulted in an increase to goodwill of $0.7 million. The acquired business provides RF filters to the defense, industrial, and communications markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the Precision Devices ("PD") segment.

The table below represents the final allocation of the purchase price to net assets acquired as of May 3, 2021:
(in millions)
Cash$2.2 
Receivables3.0 
Inventories2.6 
Property, plant, and equipment8.3 
Customer relationships27.7 
Developed technology5.2 
Trademarks and other amortized intangible assets1.6 
Goodwill32.0 
Assumed current liabilities(1.2)
Total purchase price$81.4 

The fair value for customer relationships was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of expected future cash flows less charges representing the contribution of other assets to those cash flows. The fair value for developed technology was determined using the relief from royalty method under the income approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of customer relationships and developed technology include forecasted revenue growth rates, profit margins, customer attrition rates, royalty rates, and discount rates. Discount rates of 13.0% and 14.0% were applied to the expected future cash flows to reflect the risk related to customer relationships and developed technology, respectively. Customer relationships and developed technology will be amortized on a straight-line basis over estimated useful lives of 8 years and 10 years, respectively.

The excess of the total purchase price over the total fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to synergies and the assembled workforce. All of the goodwill resulting from this acquisition is tax deductible. Goodwill has been allocated to the PD segment, which is the segment expected to benefit from the acquisition.
7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The Company believes the fair values assigned to intangible assets are based on reasonable assumptions and estimates that approximate the amounts a market participant would pay for these intangible assets as of the acquisition date. Actual results could differ materially from these estimates.

Pro-forma financial information has not been provided as the acquisition did not have a material impact on the Consolidated Statements of Earnings.

4. Inventories, net

The following table details the major components of inventories, net:
(in millions)March 31, 2022December 31, 2021
Raw materials$110.6 $89.6 
Work in progress35.5 33.6 
Finished goods68.9 66.7 
Subtotal215.0 189.9 
Less reserves(38.0)(36.8)
Total$177.0 $153.1 

5. Property, Plant, and Equipment, net

The following table details the major components of property, plant, and equipment, net:
(in millions)March 31, 2022December 31, 2021
Land$12.8 $12.9 
Buildings and improvements119.2 119.3 
Machinery, equipment, and other575.3 575.0 
Subtotal707.3 707.2 
Less accumulated depreciation(515.6)(506.4)
Total$191.7 $200.8 

Depreciation expense totaled $11.7 million and $11.8 million for the three months ended March 31, 2022 and 2021, 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, 2022 are as follows:
 (in millions)AudioPrecision DevicesTotal
Balance at December 31, 2021$878.8 $62.5 $941.3 
Purchase price adjustment 0.7 0.7 
Balance at March 31, 2022$878.8 $63.2 $942.0 

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The gross carrying value and accumulated amortization for each major class of intangible assets are as follows:
March 31, 2022December 31, 2021
(in millions)Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Amortized intangible assets:
Trademarks$2.0 $0.7 $2.0 $0.6 
Customer relationships36.4 7.0 36.4 5.9 
Developed technology45.4 14.9 45.4 13.2 
Other2.4 1.4 2.4 1.2 
Total86.2 24.0 86.2 20.9 
Unamortized intangible assets:
Trademarks32.0 32.0 
Total intangible assets, net$94.2 $97.3 

Amortization expense totaled $3.1 million and $3.3 million for the three months ended March 31, 2022 and 2021, 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 2022$9.1 
202311.6 
202411.6 
202511.2 
20265.3 

7. Restructuring and Related Activities

Restructuring and related activities are designed to better align the Company's operations with current market conditions through headcount reductions, targeted facility consolidations, and other measures to further optimize operations and align resources with growth opportunities.

During the three months ended March 31, 2022, the Company restructured its MEMS Microphones product line, which is included within the Audio segment. This action resulted in the termination of a research and development project and a reduction in workforce. During the three months ended March 31, 2022, the Company recorded restructuring charges of $5.4 million related to this action, including $4.2 million in contract termination costs and $1.2 million in severance pay and benefits. The Company may incur additional restructuring charges of up to $4 million during the remainder of the fiscal year for certain fixed assets of the terminated project, which cannot be reasonably estimated at this time due to the complex nature of the assets under review for use in other projects.

In addition, during the three months ended March 31, 2022, the Company recorded restructuring charges of $1.2 million for severance pay and benefits to rationalize the Intelligent Audio product line workforce, which is included within the Audio segment.

No restructuring charges were recorded within Gross profit for the three months ended March 31, 2022. During the three months ended March 31, 2022, the Company recorded total restructuring charges within Operating expenses of $6.6 million, primarily for contract termination costs and severance pay and benefits associated with the MEMS Microphones product line and other actions to rationalize the Intelligent Audio product line workforce.

No restructuring charges were recorded within Gross profit for the three months ended March 31, 2021. During the three months ended March 31, 2021, the Company recorded restructuring charges within Operating expenses of $0.2 million for severance pay and benefits.

9


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)20222021
Audio$6.6 $0.2 
Precision Devices  
Corporate  
Total$6.6 $0.2 

The following table details the Company’s severance and other restructuring accrual activity:
(in millions)Severance Pay and BenefitsContract Termination and Other CostsTotal
Balance at December 31, 2021$0.4 $ $0.4 
Restructuring charges2.4 4.2 6.6 
Payments(1.2) (1.2)
Balance at March 31, 2022$1.6 $4.2 $5.8 

The severance and restructuring accruals are recorded in the following line item on the Consolidated Balance Sheets:
(in millions)March 31, 2022December 31, 2021
Other accrued expenses$5.8 $0.4 
Total$5.8 $0.4 

8. Borrowings

Revolving Credit Facility

Revolving credit facility borrowings consist of the following:
(in millions)March 31, 2022December 31, 2021
Revolving credit facility $70.0 $70.0 
Less current maturities (1)
  
Total long-term debt$70.0 $70.0 
(1) There are no required principal payments due until maturity in January 2024.

On September 4, 2020, the Company 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. The New Credit Agreement serves as refinancing of indebtedness and terminates the Company's Revolving Credit Facility Agreement dated as of October 11, 2017 ("Prior Credit Facility"). The Prior Credit Facility consisted of a $400.0 million senior secured revolving credit facility.

At any time during the term of the New Credit Facility, the Company will be permitted to increase the commitments under the New Credit Facility or to establish one or more incremental term loan facilities under the New Credit Facility in an aggregate principal amount not to exceed $200.0 million for all such incremental facilities. Commitments under the New Credit Facility will terminate, and loans outstanding thereunder will mature, on January 2, 2024.

The New Credit Agreement includes requirements, to be tested quarterly, that the Company maintains (i) a minimum ratio of Consolidated EBITDA to consolidated interest expense of 3.25 to 1.0 (the "Interest Coverage Ratio"), (ii) a maximum ratio of Consolidated total indebtedness to Consolidated EBITDA of 3.75 to 1.0 (the "Total Leverage Ratio"), and (iii) a maximum ratio of senior secured indebtedness to Consolidated EBITDA of 3.25 to 1.0 (the "Senior Secured Leverage Ratio"). For these ratios, Consolidated EBITDA and consolidated interest expense are calculated using the most recent four consecutive fiscal quarters in a manner defined in the New Credit Agreement. At March 31, 2022, 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.

10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The interest rates under the New Credit Facility will be, at the Borrowers' option (1) LIBOR (or EURIBOR for borrowings denominated in Euro; or SONIA for borrowings denominated in Pounds Sterling) plus the rates per annum determined from time to time based on the total leverage ratio of the Company as of the end of and for the most recent period of four fiscal quarters for which financial statements have been delivered (the "Applicable Margin"); or (2) in the case of borrowings denominated in U.S. dollars, alternate base rate ("ABR") (as defined in the New Credit Agreement) plus the Applicable Margin. The Applicable Margin for LIBOR could range from 1.50% to 2.50% while the Applicable Margin for ABR could range from 0.50% to 1.50%. Prior to the discontinuation of the relevant LIBOR reference rate on June 30, 2023, the Company and its lenders will agree on an ABR to address the replacement of LIBOR for the remaining life of the New Credit Facility.

The interest rate under the New Credit Facility is variable based on LIBOR at the time of the borrowing and the Applicable Margin. In addition, a commitment fee accrues on the average daily unused portion of the New Credit Facility at a rate of 0.225% to 0.375%.

The weighted-average interest rate on the Company's borrowings under the New Credit Facility was 2.12% for the three months ended March 31, 2022. There were no borrowings outstanding under the New Credit Facility during the three months ended March 31, 2021. The weighted-average commitment fee on the revolving lines of credit was 0.24% and 0.27% for the three months ended March 31, 2022 and 2021, respectively.

3.25% Convertible Senior Notes Due November 1, 2021

In May 2016, the Company issued $172.5 million aggregate principal amount of 3.25% convertible senior notes which matured on November 1, 2021 (the “Notes”). Interest was payable semiannually in arrears on May 1 and November 1 of each year. The Notes were governed by an Indenture between the Company, as issuer, and U.S. Bank National Association as trustee. Upon conversion, the Company could elect to pay or deliver cash, shares of the Company's common stock, or a combination of cash and shares of common stock. On November 1, 2021, the Company settled the principal amount of the Notes in cash and the excess conversion value by delivering 0.4 million shares of its common stock held in treasury. The conversion rate was 54.2741 shares of common stock per $1,000 principal amount of Notes. The conversion price was $18.4250 per share of common stock. The Notes were senior unsecured obligations.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense over the term of the Notes.

The following table sets forth total interest expense recognized related to the Notes:
Three Months Ended
(in millions)March 31, 2021
3.25% coupon$1.4 
Amortization of debt issuance costs0.3 
Amortization of debt discount1.9 
Total$3.6 

Warrants

In the second quarter of 2016, the Company entered into warrant transactions, whereby the Company sold warrants to acquire shares of the Company's common stock at a strike price of $21.1050 per share (the “Warrants”). The Company received aggregate proceeds of $39.1 million from the sale of the Warrants. The Warrants were separate transactions entered into by the Company, and were not part of the Notes, and were accounted for as part of additional paid-in capital.

The Warrants expired during the first quarter of 2022, which resulted in the Company delivering 0.2 million shares of its common stock held in treasury. Settlement of the Warrants resulted in a $3.1 million decrease in treasury stock, which was measured based on the acquisition cost of the delivered shares determined on a first-in, first-out (“FIFO”) basis, offset by an equivalent decrease in additional paid-in capital with no net impact to equity.

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Other Comprehensive Earnings

The amounts recognized in other comprehensive loss were as follows:
Three Months EndedThree Months Ended
 March 31, 2022March 31, 2021
(in millions)Pre-taxTaxNet of taxPre-taxTaxNet of tax
Foreign currency translation$(2.2)$ $(2.2)$(3.6)$ $(3.6)
Employee benefit plans0.2 (0.1)0.1 0.2  0.2 
Changes in fair value of cash flow hedges(0.3) (0.3)(1.9)0.1 (1.8)
Total other comprehensive loss$(2.3)$(0.1)$(2.4)$(5.3)$0.1 $(5.2)

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, 2022 and 2021:
(in millions)Cash flow hedgesEmployee benefit plansCumulative foreign currency translation adjustmentsTotal
Balance at December 31, 2021$0.3 $(17.1)$(83.6)$(100.4)
Other comprehensive (loss) earnings, net of tax(0.3)0.1 (2.2)(2.4)
Balance at March 31, 2022$ $(17.0)$(85.8)$(102.8)

(in millions)Cash flow hedgesEmployee benefit plansCumulative foreign currency translation adjustmentsTotal
Balance at December 31, 2020$1.6 $(22.1)$(80.0)$(100.5)
Other comprehensive (loss) earnings, net of tax(1.8)0.2 (3.6)(5.2)
Balance at March 31, 2021$(0.2)$(21.9)$(83.6)$(105.7)

The following table summarizes the amounts reclassified from accumulated other comprehensive loss to earnings:
Three Months Ended March 31,
(in millions)Statement of Earnings Line20222021
Pension and post-retirement benefit plans:
Amortization or settlement of actuarial losses and prior service costsOther income, net$0.2 $0.2 
TaxProvision for income taxes(0.1) 
Net of tax$0.1 $0.2 
Cash flow hedges:
Net gains reclassified into earningsCost of goods sold$(0.3)$(1.3)
TaxProvision for income taxes 0.3 
Net of tax$(0.3)$(1.0)

12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 2022 and 2021 was a 13.8% provision (inclusive of discrete items totaling $1.0 million of benefit) and a 17.8% provision (inclusive of discrete items totaling $0.1 million of benefit), respectively. The discrete items impacting the tax provision for the three months ended March 31, 2022 were primarily attributable to the stock-based compensation deduction. Absent the discrete items, the ETR for the three months ended March 31, 2022 and 2021 was an 18.6% provision and an 18.4% provision, 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 three months ended March 31, 2022 and 2021.

The Company's ETR is favorably impacted by tax holidays granted to the Company in Malaysia and China. The Company secured the Chinese tax holiday in the first quarter of 2022. These tax holidays are subject to the Company's annual satisfaction of certain conditions, including investment and sales thresholds. If the Company fails to satisfy such conditions, the Company's ETR may be significantly adversely impacted. The benefit of the tax holidays in Malaysia and China for the three months ended March 31, 2022 was approximately $2.6 million, or $0.03 on a basic per share basis. The benefit of these incentives for the three months ended March 31, 2021 was approximately $2.4 million, or $0.03 on a basic per share basis. The Company's existing significant tax holiday in Malaysia will expire on December 31, 2026, while the tax holiday in China will expire on December 31, 2023.

11. Equity Incentive Program

Stock-based compensation expense recognized in the Consolidated Statements of Earnings totaled $7.6 million and $11.1 million for the three months ended March 31, 2022 and 2021, respectively. The tax benefit recognized related to stock-based compensation expense was $3.2 million for the three months ended March 31, 2022. No tax benefit was recognized related to stock-based compensation expense for the three months ended March 31, 2021.

Stock Options and SSARs

The expense related to stock options granted in the three months ended March 31, 2022 and 2021 was estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions shown in the table below:
 Three Months Ended March 31,
 20222021
Risk-free interest rate0.85%0.06%
Dividend yield%%
Expected life (years)4.54.5
Volatility34.3%36.0%
Fair value at date of grant$6.29$6.14

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the Company's stock-settled stock appreciation right ("SSAR") and stock option activity for the three months ended March 31, 2022:
SSARsStock Options
 Number of SharesWeighted-Average Exercise PriceAggregate Intrinsic ValueWeighted-Average Remaining Contractual Term (Years)Number of SharesWeighted-Average Exercise PriceAggregate Intrinsic ValueWeighted-Average Remaining Contractual Term (Years)
(in millions, except share and per share amounts)
Outstanding at December 31, 2021375,964 $23.16 3,478,438 $15.04 
Granted  216,813 21.14 
Exercised(36,759)21.77 (332,336)12.62 
Forfeited  (6,244)20.60 
Expired(95,573)21.77   
Outstanding at March 31, 2022243,632 $23.92 $ 0.93,356,671 $15.67 $19.7 3.3
Exercisable at March 31, 2022243,632 $23.92 $ 0.92,773,567 $14.91 $18.4 2.7

There was no unrecognized compensation expense related to SSARs at March 31, 2022. At March 31, 2022, unrecognized compensation expense related to stock options not yet exercisable of $2.9 million is expected to be recognized over a weighted-average period of 1.8 years.

RSUs

The following table summarizes the Company's restricted stock unit ("RSU") activity for the three months ended March 31, 2022:
 Share unitsWeighted-average grant date fair value
Unvested at December 31, 20211,778,639 $18.89 
Granted997,294 21.14 
Vested (1)
(722,073)17.98 
Forfeited(65,911)19.50 
Unvested at March 31, 20221,987,949 $20.28 
(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, 2022, $32.6 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 2022 and 2021, the number of PSUs that may be earned and vest is based on total shareholder return (“TSR”) relative to the component companies of the Russell 2000 Index over a three-year performance period.

14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The COVID-19 pandemic brought on unique and unprecedented challenges to the Company, particularly in the hearing health and medtech markets. Many of the Company's executive compensation programs were affected, including outstanding PSU awards. Due to the impact of the COVID-19 pandemic on the Company’s overall business performance, effective February 8, 2021, the Company’s Compensation Committee approved certain modifications to PSUs granted in February 2018, 2019, and 2020.

For the awards granted in February 2018 (the “2018 PSUs”), the number of PSUs that may be earned and vest was originally based on the Company’s revenues and stock price performance over a three-year performance period. The modified award was based on the Company’s revenues and stock price performance over three separate one-year performance periods to isolate the impact of the COVID-19 pandemic on the Company's fiscal 2020 performance. In addition, the performance periods corresponding to fiscal 2018 and 2019 were weighted at 25% each while the performance period corresponding to fiscal 2020 was weighted at 50%, given the impact of fiscal 2020 performance on shareholders. Service conditions were not modified. The modification of the 2018 PSUs affected nine employees and resulted in total incremental compensation expense of $3.9 million, which was recognized in the first quarter of 2021 as there was no remaining service period. In February 2021, the 2018 PSUs were converted from 329,092 PSUs to 190,544 shares of common stock based on achievement of the modified conditions.

For the awards granted in February 2019 (the “2019 PSUs”), the number of PSUs that may be earned and vest was originally based on the Company's revenues and TSR relative to the component companies of the S&P Semiconductor Select Industry Index over a three-year performance period. The modified award was based on the Company’s revenues and TSR relative to the component companies of the S&P Semiconductor Select Industry Index over three separate one-year performance periods to isolate the impact of the COVID-19 pandemic on the Company's fiscal 2020 performance. Each period was weighted equally, as the Company expected to face challenges related to the COVID-19 pandemic in fiscal 2021. Service conditions were not modified. The modification of the 2019 PSUs affected eight employees and resulted in total incremental compensation expense of $2.4 million, which was recognized over the remaining service period. Incremental compensation expense was subject to adjustment for the achievement of the performance condition based on fiscal 2021 revenues. In February 2022, the 2019 PSUs were converted from 227,812 PSUs to 150,811 shares of common stock based on achievement of the modified conditions.

For the awards granted in February 2020 (the “2020 PSUs”), the number of PSUs that may be earned and vest was originally based on TSR relative to the component companies of the S&P Semiconductor Select Industry Index over a three-year performance period. The modified award replaces the S&P Semiconductor Select Industry Index with the Russell 2000 Index. The Company is a member of the Russell 2000 Index, which represents a broader, more diversified index that better aligns with the Company's strategy. Service conditions were not modified. The modification of the 2020 PSUs affected eight employees and resulted in total incremental compensation expense of $4.7 million, which will be recognized over the remaining service period.

The following table summarizes the Company's PSU activity for the three months ended March 31, 2022:
 Share unitsWeighted-average grant date fair value
Unvested at December 31, 2021766,466 $21.28 
Granted294,935 29.92 
Vested (1)
(227,812)18.44 
Forfeited  
Unvested at March 31, 2022833,589 $25.12 
(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, 2022, $16.5 million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted-average period of 1.9 years.

15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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)20222021
Net earnings$18.1 $12.5 
Basic:
Net earnings per share$0.20 $0.14 
Weighted-average shares outstanding92.3 92.3 
Diluted:  
Net earnings per share$0.19 $0.13 
Weighted-average shares outstanding94.3 95.0 

The Company intended to settle the principal amount of the Notes in cash during all periods preceding settlement. The treasury stock method was used to calculate the dilutive effect of the conversion option on diluted earnings per share, if applicable. For the three months ended March 31, 2022 and 2021, the weighted-average number of anti-dilutive potential common shares for stock-based awards excluded from the diluted earnings per share calculation above was 0.5 million and 1.8 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.

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, 2022 and December 31, 2021.

16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. Segment Information

The Company's two reportable segments are Audio and Precision Devices. Information regarding the Company's reportable segments is as follows:
 Three Months Ended March 31,
(in millions)20222021
Revenues:  
Audio$145.7 $163.1 
Precision Devices55.7 37.9 
Total revenues$201.4 $201.0 
Earnings before interest and income taxes:
Audio$22.2 $30.4 
Precision Devices12.3 4.5 
Total segments34.5 34.9 
Corporate expense / other12.7 15.7 
Interest expense, net0.8