Company Quick10K Filing
Quick10K
Knowles
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$19.17 90 $1,730
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-04 Officers
8-K 2019-02-07
8-K 2018-10-24
8-K 2018-07-24
8-K 2018-06-22 Officers
8-K 2018-06-18 Officers
8-K 2018-05-01 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-04-26
8-K 2018-02-16 Officers, Regulation FD, Other Events, Exhibits
8-K 2018-02-07
WCG Wellcare Health Plans 13,040
ELS Equity Lifestyle Properties 10,100
FLS Flowserve 6,440
AL Air Lease 4,180
IDCC Interdigital 2,250
LEVB Level Brands 42
OHAI OHA Investment 24
WLKR Walker Innovation 0
NGTF NightFood 0
ETAH Eternity Healthcare 0
KN 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-21.1 a20181231exhibit211.htm
EX-23.1 a20181231exhibit231.htm
EX-31.1 a20181231exhibit311.htm
EX-31.2 a20181231exhibit312.htm
EX-32.1 a20181231exhibit321.htm

Knowles Earnings 2018-12-31

KN 10K Annual Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018.

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to


Commission File Number: 001-36102

Knowles Corporation
(Exact name of registrant as specified in its charter)

Delaware
90-1002689
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1151 Maplewood Drive
 
Itasca, Illinois
60143
(Address of principal executive offices)
(Zip Code)

(630) 250-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 Title of each class
 
 Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes þ No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

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 þ  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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. (Check one):
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No  þ

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the close of business on June 29, 2018 was approximately $1,359,000,000. The number of outstanding shares of the registrant’s common stock as of February 14, 2019 was 90,216,613.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant's Proxy Statement for its 2019 Annual Meeting of Stockholders is incorporated by reference into Part III hereof.





Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 




2

Table of Contents


PART I
ITEM 1. BUSINESS

Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Knowles,” the “Company,” “we,” “our,” or “us” refer to Knowles Corporation and its consolidated subsidiaries.

Our Company

We are a market leader and global provider of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medical, defense, aerospace, and industrial markets. We use our leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. We are also the leader in acoustics components used in hearing aids and have a strong position in high-end capacitors. Our focus on our customers, combined with our unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enables us to deliver innovative solutions that optimize the user experience. Knowles, founded in 1946 and headquartered in Itasca, Illinois, has approximately 8,000 employees in 11 countries around the world.

Our Strategy

Our primary focus has been to position the Company to benefit from the positive trends we are seeing in our Audio segment. With products ranging from mobile phones to headsets, and from smart speakers to household appliances, voice-powered interactions are emerging as a critical and necessary feature. Consumers want to engage with technology through natural, spoken commands, across the mobile, ear, and IoT markets, and original equipment manufacturers (“OEMs") are racing to develop and deploy the technology to enable it. Our unique capabilities in acoustics, digital signal processing, and algorithms place us in a competitive position to enable voice and audio input.

We have been focused on strategically positioning the business to support these broader trends around audio input including the acquisition of Audience, Inc. ("Audience") in 2015, which brought us essential digital signal processing and algorithm capabilities, and the divestiture of our low-margin speaker and receiver product line ("Speaker and Receiver Product Line") in 2016. During this time, we have also invested significantly in our core MEMS microphone and hearing health businesses to maintain our leadership positions and optimize our manufacturing footprint across our business units.

In our Precision Devices segment, we continue to drive higher sales growth and improved operating margins through both organic initiatives and acquisitions. In 2017, we reshaped our portfolio by divesting our timing device business ("Timing Device Business") to increase our focus on growth platforms in Precision Devices where we have strong market positions and attractive margin profiles, including industrial, medical, defense, automotive, and telecom applications.

Our Business Segments

In January 2017, the Company changed its internal reporting to drive growth in our core business. Given the changes in the allocation of resources and in its internal reporting structure, the Company now reports two segments, Audio and Precision Devices ("PD"). As a result of this change, transducer products used in hearing health and premium headset applications were moved from the historical Specialty Components segment into the new Audio segment, which includes the historical Mobile Consumer Electronics segment. The capacitor products formerly in the Specialty Components segment are now included in the PD segment.

• Audio Segment
Our Audio group designs and manufactures innovative audio products, including microphones and balanced armature speakers, audio processors, and software and algorithms used in applications that serve the mobile, ear, and IoT markets. Locations include the sales, support, and engineering facilities in North America, Europe, and Asia, as well as the manufacturing facilities in Asia.

• PD Segment
Our PD group specializes in the design and delivery of highly engineered capacitors and radio frequency ("RF") devices for technically demanding applications. Our devices are used in applications including power supplies, radar, medical implants, and satellites, serving the industrial, defense, aerospace, medical, telecommunications, and automotive markets. Locations include the sales, support, engineering, and manufacturing facilities in North America, Europe, and Asia.

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We sell our products directly to OEMs and to their contract manufacturers and suppliers and to a lesser extent through distributors worldwide. Our products by segment on a continuing operations basis are as follows:

Audio - Includes analog and digital MEMS microphones, electret condenser microphones, smart microphones, ultrasonic sensors, acoustic processors, and balanced armature speakers.

PD - Includes capacitors and filters.

Market Trends

In our Audio segment, we have seen an inflection point with voice being embraced as a primary user interface across consumer electronic devices. Voice assistants are proliferating throughout a variety of applications from mobile phones to headsets, and from smart speakers to household appliances. Consumers want to engage with technology through natural, spoken commands, across the mobile, ear, and IoT markets, and OEMs are racing to develop and deploy the technology to enable it. Our core capabilities in acoustics, digital signal processing, and algorithms are unparalleled and place us in an ideal position to enable voice and audio input.

Within the hearing aid market, sales are largely driven by aging demographics, healthcare spending, increasing affluence in emerging markets, and government subsidies.

Our Precision Devices segment sells multi-layer ceramic capacitors, electromagnetic interference filters, high reliability capacitors, single layer capacitors, precision variable capacitors, and thin film devices across diverse end markets, including industrial, defense, aerospace, medical, and telecommunications markets. Portions of this segment face much greater exposure to capital investment cycles and government spending, both direct and indirect, as some of these end markets are largely dependent on project upgrades, expansion, and government contracts.

Geographic Trends

We strive to maintain our manufacturing facilities in close proximity to our direct customers. In the case of Audio, we currently operate 5 facilities in Asia to serve the contract manufacturers who build OEM equipment on behalf of our end-customers. These contract manufacturers are largely based in China, Taiwan, India, Singapore, Indonesia, and Vietnam. Although end-user demand for consumer electronics and hearing aids is global and marketing activities occur globally, the majority of our manufacturing is located in Asia, primarily in China, Malaysia, and the Philippines.

In the case of PD, we operate 5 facilities in North America and 1 facility in Asia for the manufacturing of capacitors that support our global customers, as well as their suppliers and contract manufacturers.

Competitive Landscape

Success in the electronic components industry is primarily driven by innovation and flexibility as customers compete to gain a share of the growing consumer device market. We compete across handset, wearables, and other consumer platforms to deliver superior acoustic performance through customized products. Our investments in research and development enable us to capture new design wins across consumer OEMs. Our ability to balance and shift between full and semi-automation is key to our ability to optimize our operations and operating expenses. Additionally, it is important for suppliers to have flexibility and quick time-to-market to meet clients’ needs. Notably, according to industry estimates, the product cycle for mobile handsets has shortened over recent years. Key competitors include:

Audio - AAC Technologies, Goertek, Sonion, and Synaptics; and
PD - AVX Corporation, Kemet, and Murata.

In the Audio segment, our investments in research and development enable us to continually introduce new products with higher performance. Our customers are adopting these higher value microphones to improve the overall audio performance of their devices which in turn improves the end user experience. Typically our new products have higher average selling prices than the products they are replacing. Once introduced, the pricing for these products trend lower, as is typical in the consumer electronics market.


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For products that were introduced more than 18 months ago, we strive to offset anticipated price erosion through bill of material cost reductions, yield improvements, equipment efficiency, and movement to lower-cost manufacturing locations.

In the PD segment, the end markets tend to be more stable. We see a highly fragmented set of competitors across capacitor products for a diverse set of end markets including industrial, defense, aerospace, medical, and telecommunications.

Customers, Sales, and Distribution

We serve customers in the mobile consumer electronics, industrial, defense, aerospace, medical, and telecommunications markets. Our customers include some of the largest OEMs and operators in these markets. In addition, many of our OEM customers outsource their manufacturing to Electronic Manufacturing Services (“EMS”) companies. Other customers include global mobile phone manufacturers, hearing aid manufacturers, and many of the largest global EMS companies, particularly in China.

The Company's customers that accounted for 10% or more of total revenues were as follows:
 
Revenues
 
Years Ended December 31,
 
2018
 
2017
 
2016
Apple Inc.
19
%
 
19
%
 
20
%
Samsung Electronics Co., Ltd.
*

 
10
%
 
12
%
* Less than 10% of total revenues.

The following table details our sales by geographic location for the years ended December 31, 2018, 2017, and 2016. These results do not necessarily indicate the geographies where our products are deployed or where end-customer demand is originated.
 
Years Ended December 31,
(in millions)
2018
 
2017
 
2016
Asia
$
605.4

 
$
560.8

 
$
578.7

Europe
85.8

 
72.3

 
75.1

Other Americas
3.6

 
4.4

 
3.1

Other
5.5

 
5.4

 
5.5

Subtotal non-United States
700.3

 
642.9

 
662.4

United States
126.6

 
101.3

 
93.3

Total
$
826.9

 
$
744.2

 
$
755.7


We manufacture and develop our products as well as maintain sales and technical customer support offices in North America, Europe, and Asia. In our PD segment, we supplement our direct sales force with external sales representatives and distributors. Our global distribution center is located in Penang, Malaysia. Our worldwide sales force provides geographically specific support to our customers and specialized selling of product lines to various customer bases. For further detail and for additional disclosures regarding sales and property, plant, and equipment, net, by geographic location, see Note 17. Segment Information to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Raw Materials

We use a wide variety of raw materials, primarily metals, and semi-processed or finished components. Commodity pricing for various metals, such as palladium, gold, brass, stainless steel, and copper, fluctuates. As a result, our operating results are exposed to such fluctuations. Although some cost increases may be recovered through increased prices to customers, if commodity prices trend upward, we attempt to control such costs through fixed-price contracts with suppliers and various other programs.

We rely on highly specialized suppliers or foundries for critical materials, components, or subassemblies that are used in our products which, in some cases, may be sole sourced from such suppliers or foundries or, such suppliers or foundries may also be a strategic supplier to one of our competitors or a customer. The loss of any single supplier has not had a material impact on operating profits. However, should an event occur which affects the ability or willingness of any supplier or foundry to continue to deliver materials or components to us in a timely manner, we may not be able to identify or qualify an alternative supplier in a

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timely manner which, in any such period and future periods, could have a material adverse impact on our results of operations. See Item 1A. Risk Factors for additional information regarding risks related to our business.

Research and Development

We concentrate our research and development efforts on the design and development of new products for each of our principal markets. We also fund certain other emerging product and technology opportunities. Expenditures for research and development in fiscal years 2018, 2017, and 2016 were $100.6 million, $93.4 million, and $92.0 million, respectively. Our future success is highly dependent upon our ability to develop complex new products, transfer new products to volume production, introduce them into the marketplace in a timely fashion, and have them selected for design into our customers’ products at competitive prices. Our future success may also depend on increasing acoustic content in our customers’ products including assisting our customers with integration of our products and software into their new products and providing support from the concept stage through design, launch, and production ramp.

Intellectual Property and Intangible Assets

We rely on patent, copyright, trademark, and trade secret laws to protect our intellectual property, products, and technology. Our U.S. patents expire in calendar years 2019 through 2037. While our patents are an important element of our success, our business as a whole is not dependent on any one patent or group of patents. We do not anticipate any material effect on our business due to any patents expiring in 2019, and we continue to obtain new patents through our ongoing research and development. We have maintained U.S. federal trademark registrations for KNOWLES, Knowles logo designs, along with various other trademarks. These U.S. registrations may be renewed as long as the marks continue to be used in interstate commerce. We have also filed or obtained foreign registration for these marks in other countries or jurisdictions where we conduct, or anticipate conducting, international business. To complement our own research and development efforts, we have also licensed and expect to continue to license, a variety of intellectual property and technologies important to our business from third parties. See Item 1A. Risk Factors for additional information regarding risks related to our business.

Seasonality

In general, our businesses tend to have higher revenues in the third and fourth quarters of each fiscal year. This is particularly true of those businesses that serve the consumer electronics market. Our businesses tend to have short product cycles due to the highly technical nature of the industries they serve which can result in new OEM product launches that can impact quarterly revenues, earnings, and cash flow.

Environmental and Social Responsibility Matters

As a socially responsible company, we strive to align our business practices and policies with the needs of our key stakeholders, and to that end we have developed environmental, social, and governance policies which can be accessed at our website, www.knowles.com.

Our operations are governed by a variety of international, national, state, and local environmental laws. These regulations include limitations on discharge of pollutants to the air, water, and soil; manufacturing chemical use and handling restrictions; and requirements with respect to the treatment, transport, storage, and disposal of solid and hazardous wastes. We are committed to continued compliance and believe our operations generally are in substantial compliance with these laws.

We are dedicated to the preservation and improvement of our global environment. We have established a Green Materials Policy, pursuant to which we have established a Green Materials Standard. Our products are in compliance with the European Union Restriction of Hazardous Substances ("EU RoHS") and Waste Electrical and Electronic Equipment ("WEEE") directives. This standard is based on the list of substances identified in the Joint Industry Guide-101 Standard which is endorsed by the Electronic Industry Association, the Joint Electronics Device Engineering Council, and the Japan Green Procurement Survey Standardization Initiative associations as well as the Sony Standard-00259. As part of Knowles’s commitment to social responsibility and compliance with Rule 13p-1 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") it is our goal to only use 3TG minerals in our products that do not directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo region.

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Employees

We currently employ approximately 8,000 persons across our facilities in 11 countries. Approximately 78% of our employees are located in Asia. We are subject to various local, national, and multi-national laws and regulations relating to our relationships with our employees. Our workforce in the United States is not unionized. We believe we generally have good relationships with employees and their representative organizations.

Other Information

Knowles was incorporated in Delaware on June 12, 2013. The address of our principal executive offices is 1151 Maplewood Drive, Itasca, Illinois 60143. Our telephone number is 630-250-5100.

We post our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports on the "Financial Information - SEC Filings” link on the Investor Relations section of our website, www.knowles.com. We post each of these reports on the website as soon as reasonably practicable after the report is filed with or furnished to the Securities and Exchange Commission ("SEC"). The information on our website is not incorporated into this Form 10-K.

ITEM 1A. RISK FACTORS

Cautionary Statement Concerning Forward-Looking Statements

This Annual Report on Form 10-K contains certain statements regarding business strategies, market potential, future financial performance, future action, results, and any other statements that do not directly relate to any historical or current fact which are “forward-looking” statements within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “project,” “estimate,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” and similar expressions, among others, generally identify forward-looking statements, which speak only as of the date the statements were made.

In particular, information included under the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements.

Readers are cautioned that the matters discussed in these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that are difficult to predict and which could cause actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will be achieved or accomplished. Many factors that could cause actual results or events to differ materially from those anticipated include those matters described under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K and Knowles does not assume any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required by applicable law. All forward-looking statements, expressed or implied, included in this Annual Report on Form 10-K are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we may make or persons acting on our behalf may issue.

You should consider each of the following factors as well as the other information in this Annual Report on Form 10-K, including our financial statements and the related notes, in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. In general, we are subject to the same general risks and uncertainties that impact many other companies such as general economic, industry, and/or market conditions and growth rates; possible future terrorist threats or armed conflicts and their effect on the worldwide economy; and changes in laws or accounting rules. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of these risks occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline.

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Risks Related To Our Business

We depend on the mobile handset market for a significant portion of our revenues, and any downturn or slower than expected growth in this market could significantly reduce our revenues and adversely impact our operating results.

Our Audio segment accounted for 83% of our consolidated revenues for the year ended December 31, 2018, and the mobile handset market accounted for approximately 35% of our consolidated revenues. While other markets such as mobile headsets, wearables, and IoT are gaining in significance, we expect that a substantial portion of our consolidated revenues will continue to be attributable to the mobile handset market, which is cyclical and characterized by continuous and rapid technological change, product obsolescence, price erosion, evolving standards, short product life cycles, and significant fluctuations in product supply and demand. Moreover, the mobile handset market may not continue to grow at the rate experienced in recent years or may decline for reasons outside of our control including competition among market participants, market saturation, and global economic conditions. The mobile handset market has experienced and may experience periodic downturns which may be characterized by diminished product demand, production overcapacity, high inventory levels, and accelerated erosion of average selling prices. Given that the strength of the mobile handset market is a primary driver of revenues for our Audio segment, any downturn in the mobile handset market could have a material adverse effect on our business and operating results. In addition, a decline in global economic conditions, particularly in China and other geographic regions with high concentrations of mobile handset users, could have adverse, wide-ranging effects on demand for our products or technologies, the products and services of our customers or licensees, particularly OEM handset manufacturers, the solvency of key suppliers, failures by counterparties, and negative effects on mobile handset inventories. In addition, our customers’ ability to purchase or pay for our products and services and their customers’ ability to upgrade their mobile handsets could be adversely affected by economic conditions, leading to a reduction, cancellation, or delay of orders for our products or services.
          
We derive the majority of our Audio revenues from MEMS microphones sold to the mobile handset market and a significant reduction in our sales of MEMS microphones could significantly reduce our revenues and adversely impact our operating results.

Within our Audio segment, revenues are generated primarily from the sales of our MEMS microphones. Sales of MEMS microphones accounted for approximately 60% of our total revenues for fiscal 2018. We expect that a substantial portion of our revenues will continue to be attributable to sales of MEMS microphones and any weakening of demand, loss of market share, or other factors adversely affecting our levels and the timing of our sales of MEMS microphones, including our customers’ product release cycles, market acceptance, product competition, the performance and reliability of our MEMS microphones, and economic and market conditions could cause our Audio revenues to substantially decline, which may have a material adverse effect on our operating results.

Our largest segment, Audio, derives a significant portion of its revenues from a limited number of OEM customers. If revenues derived from these customers decrease or the timing of such revenues fluctuates, our operating results could be adversely affected.

Our Audio segment derives a significant portion of revenues from a small number of OEM customers. For 2018, Audio top five customers accounted for approximately 45% of Audio’s revenues. For the year ended December 31, 2018, Apple Inc. accounted for approximately 23% of Audio’s revenues and 19% of total company revenues. The mobile handset industry is also subject to intense competition that could result in decreased demand and/or declining average selling prices for our products and those of our OEM customers. The loss of any one of Audio’s top customers or a reduction in the purchases of Audio’s products by such customers would reduce our total revenues and may have a material adverse effect on our operating results, and any delay of a significant volume of purchases by any one of our top customers, even if only temporary, would reduce our revenues in the period of the delay and may have a material adverse effect on our operating results. Further, concentration of market share among a few companies and the corresponding increase in purchasing power of these companies may result in lower prices for our products which, if not offset by a sufficient increase in the volume, or favorable changes in the mix, of purchases of our products, could have a material adverse effect on our revenues and margins. In addition, the timing, volume, and mix of purchases by our significant customers may be impacted by the timing of such customers’ new or next generation product introductions, and the timing of such introductions may have a material adverse effect on our operating results. Accordingly, if current market and industry dynamics continue, our Audio segment’s revenues will continue to depend largely upon, and be impacted by the timing, volume, and mix of future purchases by a limited number of our OEM customers.


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If we are unable to continue to offset erosion of average selling prices in our Audio segment our gross margins may be adversely affected.

Like most technology sectors, the mobile handset industry has traditionally experienced an erosion of average selling prices due to a number of factors, including intense competition, component pricing trends, changes in demand mix, excess inventories, and rapid obsolescence resulting from technology advances. Within our Audio segment, while average selling prices vary significantly on a product to product basis, we have generally been successful with largely offsetting price erosion by shifting our product mix to new, higher end or higher performance microphones and gradually shifting customers from analog microphones to higher value digital microphones. To offset average selling price erosion, we must either continue to be successful with these initiatives or increase our selling prices. If we are unable to continue to offset average selling price erosion, the average selling prices of our products may decrease and our future operating results may be materially adversely affected.

We rely on highly specialized suppliers for a variety of highly engineered or specialized components, and other inputs which we may not be able to readily identify alternatives or substitutes in the event of a supply disruption or capacity constraint at or by any of these suppliers, which could have a material adverse impact on our results of operations.

Certain of our businesses rely on highly specialized suppliers or foundries for critical materials, components, or subassemblies that are used in our products. In some cases, such suppliers or foundries may be our sole source of supply or, such suppliers or foundries may also be a strategic supplier to one of our competitors or a customer. In either of these cases, should an event occur which affects the ability or willingness of any of such supplier or foundry to continue to deliver materials or components to us in a timely manner, we may not be able to identify or qualify an alternative supplier in a timely manner which, in any such period and future periods, could have a material adverse effect on our results of operations. Potential events or occurrences which could cause business or supply disruptions or affect the ability or willingness of a supplier or foundry to continue to supply us include changes in market strategy, the acquisition of, sale, or other change in control or ownership structure of a supplier or foundry, strategic divestiture, bankruptcy, insolvency or other financial difficulties, business disruptions, operational issues, or capacity constraints at a supplier or foundry.

Global markets for our products are highly competitive and subject to rapid technological change. If we are unable to develop new products and compete effectively in these markets, our financial condition and operating results could be materially adversely affected.

We compete in highly competitive, technology-based, industries that are highly dynamic as new technologies are developed and introduced. Our competitors may introduce products that are as or more technologically advanced than our products or launch new products faster than we can, which may result in a loss of market share or revenue by us. If we are unable to anticipate or match our competitors’ development or launch of new products, identify customer needs and preferences on a timely basis, or successfully launch or ramp production of our new products, our business and operating results may be materially adversely affected.

We operate in the highly competitive mobile handset industry, which requires us to invest significant capital in developing, qualifying, and ramping production of new products without any assurance of product sales which could negatively impact our operating results and profits.

A significant portion of our consolidated revenues are derived from acoustic components and audio solutions, including software, that are required to go through extensive customer qualification processes before being selected by customers for inclusion in their end products. In order to meet the product launch schedules of our top customers, we may invest capital and devote substantial resources, including design, engineering, sales, marketing, and programming efforts, based on non-binding forecasts provided by these customers, without any assurance that our products will be designed into a customer’s product or qualified by the customer. In such cases, if our product is not designed into or qualified by the customer, we may not recover or realize any return on the capital that we invested and our operating results may be materially adversely affected.

In addition, the time required and costs incurred by us to ramp-up production for new products can be significant. Certain non-recurring costs and expenditures for tooling and other equipment may not be reusable in manufacturing products for other customers or different products for the same customer. Product ramps typically involve greater volumes of scrap and risks to execution such as higher costs due to inefficiencies and delays in production, all of which can have a material adverse effect on our operating results.


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Our foreign operations, supply chain, and footprint optimization strategies are each subject to various risks that could materially adversely impact our results of operations and financial position.

Many of our manufacturing operations, research and development operations, vendors, and suppliers are located outside the United States and if we are unable to successfully manage the risks associated with our global operations, our results of operations and financial position could be negatively impacted. These risks include:
o  
labor unrest and strikes, particularly in Asia, where the majority of our manufacturing operations are located;
o  
earthquakes, floods, and other natural disasters or catastrophic events, particularly in Asia, where the majority of our manufacturing operations are located;
o  
acts of terrorism or armed conflicts;
o  
government embargoes, trade restrictions, and import and export controls; and
o  
transportation delays and interruptions.
Given that many of our manufacturing operations are located outside the United States, a border tax, if enacted, could have a material adverse effect on our operating results.

Global economic conditions and changes in U.S. and International Trade Policy could materially adversely impact our business, results of operations, and financial position.

The global economic instability of the past few years has caused, among other things, declining consumer and business spending, volatile raw material prices, instability in credit markets, high unemployment, fluctuating interest and exchange rates, and other challenges. The Company's business and operating results have been adversely affected by these global economic conditions and remain vulnerable to future adverse impacts. In particular, our sales to customers in China continue to be impacted by the recent economic slowdown in China. Any continued or prolonged economic deceleration in China may have a material adverse effect on our sales to customers in China, our operating results, and our financial condition.
  
Further, rising international trade tensions, new or increased tariffs and trade wars among countries have and may continue to impact the global economy and the trade policies of the United States. The Trump Administration has indicated and demonstrated its intent to alter the United States’ government’s approach to international trade policy using many tactics at its disposal including the renegotiation, termination or threatened termination, or renegotiation of certain existing bilateral or multi-lateral trade agreements and treaties with, the imposition of tariffs on a wide range of products and other goods manufactured in, China, countries in Europe, and other countries and the imposition of sanctions on countries and companies that it has concluded are directly or indirectly dodging United States’ trade sanctions. Given that the majority of our largest manufacturing facilities are located in China and Southeast Asia, trade policy changes in the United States, China or other countries, such as the tariffs and sanctions currently proposed, implemented, and threatened by the Trump Administration, present particular risks for us that could adversely impact our results of operations and financial condition. New or increased tariffs implemented in China are having an adverse effect on a small percentage of our capacitor products, tariffs announced but not yet implemented could have an adverse effect on our other products, and threatened tariffs could adversely affect all of our products. We cannot predict future foreign trade policy in the United States or other countries, the terms of any new or renegotiated trade agreements or treaties, or tariffs or the impact of such matters on our business. A trade war involving the United States is likely to negatively impact world trade and the world economy in various ways and, consequently, have a material adverse effect on our results of operations and financial condition. To the extent that tariffs, trade restrictions, or sanctions imposed by the United States or other countries increase the price of, affect customer demand for, affect our ability to supply our products, or create adverse tax consequences, in the United States or other countries, our business and our operating results may be adversely affected. As a result, changes in international trade policy, changes in trade agreements, the imposition of tariffs or sanctions by the United States or other countries could materially adversely affect our results of operations and our financial condition.

Our success depends on our ability to attract and retain key employees, and if we are unable to attract and retain such qualified employees, our business and our ability to execute our business strategies may be materially impaired.

Our future success depends largely on the continued service and efforts of our executive officers and other key management and technical personnel and on our ability to continue to identify, attract, retain, and motivate them, particularly in an environment of cost reductions and a general move toward more performance-based compensation for executives and key management.


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Implementing our business strategy also requires specialized engineering and other talent, as our revenues are highly dependent on technological and product innovations. Competition for such experienced technical personnel in our industry and where we are located is intense, and we cannot assure that we can continue to recruit and retain such personnel. For example, there is substantial competition in China for experienced engineers and technical personnel where most of our operations are located and for machine learning and software engineers in California and India where we primarily conduct research and development for our software and intelligent audio products, which may make it difficult for us to recruit and retain key employees. If we are unable to attract and retain such qualified employees, our business and our ability to execute our business strategies may be materially impaired.

Our revenues, operating profits, and cash flows could be materially adversely affected if we are unable to protect or obtain patent and other intellectual property rights or if intellectual property litigation is successful against us.

We employ various measures to maintain, protect, and defend our intellectual property, including enforcing our intellectual property rights in various jurisdictions and forums throughout the world. However, policing unauthorized use of our products, technologies, and proprietary information is difficult and time consuming and these measures may not prevent our intellectual property from being challenged, invalidated, copied, disclosed, or circumvented. We also may not be successful in litigation or other actions to enforce our intellectual property rights, particularly in countries where intellectual property rights are not highly developed or protected. Litigation, if necessary, may result in retaliatory legal proceedings alleging infringement by us of intellectual property owned by others. We have had and may in the future have difficulty in certain circumstances in protecting or enforcing our intellectual property rights, including collecting royalties for use of certain patents included in our patent portfolio in certain foreign jurisdictions due to, among other things: policies of foreign governments; challenges to our licensing practices under such jurisdictions’ competition laws; failure of foreign courts to recognize and enforce judgments of contract breach and damages issued by courts in the United States; and/or challenges pending before foreign patent authorities as to the validity of our patents and those owned by competitors and other parties.
The expense of protecting, defending, and enforcing our intellectual property, or defending claims that our products, technology, or manufacturing processes infringe the intellectual property rights of others, can vary significantly period to period and, in any given period, could have a material adverse effect on our operating results. In addition, in any period, we may have liability for damages arising out of adverse judgments for intellectual property claims that may have a material adverse effect on our operating results and financial condition.

We have invested and continue to make strategic investments and acquisitions that, if not successful, could have a material adverse effect on our financial results.

We engage in strategic transactions and make strategic investments including investments in emerging technology companies and intellectual property which are focused on growth by positioning the Company for expansion into new markets, territories or technologies, exploiting new or growing customer or market opportunities and developing new technologies and products. Such acquisitions and strategic investments naturally entail significant risks and uncertainties, some of which are beyond our control. We may not, for example, be able to retain key employees, customers, or suppliers of acquired companies, derive value from acquired technology or assets and we may experience delays in achieving cost synergies or higher than expected costs in implementing them. In addition, due to our inexperience with certain adjacent or complimentary technologies and doing business in certain geographic regions that may be served by acquired businesses, we may underestimate the costs or overestimate the benefits that we expect to realize from such acquisitions or investments, and we may not achieve them. We cannot, therefore, provide assurance that each of our acquisitions or strategic investments will be accretive or generate anticipated financial returns. If, for any of these or for unforeseen reasons, our strategic acquisitions or investments fail to meet our expectations or forecasts, our business and results of operations may be materially adversely affected.


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Our stock price has been and may continue to be volatile and may fluctuate significantly which may adversely impact investor confidence and increase the likelihood of securities class action litigation.

Our common stock price has experienced substantial volatility in the past and may remain volatile in the future. Volatility in our stock price can be driven by many factors including divergence between our actual or anticipated financial results and published expectations of analysts or the expectations of the market, market conditions in our industry, announcements that we, our competitors, our vendors, or our customers may make regarding their operating results, technological innovations, and the gain or loss of customers, or key opportunities. During 2018, our closing stock price ranged from a high of $18.13 per share to a low of $11.00 per share. Our common stock is also included in certain market indices, and any change in the composition of these indices to exclude our company may adversely affect our stock price. Increased volatility in the financial markets and/or overall economic conditions may reduce the amounts that we realize in the future on our cash equivalents and/or marketable securities and may reduce our earnings as a result of any impairment charges that we record to reduce recorded values of marketable securities to their fair values.

Further, securities class action litigation is often brought against a public company following periods of volatility in the market price of its securities. Due to changes in our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial uninsured costs and divert management’s attention and our resources.

Our effective tax rate may fluctuate which will impact our future financial results.

Our effective tax rate may be adversely impacted by, among other things, changes in the mix of our earnings among countries having differing statutory tax rates, changes in the valuation of deferred tax assets, or changes in tax laws where we operate, including the resulting tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). We cannot give any assurance as to the stability or predictability of our effective tax rate in the future because of, among other things, uncertainty regarding the tax laws and policies of the countries where we operate.

The estimated effects of applicable tax laws, including current interpretation of the Tax Reform Act and recently proposed regulations on the Section 965 deemed repatriation tax on U.S. persons with foreign earnings accumulated offshore, have been incorporated into our financial results. The U.S. Treasury Department, Internal Revenue Service, and other standard-setting bodies could interpret or issue future legislation or guidance which impact how provisions of the Tax Reform Act will be applied or otherwise administered that is different from our interpretation, which could have a material adverse impact on our effective tax rate as well as our future financial results and tax payments.

Further, our tax returns are subject to periodic reviews or audits by domestic and international authorities, and these audits may result in adjustments to our provision for taxes or allocations of income or deductions that result in tax assessments different from amounts that we have estimated. We regularly assess the likelihood of an adverse outcome resulting from these audits to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these audits or that our tax provisions will not change materially or be adequate to satisfy any associated tax liability. If our effective tax rates were to increase or if our tax liabilities exceed our estimates and provisions for such taxes, our financial results could be adversely affected.

Our effective tax rate is favorably impacted by tax holidays granted to us by certain foreign jurisdictions, which lowers the tax rates we are subject to for a period of time as compared to the countries' statutory tax rates. These tax holidays are subject to the satisfaction of certain conditions, including exceeding certain annual thresholds of operating expenses and gross sales. If we fail to satisfy such conditions, our effective tax rate may be materially adversely impacted. For additional detail, see Note 12. Income Taxes to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Moreover, tax rates and laws in the countries where we operate may change, or tax reforms may be enacted domestically or in foreign jurisdictions which adversely affect our liquidity, cash flows, and future reported financial results or our ability to continue to structure and conduct our business as is done currently.

We are subject to potentially material liability for breaches of confidentiality agreements with certain of our top customers.

We have entered into non-disclosure agreements with several of our top customers which require us not to disclose and to protect certain information regarding, among other things, aspects of those customers’ businesses plans, products, and technology. These confidentiality agreements, in some cases, impose strict liability on us in the event of any breach of these agreements by us or our employees or agents and, should such a breach occur, any resulting damage award or settlement could have a material adverse effect on our operating results and financial condition.

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Our business and operations could suffer in the event of security breaches or other unauthorized disclosures.

We have taken and continue to actively take measures to protect the various proprietary information, algorithms, source code, and confidential data relating to both our and our customers’ business and products that is stored on our computer networks, servers, and peripheral devices, as well as on servers owned or managed by third party vendors whom we leverage. Such data and information remains vulnerable to cyber attacks, cyber breaches, theft, or other unauthorized disclosure which, if successful, could result in loss of valuable intellectual property, disclosure of confidential customer or commercial data, disclosure of government classified information, or system disruptions and subject us to civil liability and fines or penalties, damage our brand and reputation or otherwise harm our business, any of which could be material. Should any security breach result in the disclosure of certain of our customers’ or business partners’ confidential information, we may incur liability to such customers or business partners under confidentiality agreements that we are party to with such parties. In addition, delayed sales, lower margins, or lost customers resulting from security breaches or network disruptions could materially reduce our revenues, materially increase our expenses, damage our reputation, and have a material adverse effect on our stock price.

There is also a danger of industrial espionage, unauthorized disclosures, theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to the Company's facilities, systems, or information. Such breaches, misuse, or other disruptions could lead to unauthorized disclosure of confidential or proprietary information or improper usage or sale of the Company's products or intellectual property without compensation and theft, manipulation, and destruction of private and proprietary data, which could result in defective products, production downtimes, lost revenue, or damage to our reputation, and have a material adverse effect on our stock price.

Our net exposure to exchange rate fluctuations could have a material adverse effect on our results of operations.

We conduct a significant amount of business outside the United States and adverse movements in currency exchange rates, particularly the Malaysian ringgit, the Chinese renminbi (yuan), and the Philippine peso, may, in any period or periods, could have a material adverse effect on our business and our operating results due to a number of factors, including, among others:
o
our products are manufactured and sold outside the United States which increases our net exposure to changes in foreign exchange rates;
o
our products, which are typically sold in U.S. dollars, may become less price-competitive outside the United States as a result of unfavorable foreign exchange rates;
o
certain of our revenues that are derived from customer sales denominated in foreign currencies could decrease;
o
our foreign suppliers may raise their prices if they are impacted by currency fluctuations, resulting in higher than expected costs and lower margins;
o
the cost of materials, products, services, and other expenses outside the United States could be materially impacted by a weakening of the U.S. dollar; and
o
a sustained weakening of the U.S. dollar for an extended period could have a material adverse impact on our operating results and financial position.


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Our products are complex and could contain defects, which could result in material costs to us and harm our business.

Our products are complex and could contain defects, which could result in material costs to us. Product development in the markets we serve is becoming more focused on audio signal processing for improved audio performance and to enable intelligent and more sophisticated audio solutions. The increasing complexity of our products increases the risk that we or our customers or end users could discover latent defects or subtle faults after significant volumes of product have been shipped. This could result in material costs and other adverse consequences to us including, but not limited to: loss of customers, reduced margins, damage to our reputation, a material product recall, replacement costs for product warranty and support, payments to our customers related to recall claims as a result of various industry or business practices, a delay in recognition or loss of revenues, loss of market share, or failure to achieve market acceptance, and a diversion of the attention of our engineering personnel from our product development efforts. In addition, any defects or other problems with our products could result in financial losses or other damages to our customers who could seek damages from us for their losses. A product liability or warranty claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. In particular, the sale of systems and components that are incorporated into mobile handsets for the global mobile phone industry involves a high degree of risk that such claims may be made. Due to the complex nature of our products, quality and reliability issues may be identified after significant volumes of a product have been shipped to a large customer. While we have attempted to contractually limit our financial exposure with many of our customers for such claims, a warranty or product liability claim against us in excess of our available insurance coverage and established reserves, or a determination that we have liability or an obligation to cover the costs of a customer product recall, could have a material adverse effect on our business, results of operations, and financial condition.

In addition, our products are typically sold to customers at prices that are significantly lower than the cost of the customer’s products in which they are incorporated. Given that a defect in one of our products could give rise to failures in the products that incorporate them, we may face claims for damages that are disproportionate to the revenues we receive from the products involved and because we are self-insured for matters relating to product quality a significant claim(s) could have a material adverse effect on our financial position. Moreover, to the extent a defect in one of our products is caused by a defective component supplied to us by a third party, we may, nonetheless, be liable to the customer and be unsuccessful in seeking indemnification from that third party.

Our goodwill, other intangible assets, or long-lived assets may become impaired, which could result in a significant charge to earnings.

We hold significant amounts of goodwill, other intangible assets, and long-lived assets, and the balances of these assets could increase in the future if we acquire other businesses. At December 31, 2018, the balance of our goodwill, other intangible assets, and long-lived assets was $1.2 billion and the total market value of the Company’s outstanding shares was $1.2 billion. Under generally accepted accounting principles in the United States ("U.S. GAAP"), we review our goodwill, other intangible assets, and long-lived assets for impairment when events or changes in circumstances indicate the carrying value of such goodwill, other intangible assets, or long-lived assets may not be recoverable. In addition, we test goodwill and other indefinite-lived intangible assets for impairment annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill, other intangible assets, or long-lived assets may not be recoverable, include, but are not limited to, a sustained decline in stock price and market capitalization, significant negative variances between actual and expected financial results, reduced future cash flow estimates, adverse changes in legal factors, failure to realize anticipated synergies from acquisitions, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill, other intangible assets, or long-lived assets is determined to exist, negatively impacting our results of operations. If our market capitalization was to fall below the book value of our total stockholders’ equity for a sustained period, we may conclude that the fair value of certain of our intangible or long-lived assets is materially impaired. In this case, we would be required under U.S. GAAP to record a non-cash charge to our earnings which could have a material adverse effect on our business, results of operations, and financial condition.

Our credit agreement requires us to comply with certain financial covenants and our failure to comply could have a material adverse effect on our financial condition.

The credit agreement governing our revolving credit facility contains covenants requiring us to, among other things, maintain a minimum ratio of consolidated EBITDA to consolidated interest expense and a maximum ratio of consolidated total indebtedness to consolidated EBITDA. In the past, we have obtained amendments from the lenders under the credit agreement which have allowed us to comply with the financial covenants, but there can be no assurance that in the future the lenders will agree to such amendments, and our inability to comply with the covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition, and operating results.


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We are subject to counterparty risk with respect to the convertible note hedge transactions.
 
As discussed in Note 11. Borrowings to our audited Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data", we issued convertible senior notes and concurrently entered into convertible note hedge transactions and separate warrants. The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any of the option counterparties become subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with such counterparties. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by the option counterparties, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.

There are risks associated with our indebtedness, which could have a material adverse effect on our financial condition.

Our outstanding indebtedness and any additional indebtedness we incur may have negative consequences, including:
o
requiring us to use cash to pay the principal of and interest on our indebtedness, thereby reducing the amount of cash flow available for other purposes;
o
limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions, stock repurchases, dividends, or other general corporate and other purposes;
o
limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
o
increasing our vulnerability to interest rate fluctuations to the extent a portion of our debt has variable interest rates.

Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which is subject to general economic conditions, industry cycles, and financial, business, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to, among other things: refinance or restructure all or a portion of our indebtedness; reduce or delay planned capital or operating expenditures; or sell selected assets. Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing, or sale of assets might not be available on economically favorable terms or at all, and if prevailing interest rates at the time of any such financing and/or refinancing are higher than our current rates, interest expense related to such financing and/or refinancing would increase. If there are adverse changes in the ratings assigned to our debt securities by credit rating agencies, our borrowing costs, our ability to access debt in the future, and/or the terms of the financing could be adversely affected.

Risks Related to Our Corporate Governance

Our business could be negatively affected as a result of the actions of activist or hostile stockholders.

Our business could be negatively affected as a result of stockholder activism, which could cause us to incur significant expense, hinder execution of our business strategy, and impact the trading value of our securities. Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing in publicly traded companies in recent years and we are subject to the risks associated with such activism. Stockholder activism, including potential proxy contests, requires significant time and attention by management and the Board of Directors, potentially interfering with our ability to execute our strategic plan. Additionally, such stockholder activism could give rise to perceived uncertainties as to our future direction, adversely affect our relationships with key executives and business partners, and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to activist stockholder matters. Any of these impacts could materially and adversely affect our business and operating results. Further, the market price of our common stock could be subject to significant fluctuation or otherwise be adversely affected by stockholder activism.


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Certain provisions in our certificate of incorporation, by-laws, and Delaware law may prevent or delay an acquisition of the Company, which could decrease the trading price of our common stock.

Each of our certificate of incorporation, our by-laws, and Delaware law, as currently in effect, contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:
o
the inability of our stockholders to call a special meeting or act by written consent;
o
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
o
the right of our Board of Directors to issue preferred stock without stockholder approval;
o
the classification of our Board of Directors and a provision that stockholders may only remove directors for cause, in each case until our 2021 annual meeting of stockholders;
o
the ability of our directors, without a stockholder vote, to fill vacancies on our Board of Directors (including those resulting from an enlargement of the Board of Directors); and
o
the requirement that stockholders holding at least 80% of our voting stock are required to amend certain provisions in our certificate of incorporation and our by-laws.

In addition, current Delaware law includes provisions which limit the ability of persons that, without prior board approval, acquire more than 15% of the outstanding voting stock of a Delaware corporation from engaging in any business combination with that corporation, including by merger, consolidation, or purchases of additional shares, for a three-year period following the acquisition by such persons of more than 15% of the corporation’s outstanding voting stock.

In light of present circumstances, we believe these provisions taken as a whole protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers or prevent the removal of incumbent directors. However, these provisions could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of the Company and all of our stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


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ITEM 2. PROPERTIES

Our corporate headquarters is located in Itasca, Illinois. We maintain technical customer support offices and operating facilities in North America, Europe, and Asia. Our principal manufacturing locations for the Audio segment are located in China, Malaysia, and the Philippines. Our principal manufacturing locations for the PD segment are located in the U.S, Asia, and the Dominican Republic.

The number, type, location, and size of the properties used by our continuing operations as of December 31, 2018 are shown in the following chart:
 
 
Total
Number and nature of facilities:
 
 
Manufacturing and Distribution
 
11

Other Facilities (principally sales, research and development, and headquarters)
 
13

 
 
 
Square footage (in 000s):
 
 
Owned
 
630

Leased (1)
 
905

 
 
 
Locations:
 
 
Asia
 
14

North America
 
8

Europe
 
2


(1) Expiration dates on leased facilities range from 1 to 9 years.

We believe that our owned and leased facilities are well-maintained and suitable for our operations.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of our business, including those related to intellectual property, which may be owned by us or others. We own many patents covering products, technology, and manufacturing processes. Some of these patents have been and may continue to be challenged by others. In appropriate cases, we have taken and will take steps to protect and defend our 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 that we infringe on patents owned by others. The costs of investigations and legal proceedings, particularly multi-forum litigation, relating to the enforcement and defense of our intellectual property, may be substantial. Additionally, in multi-forum disputes, we 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. 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 each claim, we do not expect that any asserted or unasserted legal proceedings or claims, individually or in the aggregate, will have a material adverse effect on our cash flow, results of operations, or financial condition.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


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EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth information regarding our executive officers, as of February 19, 2019.
Name
Age
Position
 
 
 
Jeffrey S. Niew
52
President & Chief Executive Officer
 
 
 
John S. Anderson
55
Senior Vice President & Chief Financial Officer
 
 
 
Christian U. Scherp
53
President, Performance Audio
 
 
 
Raymond D. Cabrera
52
Senior Vice President, Human Resources & Chief Administrative Officer
 
 
 
Daniel J. Giesecke
51
Senior Vice President & Chief Operating Officer
 
 
 
Thomas G. Jackson
53
Senior Vice President, General Counsel & Secretary
 
 
 
Michael S. Polacek
55
President, Intelligent Audio
 
 
 
Air A. Bastarrica, Jr.
39
Vice President, Controller

Jeffrey S. Niew has served as President & Chief Executive Officer since September 2013 and as a member of our Board of Directors since February 2014. From November 2011 until the Separation in February 2014, Mr. Niew served as a Vice President of Dover Corporation and as President and Chief Executive Officer of Dover Communication Technologies. Mr. Niew joined Knowles Electronics LLC (“Knowles Electronics”) in May 2000 and became Chief Operating Officer in January 2007, President in January 2008, and President and Chief Executive Officer in February 2010. Prior to joining Knowles Electronics, Mr. Niew was employed by Littelfuse, Inc., from 1995 to 2000, where he held various positions in product management, sales, and engineering in the Electronic Products group and by Hewlett-Packard Company, from 1988 to 1994, where he served in various engineering and product management roles in the Optoelectronics Group in California.

John S. Anderson has served as Senior Vice President & Chief Financial Officer since December 2013. From January 2013 until the Separation in February 2014, Mr. Anderson served as Vice President and Chief Financial Officer of Dover Communication Technologies. Previously, Mr. Anderson served as Vice President and Chief Financial Officer of Dover Energy (from August 2010 to January 2013) and Vice President and Chief Financial Officer of Dover Fluid Management (from October 2009 to August 2010). Previous experience includes the roles of Corporate Controller and Director Financial Planning & Analysis for Sauer-Danfoss Inc. (from October 2004 to October 2009) and Director of Finance and Controller for Borg Warner Turbo Systems GmbH (from August 2002 to October 2004).

Christian U. Scherp has served as President, Performance Audio since July 2015 and prior thereto he was Co-President, Mobile Consumer Electronics - Speakers and Receivers (from September 2012 to June 2015). Prior to joining Knowles Electronics, Mr. Scherp served as the Global Head of Sales for the Consumer Devices business of TE Connectivity, a manufacturer of connectivity and sensor platforms (from November 2011 to August 2012). Additional previous experience includes the following roles at Conexant Systems: Executive Vice President of Sales (from January 2011 to June 2011), Co-President, WW Sales, Marketing, Program Management (from July 2009 to December 2010), and President (from 2008 to 2009).

Raymond D. Cabrera has served as Senior Vice President, Human Resources & Chief Administrative Officer since February 2014. From November 2011 until the Separation in February 2014, Mr. Cabrera served as Vice President, Human Resources of Dover Communication Technologies. Previously, Mr. Cabrera served in the following capacities at Knowles: as Vice President, Human Resources and Chief Administrative Officer (from January 2004 to November 2011), Vice President, Human Resources (from March 2000 to January 2004), and Director, Human Resources (from June 1997 to March 2000) of Knowles Electronics.

Daniel J. Giesecke has served as Senior Vice President & Chief Operating Officer since February 2014. From January 2012 until the Separation in February 2014, Mr. Giesecke served as Vice President, Global Operations of Dover Communication Technologies. Previously, Mr. Giesecke served as Vice President, Advanced Manufacturing Engineering, Knowles Electronics (from February 2009 to January 2012), Senior Director, Advanced Manufacturing Engineering, Knowles Electronics (from January 2008 to February 2009), Director of Engineering Operations, Knowles Electronics (from November 2003 to January 2008), and various operations, supply chain, and engineering positions since he joined Knowles Electronics in 1995.


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Thomas G. Jackson has served as Senior Vice President, Secretary since February 2014 and effective April 1, 2014, General Counsel. Prior to joining Knowles, Mr. Jackson served as Vice President and Assistant General Counsel at Jabil Circuit, Inc., a provider of electronic manufacturing services (from March 2012 to December 2013). In addition, he served as Vice President, General Counsel and Secretary at P.H. Glatfelter Company, a manufacturer of specialty papers and fiber-based engineered materials (from June 2008 to November 2011) and as its Assistant General Counsel, Assistant Secretary, and Director of Compliance (from September 2006 to June 2008).

Michael S. Polacek has served as President, Intelligent Audio since February 2017. Prior to joining Knowles, Mr. Polacek was a partner with Eachwin Capital, L.P., a management investment firm, from December 2012 to January 2017 and served as a strategic adviser for KKR Private Equity during 2012. In addition, he held numerous management and other senior positions, including Senior Vice President, Corporate Development and Key Market Segments at National Semiconductor, a semiconductor manufacturer, from 1992 to 2011.

Air A. Bastarrica, Jr. has served as Vice President, Controller since July 6, 2018. Mr. Bastarrica has been with the Company since 2012 and has held numerous financial leadership roles including Director, Finance-Performance Audio (MCE and HHT) (2016 to 2018), Director, Finance-Hearing Health Technologies (2015 to 2016), and Manager, Corporate Financial Planning and Analysis (2012 to 2015). Previously, Mr. Bastarrica held several financial positions at Navistar Inc. from 2000 to 2012 in Brazil and the United States.


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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the New York Stock Exchange ("NYSE") under the ticker symbol “KN”.

Dividends

Since our common stock began trading on the NYSE, we have not paid cash dividends and we do not anticipate paying a cash dividend on our common stock in the immediate future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that the Board of Directors deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and access to the capital markets.

Holders

The number of holders of record of our common stock as of February 14, 2019 was approximately 982.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

None.


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Performance Graph
This performance graph does not constitute soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in any such filing, except to the extent we specifically incorporate this performance graph by reference therein.

chart-31d843e760125e84904a01.jpg
Data Source: NYSE
*Total return assumes reinvestment of dividends.
During the year ended December 31, 2018, the Company’s S&P index was changed to the S&P Small Cap 600 Index from the S&P Mid Cap 400 Index. The graph assumes $100 invested on March 3, 2014, the date our common stock began "regular way" trading on the NYSE, in Knowles Corporation common stock, the S&P Small Cap 600 Index, the S&P Mid Cap 400 Index, and the PHLX / Semiconductor Sector Index.







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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data on a continuing operations basis as derived from our audited Consolidated Financial Statements.

The selected financial data includes costs of Knowles’ businesses, which include the allocation of certain corporate expenses from our Former Parent through the date of the Separation. We believe that these allocations were made on a reasonable basis. The selected historical financial data for the period prior to the Separation may not be indicative of our future performance as an independent publicly traded company. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included under Item 7 and the Consolidated Financial Statements and accompanying notes included under Item 8, "Financial Statements and Supplementary Data."
 
 
Years Ended December 31,
Statement of Earnings Data (1)
(in millions, except share and per share amounts)
 
2018

2017

2016

2015 (2)

2014
Revenues
 
$
826.9

 
$
744.2

 
$
755.7

 
$
753.6

 
$
785.0

Gross profit (3)
 
322.6

 
286.0

 
295.7

 
281.6

 
308.6

Interest expense, net (4)
 
16.0

 
20.6

 
20.4

 
12.7

 
6.6

(Benefit from) provision for income taxes
 
(4.5
)
 
12.9

 
8.3

 
3.2

 
8.4

Earnings from continuing operations
 
$
65.6

 
$
6.5

 
$
19.8

 
$
17.4

 
$
111.0

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
0.73

 
$
0.07

 
$
0.22

 
$
0.20

 
$
1.31

Diluted earnings per share from continuing operations
 
$
0.72

 
$
0.07

 
$
0.22

 
$
0.20

 
$
1.30

Basic shares outstanding (5)
 
90,050,051

 
89,329,794

 
88,667,098

 
86,802,828

 
85,046,042

Diluted shares outstanding (5)
 
91,194,747

 
90,490,007

 
89,182,967

 
86,992,254

 
85,292,959

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
Balance Sheet Data
(in millions)
 
2018
 
2017
 
2016
 
2015 (2)
 
2014
Total assets
 
$
1,547.9

 
$
1,549.8

 
$
1,515.0

 
$
1,696.4

 
$
1,998.4

Total third party debt and lease obligations (4)(6)
 
$
170.6

 
$
207.4

 
$
313.8

 
$
447.5

 
$
404.3

 
 
Years Ended December 31,
Other Data (1)
(in millions)
 
2018
 
2017
 
2016
 
2015 (2)
 
2014
EBIT (7)
 
$
77.1

 
$
40.0

 
$
48.5


$
33.3


$
126.0

Depreciation and amortization
 
$
52.4

 
$
53.8

 
$
69.0

 
$
72.4

 
$
70.1

Capital expenditures
 
$
80.1

 
$
49.5

 
$
32.2

 
$
36.8

 
$
59.2


(1) 
On July 7, 2016, the Company completed the sale of its Speaker and Receiver Product Line. On November 28, 2017, the Company completed the sale of its Timing Device Business. All amounts presented are on a continuing operations basis. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

(2) 
On July 1, 2015, the Company completed its acquisition of all of the outstanding shares of common stock of Audience. The Consolidated Statements of Earnings and Consolidated Balance Sheets include the results of operations, net assets acquired, and depreciation and amortization expense related to Audience since the date of acquisition.


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(3) 
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-07 related to the presentation of net periodic pension and post-retirement benefit cost on a retrospective basis. The standard requires components of net benefit cost other than service cost to be presented separately from the service cost component and outside of any subtotal of operating income. The impacts of the reclassifications on gross profit were decreases of $0.3 million, $0.2 million, $0.2 million, and nil for the years ended December 31, 2017, 2016, 2015, and 2014, respectively. For additional information, refer to Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”

(4) 
On January 27, 2014, we, as a borrower, entered into a $200.0 million five-year senior secured revolving credit facility with a group of lenders, as well as a $300.0 million five-year senior secured term loan facility pursuant to a Credit Agreement ("Original Credit Agreement"), which are referred to collectively as the “Prior Credit Facilities.” In connection with the Separation, we incurred $100.0 million of borrowings under the revolving credit facility and $300.0 million of borrowings under the term loan facility, in each case to finance a cash payment to our Former Parent immediately prior to the Separation. On December 31, 2014, we amended our Prior Credit Facilities to increase the amount of the revolving credit facility in the Original Credit Agreement to $350.0 million but incurred no additional borrowings. On July 1, 2015, we amended our Prior Credit Facilities to facilitate our ability to consummate the Audience acquisition. We funded the cash portion of the consideration through a drawdown of our existing revolving credit facility and cash on hand. On February 9, 2016, the Company entered into a third amendment to its Prior Credit Facilities in connection with the Company’s decision to sell the Speaker and Receiver Product Line, which also included permanent reduction by the Company of the aggregate revolving commitment under the Original Credit Agreement from $350.0 million to $300.0 million. On April 27, 2016, the Company entered into a fourth amendment to its Prior Credit Facilities in connection with the Company's offering of the 3.25% Convertible Senior Notes due November 1, 2021 (the "Notes"). On October 11, 2017, the Company entered into a Revolving Credit Facility Agreement (the "New Credit Facility"). The new agreement is being used for working capital and other general corporate purposes of the Company, including refinancing of indebtedness under the Company’s Prior Credit Facilities. The New Credit Facility contains a five-year senior secured revolving credit facility providing for borrowings in aggregate principal amount of up to $400.0 million. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Borrowings" section for additional information related to our debt.

(5) 
On July 1, 2015, the Company issued 3.2 million shares to former stockholders of Audience and for the conversion of vested in-the-money Audience stock options. The Company also converted unvested in-the-money Audience stock options and restricted stock units for an aggregate of 461,371 shares of its common stock. On February 28, 2014, in connection with the Separation, Former Parent stockholders received one share of Knowles common stock for every two shares of Former Parent's common stock held as of the record date. Basic and diluted earnings per common share and the average number of common shares outstanding for the periods prior to the Separation were calculated using the number of Knowles common shares outstanding immediately following the Separation. See Note 18. Earnings per Share to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data" for information regarding earnings per common share.

(6) 
Also includes current portion of long-term debt and capital lease obligations.

(7) 
We use the term “EBIT” throughout this Annual Report on Form 10-K, defined as net earnings plus (i) interest expense, net and (ii) income taxes. EBIT is not presented in accordance with accounting principles generally accepted in the United States of America ("GAAP" or "U.S. GAAP") and may not be comparable to similarly titled measures used by other companies. We use EBIT as a supplement to our GAAP results of operations in evaluating certain aspects of our business, and our Board of Directors and executive management team focus on EBIT as a key measure of our performance for business planning purposes. This measure assists us in comparing performance between various reporting periods on a consistent basis, as this measure removes from operating results the impact of items that, in our opinion, do not reflect our core operating performance. We believe that our presentation of EBIT 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. For a reconciliation of EBIT to net earnings, the most directly related GAAP measure, please see the Statement of Earnings Data table above. The Company does not consider EBIT to be a substitute for the information provided by GAAP financial results.


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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis presented below refer to and should be read in conjunction with our audited Consolidated Financial Statements and related notes under Item 8. "Financial Statements and Supplementary Data." The following discussion contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Management’s discussion and analysis, which we refer to as “MD&A,” of our results of operations, financial condition, and cash flows should be read together with the audited Consolidated Financial Statements and accompanying notes included under Item 8. "Financial Statements and Supplementary Data," to provide an understanding of our financial condition, changes in financial condition, and results of our operations. We believe the assumptions underlying the Consolidated Financial Statements are reasonable. However, the Consolidated Financial Statements included herein may not necessarily reflect our results of operations, financial position, and cash flows in the future.

As discussed in Note 2. Disposed and Discontinued Operations to our audited Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data", we completed the sale of our high-end oscillators business ("Timing Device Business") in the fourth quarter of 2017 and the sale of our speaker and receiver product line ("Speaker and Receiver Product Line") in the third quarter of 2016. Accordingly, the results of operations and related assets and liabilities for the Timing Device Business and the Speaker and Receiver Product Line have been reclassified as discontinued operations for all periods presented. Unless otherwise indicated, discussion within this MD&A and elsewhere within this Annual Report Form 10-K refers to results from continuing operations.

Our Business

We are a market leader and global provider of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medical, defense, aerospace, and industrial markets. We use our leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. We are also the leader in acoustics components used in hearing aids and have a strong position in high-end capacitors. Our focus on the customer, combined with our unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enables us to deliver innovative solutions that optimize the user experience. References to "Knowles," the "Company," "we," "our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.

Our Business Segments

We are organized into two reportable segments based on how management analyzes performance, allocates capital, and makes strategic and operational decisions. These segments were determined in accordance with Accounting Standards Codification ("ASC") 280, Segment Reporting, and are comprised of (i) Audio and (ii) 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 and balanced armature speakers, audio processors, and software and algorithms used in applications that serve the mobile, ear, and IoT markets. Locations include the sales, support, and engineering facilities in North America, Europe, and Asia, as well as the manufacturing facilities in Asia.

PD Segment
Our PD group specializes in the design and delivery of highly engineered capacitors and RF devices for technically demanding applications. Our devices are used in applications including power supplies, radar, medical implants, and satellites, serving the industrial, defense, aerospace, medical, telecommunications, and automotive markets. 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.

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On January 19, 2018, we acquired substantially all of the assets of Compex Corporation ("Compex") for $18.7 million. The acquired business provides single layer electronic components to the telecommunicaton, fiber optics, defense, and aerospace markets. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

On November 28, 2017, we completed the sale of the Timing Device Business, part of the PD segment, for $130.0 million, plus purchase price adjustments for a net amount of $135.1 million. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

On January 11, 2017, we completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during the first quarter of 2017. An additional $1.0 million was paid during 2018, with the remaining $0.2 million to be paid in the first quarter of 2019. This acquisition's operations are included in the PD segment.

On July 7, 2016, we completed the sale of our Speaker and Receiver Product Line for $45.0 million in cash, less purchase price adjustments, for a net amount received of $40.6 million. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Results of Operations for the Year Ended December 31, 2018 compared with the Years Ended December 31, 2017 and 2016

In addition to the GAAP financial measures included herein, 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.

 
 
Years Ended December 31,
(in millions, except per share amounts)
 
2018
 
2017
 
2016
Revenues
 
$
826.9

 
$
744.2

 
$
755.7

 
 
 
 
 
 
 
Gross profit
 
$
322.6

 
$
286.0

 
$
295.7

Non-GAAP gross profit
 
$
327.0

 
$
299.9

 
$
302.0

 
 
 
 
 
 
 
Earnings from continuing operations before interest and income taxes
 
$
77.1

 
$
40.0

 
$
48.5

Adjusted earnings from continuing operations before interest and income taxes
 
$
117.2

 
$
110.6

 
$
99.7

 
 
 
 
 
 
 
(Benefit from) provision for income taxes
 
$
(4.5
)
 
$
12.9

 
$
8.3

Non-GAAP provision for income taxes
 
$
13.0

 
$
14.9

 
$
3.2

 
 
 
 
 
 
 
Earnings from continuing operations
 
$
65.6

 
$
6.5

 
$
19.8

Non-GAAP net earnings from continuing operations
 
$
94.5

 
$
81.2

 
$
80.5

 
 
 
 
 
 
 
Earnings per share from continuing operations - diluted
 
$
0.73

 
$
0.07

 
$
0.22

Non-GAAP diluted earnings per share from continuing operations
 
$
1.01

 
$
0.88

 
$
0.89



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Revenues

2018 Versus 2017

Revenues for the year ended December 31, 2018 were $826.9 million, compared with $744.2 million for the year ended December 31, 2017, an increase of $82.7 million or 11.1%. This change was due to an increase in Audio revenues of $44.8 million primarily due to higher shipments of MEMS microphones to Chinese OEMs and key North American OEMs. In addition, we had higher shipments of intelligent audio solutions and hearing health transducers, partially offset by lower average selling prices on mature products, lower royalties as a result of a settlement in 2017, and lower shipments to a key Korean OEM. PD revenues had an increase of $37.9 million primarily due to higher capacitor product shipments for the defense, industrial, and automotive markets, as well as increased revenues related to our acquisition of Compex.

2017 Versus 2016

Revenues for the year ended December 31, 2017 were $744.2 million, compared with $755.7 million for the year ended December 31, 2016, a decrease of $11.5 million or 1.5%. This change was due to a decrease in Audio revenues of $24.5 million primarily due to lower average selling prices on mature products in the Audio segment. In addition, shipments of hearing health transducers decreased from the prior year as we have been more disciplined with our pricing. The decreases were partially offset by the $13.6 million of revenue from a settlement of a royalty dispute and higher shipments of MEMS microphones to the IoT market. PD revenues had an increase of $13.0 million primarily due to higher capacitor product shipments for the defense, medical, and automotive markets, as well as increased revenues related to our capacitors acquisition in January 2017, partially offset by lower pricing.

Cost of Goods Sold

2018 Versus 2017

Cost of goods sold ("COGS") for the year ended December 31, 2018 was $503.9 million, compared with $452.8 million for the year ended December 31, 2017, an increase of $51.1 million or 11.3%. This increase was primarily due to higher volume from MEMS microphones, capacitor products, and intelligent audio solutions. In addition, there were unfavorable foreign currency exchange rate changes and higher ramp costs associated with new product launches at our largest customer, partially offset by material cost savings, productivity initiatives, lower production transfer costs, and a settlement of a supplier warranty claim.

2017 Versus 2016

COGS for the year ended December 31, 2017 was $452.8 million, compared with $458.2 million for the year ended December 31, 2016, a decrease of $5.4 million or 1.2%. This decrease was primarily due to favorable impacts from productivity initiatives and foreign exchange rate changes, partially offset by lower fixed overhead absorption. In addition, we experienced higher capacitor and MEMS microphone shipment volume to the IoT market, along with increases in both production transfer costs and restructuring charges.

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Impairment Charges

In 2017 we recorded total impairment charges of $21.3 million, which relates to a specific product line within the Audio segment. We concluded that the projected cash flows from this product line were not sufficient to recover the carrying value of the associated long-lived assets. Total impairment charges of $1.4 million were classified as COGS and $19.9 million were classified as Operating expenses. For additional information on impairments of long-lived assets, refer to Note 4. Impairments to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Restructuring Charges

We undertake restructuring programs from time to time to better align our operations with current market conditions. Such activities include facility consolidations, headcount reductions, and other measures to further optimize operations. It is likely that we will have restructuring charges in the future as we continue to consolidate our manufacturing footprint. Details regarding restructuring programs undertaken during the reporting period are as follows:

2018

During the year ended December 31, 2018, we recorded restructuring charges of $2.1 million. The charges consist primarily of actions associated with rationalizing the workforce and transferring certain operations of capacitors manufacturing to other existing facilities in order to optimize operations. Charges of $0.4 million were classified as COGS and charges of $1.7 million were classified as Operating expenses.

2017

During the year ended December 31, 2017, we recorded restructuring charges of $10.2 million. The charges consist primarily of actions associated with rationalizing the workforce and the continued transfer of our hearing health manufacturing into a lower-cost Asian manufacturing facility. Charges of $4.0 million were classified as COGS and charges of $6.2 million were classified as Operating expenses.

2016

During the year ended December 31, 2016, we recorded restructuring charges of $10.1 million comprised primarily of actions associated with the integration of Audience. Other charges related to actions associated with lowering operating expenses and the continued expenses for the transfer of our capacitors business into existing, lower-cost Asian manufacturing facilities. Charges of $1.5 million were classified as COGS and charges of $8.6 million were classified as Operating expenses.

Gross Profit and Non-GAAP Gross Profit

2018 Versus 2017

Gross profit for the year ended December 31, 2018 was $322.6 million, compared with $286.0 million for the year ended December 31, 2017, an increase of $36.6 million or 12.8%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2018 was 39.0%, compared with 38.4% for the year ended December 31, 2017. The gross profit and margin increased primarily due to higher shipment volumes. In addition, there were material cost savings, productivity initiatives, lower production transfer costs, a settlement of a supplier warranty claim, and reduced restructuring charges. The increases were partially offset by lower average selling prices on mature products, a settlement of a royalty dispute in 2017, foreign currency exchange rate changes, and higher ramp costs associated with new product launches at our largest customer.

Non-GAAP gross profit for the year ended December 31, 2018 was $327.0 million, compared with $299.9 million for the year ended December 31, 2017, an increase of $27.1 million or 9.0%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2018 was 39.5%, as compared with 40.3% for the year ended December 31, 2017. Non-GAAP gross profit increased primarily due to higher shipment volumes. In addition, there were material cost savings, productivity initiatives, and a settlement of a supplier warranty claim. The increases were partially offset by lower average selling prices on mature products, a settlement of a royalty dispute in 2017, foreign currency exchange rate changes, and higher ramp costs associated with new product launches at our largest customer. Non-GAAP gross profit margin decreased primarily due to a settlement of a royalty dispute in 2017.


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2017 Versus 2016

Gross profit for the year ended December 31, 2017 was $286.0 million, compared with $295.7 million for the year ended December 31, 2016, a decrease of $9.7 million or 3.3%. Gross profit margin for the year ended December 31, 2017 was 38.4%, compared with 39.1% for the year ended December 31, 2016. The gross profit and margin decreased primarily due to lower average selling prices on mature products, lower fixed overhead absorption, higher production transfer costs, and increased restructuring charges. The decreases were partially offset by favorable impacts from productivity initiatives, a settlement of a royalty dispute, and foreign currency exchange rate changes.

Non-GAAP gross profit for the year ended December 31, 2017 was $299.9 million, compared with $302.0 million for the year ended December 31, 2016, a decrease of $2.1 million or 0.7%. Non-GAAP gross profit margin for the year ended December 31, 2017 was 40.3%, as compared with 40.0% for the year ended December 31, 2016. The Non-GAAP gross profit decreased primarily due to lower average selling prices on mature products and lower fixed overhead absorption. The decrease was partially offset by favorable impacts from productivity initiatives, a settlement of a royalty dispute, and foreign currency exchange rate changes. Non-GAAP gross profit margin increased slightly as non-GAAP gross profit remained relatively consistent with prior year while revenues decreased $11.5 million.

Research and Development Expenses

2018 Versus 2017

Research and development expenses for the years ended December 31, 2018 and 2017 were $100.6 million and $93.4 million, respectively. Research and development expenses as a percentage of revenues for the years ended December 31, 2018 and 2017 were 12.2% and 12.6%, respectively. The increase in research and development expenses was driven by compensation increases and an increase in new product development spending.

2017 Versus 2016

Research and development expenses for the years ended December 31, 2017 and 2016 were $93.4 million and $92.0 million, respectively. Research and development expenses as a percentage of revenues for the years ended December 31, 2017 and 2016 were 12.6% and 12.2%, respectively. The increase in research and development expenses was driven by compensation increases, partially offset by lower headcount.

Selling and Administrative Expenses

2018 Versus 2017

Selling and administrative expenses for the year ended December 31, 2018 were $142.5 million, compared with $126.6 million for the year ended December 31, 2017, an increase of $15.9 million or 12.6%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2018 were 17.2%, compared with 17.0% for the year ended December 31, 2017. The increase in selling and administrative expenses was primarily driven by incentive compensation increases, an increase in legal fees, and the acquisition of Compex, partially offset by lower intangible amortization costs. The increase in legal fees was primarily due to a settlement of a royalty dispute in 2017.

2017 Versus 2016

Selling and administrative expenses for the year ended December 31, 2017 were $126.6 million, compared with $149.9 million for the year ended December 31, 2016, a decrease of $23.3 million or 15.5%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2017 were 17.0%, compared with 19.8% for the year ended December 31, 2016.
The decrease in selling and administrative expenses and as a percentage of revenues was primarily driven by lower intangible amortization costs, benefits of our cost reduction initiatives, and a reduction in legal fees. The reduction in legal fees was driven by a settlement of a royalty dispute, which included a $5.6 million allocation against previously incurred expenses.


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Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes

2018 Versus 2017

Earnings before interest and income taxes ("EBIT") from continuing operations for the year ended December 31, 2018 was $77.1 million, compared with $40.0 million for the year ended December 31, 2017, an increase of $37.1 million or 92.8%. EBIT margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2018 was 9.3%, as compared with 5.4% for the year ended December 31, 2017. This increase was primarily due to higher gross profit and the absence of impairment charges in 2018, partially offset by higher operating expenses due to incentive compensation increases, an increase in legal fees due to a settlement of a royalty dispute in 2017, and the acquisition of Compex.

Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2018 was $117.2 million, compared with $110.6 million for the year ended December 31, 2017, an increase of $6.6 million or 6.0%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2018 was 14.2%, as compared with 14.9% for the year ended December 31, 2017. This Adjusted EBIT increase was primarily due to higher gross profit, partially offset by higher operating expenses due to compensation increases, an increase in legal fees due to a settlement of a royalty dispute in 2017, and the acquisition of Compex. The Adjusted EBIT margin decrease is primarily due to a settlement of a royalty dispute in 2017, and higher operating expenses due to incentive compensation increases.

2017 Versus 2016

EBIT from continuing operations for the year ended December 31, 2017 was $40.0 million, compared with $48.5 million for the year ended December 31, 2016, a decrease of $8.5 million or 17.5%. EBIT margin for the year ended December 31, 2017 was 5.4%, as compared to 6.4% for the year ended December 31, 2016. This decrease was primarily due to lower gross profit and higher impairment charges in Operating expense, partially offset by lower intangible amortization costs, benefits of our operating cost reduction initiatives, and the reduction in legal fees driven by a settlement of a royalty dispute.

Adjusted EBIT from continuing operations for the year ended December 31, 2017 was $110.6 million, compared with $99.7 million for the year ended December 31, 2016, an increase of $10.9 million or 10.9%. Adjusted EBIT margin for the year ended December 31, 2017 was 14.9%, as compared with 13.2% for the year ended December 31, 2016. The increase is primarily due to lower non-GAAP operating expenses, driven by our operating cost reduction initiatives, and the reduction in legal fees driven by a settlement of a royalty dispute.

Interest Expense, net

2018 Versus 2017

Interest expense, net for the year ended December 31, 2018 was $16.0 million, compared with $20.6 million for the year ended December 31, 2017, a decrease of $4.6 million or 22.3%. The decrease in interest expense is primarily due to lower outstanding borrowings. For additional information on borrowings and interest expense, refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

2017 Versus 2016

Interest expense, net for the year ended December 31, 2017 was $20.6 million, compared with $20.4 million for the year ended December 31, 2016, an increase of $0.2 million or 1.0%. The increase in interest expense is primarily due to non-cash interest expense related to the Company's issuance of $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021 in a private placement in May 2016 (the "Notes") and higher interest rates, partially offset by lower outstanding borrowings. For additional information on borrowings and interest expense, refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."


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(Benefit from) Provision for Income Taxes and Non-GAAP Provision for Income Taxes

2018 Versus 2017

The effective tax rate ("ETR") for the year ended December 31, 2018 was a 7.4% benefit, compared with a 66.5% provision for the year ended December 31, 2017. The change in the ETR is primarily due to the mix of earnings by taxing jurisdictions and the Tax Reform Act. As a result of the Internal Revenue Service ("IRS") approval for an entity classification election received during the fourth quarter of 2018, we recorded a $17.8 million reduction to our transition tax liability.

The ETR for the years ended December 31, 2018 and 2017 was favorably impacted by two tax holidays granted to us by Malaysia. For additional information on these tax holidays, see Note 12. Income Taxes to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data."

The non-GAAP ETR for the year ended December 31, 2018 was a 12.1% provision, compared with a 15.5% provision for the year ended December 31, 2017. The change in the non-GAAP ETR was due to the mix of earnings by taxing jurisdictions.

The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which we generate taxable income or loss, the favorable impact of our tax holidays in Malaysia, and judgments as to the realizability of our deferred tax assets. A significant portion of our pre-tax income is not subject to tax as a result of our tax holidays in Malaysia, subject to our satisfaction of certain conditions that we expect to continue to satisfy. Unless extended or otherwise renegotiated, our existing tax holidays in Malaysia will expire December 31, 2021. During 2016, the Company applied for and received final approval to modify the terms of its main tax holiday in Malaysia, reducing the rate to 7.2% versus the statutory rate of 24.0%, effective January 1, 2017 through December 31, 2021. The U.S. operations were in a cumulative loss position as of December 31, 2018 and 2017, respectively. Based on this, and other relevant information, the Company concluded that tax losses and deferred tax assets generated in the U.S. would not be benefited currently or in the future.

2017 Versus 2016

The ETR for the year ended December 31, 2017 was a 66.5% provision, compared with a 29.5% provision for the year ended December 31, 2016. The change in the ETR is primarily due to the mix of earnings by taxing jurisdictions, the change to the terms of our tax holiday in Malaysia, and the Tax Reform Act. We recorded a provisional tax benefit of $11.7 million related to the reassessment of the beginning of the year valuation allowance, and a $5.6 million provisional benefit related to the remeasurement of our net deferred tax liability as a result of the Tax Reform Act. We also recorded a provisional tax expense of $56.0 million, net of expected foreign tax credits, related to the deemed repatriation of unremitted earnings for foreign subsidiaries, which was partially offset by the use of existing tax attributes primarily consisting of net operating loss carryforwards and research and development tax credits.

The ETR for the years ended December 31, 2017 and 2016 was favorably impacted by two tax holidays granted to us by Malaysia. The ETR for the year ended December 31, 2017 was unfavorably impacted by losses incurred in jurisdictions with zero tax benefit recorded. The ETR for the year ended December 31, 2016 was unfavorably impacted by valuation allowances recorded in certain jurisdictions, primarily the U.S. and the United Kingdom ("U.K").

The non-GAAP ETR for the year ended December 31, 2017 was a 15.5% provision, compared with a 3.8% provision for the year ended December 31, 2016. The change in the non-GAAP ETR was due to the mix of earnings by taxing jurisdictions.

The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which we generate taxable income or loss, the favorable impact of our tax holidays in Malaysia, and judgments as to the realizability of our deferred tax assets.

Earnings (Loss) from Discontinued Operations, net

2018 Versus 2017

The earnings from discontinued operations was $2.1 million net of tax for the year ended December 31, 2018, compared with earnings of $61.8 million for the year ended December 31, 2017. The change in discontinued operations was primarily driven by the sale of our Timing Device Business on November 28, 2017, for which we recognized a $62.3 million pre-tax gain in 2017 and a $1.8 million favorable purchase price adjustment in 2018.


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2017 Versus 2016

The earnings from discontinued operations was $61.8 million net of tax for the year ended December 31, 2017 compared with a loss of $62.1 million for the year ended December 31, 2016 . The earnings in 2017 primarily relates to the $62.3 million pre-tax gain on sale of our Timing Device Business. The 2016 loss was primarily related to the high unabsorbed fixed costs in our Speaker and Receiver Product Line due to lower production activity and the $25.6 million pre-tax loss on the sale of our Speaker and Receiver Product Line.

Diluted Earnings per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share from Continuing Operations

2018 Versus 2017

Diluted earnings per share from continuing operations was $0.72 for the year ended December 31, 2018, compared with $0.07 for the year ended December 31, 2017. The increase in diluted earnings per share was primarily due to higher EBIT.

Non-GAAP diluted earnings per share from continuing operations for the year ended December 31, 2018 was $1.01, compared with $0.88 for the year ended December 31, 2017. The increase in non-GAAP diluted earnings per share was primarily due to higher Adjusted EBIT.
 
2017 Versus 2016

Diluted earnings per share from continuing operations was $0.07 for the year ended December 31, 2017, compared with $0.22 for the year ended December 31, 2016. The decrease in diluted earnings per share was primarily due to lower EBIT.

Non-GAAP diluted earnings per share from continuing operations for the year ended December 31, 2017 was $0.88, compared with $0.89 for the year ended December 31, 2016. The decrease in non-GAAP diluted earnings per share was mainly driven by higher adjusted EBIT, which was more than offset by a higher effective tax rate.


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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1) 
 
 
Years Ended December 31,
(in millions, except share and per share amounts)
 
2018
 
2017
 
2016
Gross profit
 
$
322.6

 
$
286.0

 
$
295.7

Stock-based compensation expense
 
1.6

 
1.8

 
1.5

Impairment charges
 

 
1.4

 
0.3

Restructuring charges
 
0.4

 
4.0

 
1.5

Production transfer costs (2)
 
2.2

 
6.7

 
3.0

Other (3)
 
0.2

 

 

Non-GAAP gross profit
 
$
327.0

 
$
299.9

 
$
302.0


 
 
 
 
 
 
Earnings from continuing operations
 
$
65.6

 
$
6.5

 
$
19.8

Interest expense, net
 
16.0

 
20.6

 
20.4

(Benefit from) provision for income taxes
 
(4.5
)
 
12.9

 
8.3

Earnings from continuing operations before interest and income taxes
 
77.1

 
40.0

 
48.5

Stock-based compensation expense
 
27.0

 
24.7

 
20.9

Intangibles amortization expense
 
6.5

 
7.3

 
18.2

Impairment charges
 

 
21.3

 
0.5

Restructuring charges
 
2.1

 
10.2

 
10.1

Production transfer costs (2)
 
2.6

 
6.8

 
3.0

Other (3)
 
1.9

 
0.3

 
(1.5
)
Adjusted earnings from continuing operations before interest and income taxes
 
$
117.2

 
$
110.6


$
99.7


 
 
 
 
 
 
Interest expense, net
 
$
16.0

 
$
20.6

 
$
20.4

Interest expense, net non-GAAP reconciling adjustments (4)
 
6.3

 
6.1

 
4.4

Non-GAAP interest expense
 
$
9.7

 
$
14.5

 
$
16.0

 
 
 
 
 
 
 
(Benefit from) provision for income taxes
 
$
(4.5
)
 
$
12.9

 
$
8.3

Income tax effects of non-GAAP reconciling adjustments (5)
 
17.5

 
2.0

 
(5.1
)
Non-GAAP provision for income taxes
 
$
13.0

 
$
14.9


$
3.2

 
 
 
 
 
 
 
Earnings from continuing operations
 
$
65.6

 
$
6.5

 
$
19.8

Non-GAAP reconciling adjustments (6)
 
40.1

 
70.6

 
51.2

Interest expense, net non-GAAP reconciling adjustments (4)
 
6.3

 
6.1

 
4.4

Income tax effects of non-GAAP reconciling adjustments (5)
 
17.5

 
2.0

 
(5.1
)
Non-GAAP net earnings from continuing operations
 
$
94.5

 
$
81.2


$
80.5

 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.72

 
$
0.07

 
$
0.22

Earnings per share non-GAAP reconciling adjustment
 
0.29

 
0.81

 
0.67

Non-GAAP diluted earnings per share from continuing operations
 
$
1.01

 
$
0.88

 
$
0.89

 
 
 
 
 
 
 
Diluted average shares outstanding
 
91,194,747

 
90,490,007

 
89,182,967

Non-GAAP adjustment (7)
 
2,046,989

 
1,959,801

 
1,758,522

Non-GAAP diluted average shares outstanding (7)
 
93,241,736

 
92,449,808

 
90,941,489



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Table of Contents


(1) 
In addition to the GAAP financial measures included herein, Knowles has presented certain non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable GAAP measures. Knowles believes that non-GAAP measures are useful as supplements to its GAAP results of operations to evaluate certain aspects of its operations and financial performance, and its management team primarily focuses on non-GAAP items in evaluating Knowles' performance for business planning purposes. Knowles also believes that these measures assist it with comparing its performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in Knowles' opinion, do not reflect its core operating performance. Knowles believes that its presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that Knowles uses internally for purposes of assessing its core operating performance.
(2) 
Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities primarily in Asia. These amounts are included in the corresponding Gross profit and Earnings from continuing operations before interest and income taxes for each period presented.
(3) 
In 2018, Other expenses in Gross profit and Operating expenses represent expenses related to acquisitions and the remaining Other expenses represent an adjustment to pre-spin-off pension obligations. In 2017, Other primarily represents expenses related to the acquisition of certain assets of a capacitors manufacturer. In 2016, Other primarily represents a gain on the sale of investment related to a non-controlling interest in a MEMs timing device company, partially offset by expenses related to the Audience acquisition.
(4) 
Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) upon conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the Company’s $172.5 million of convertible senior notes due 2021 that were issued in a private placement in May 2016. The imputed interest rate is 8.12% for the convertible notes due 2021, while the actual coupon interest rate of the notes was 3.25%. The difference between the imputed interest expense and the coupon interest expense is excluded from management’s assessment of the Company’s operating performance because management believes that this non-cash expense is not indicative of its core, ongoing operating performance.
(5) 
Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments. Adjustments are also made to exclude certain impacts of the Tax Reform Act and the resulting consequences that were accounted for as uncertain tax positions.
(6) 
The Non-GAAP reconciling adjustments are those adjustments made to reconcile Earnings from continuing operations before interest and income taxes to Adjusted earnings from continuing operations before interest and income taxes.
(7) 
The number of shares used in the diluted per share calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method.

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Table of Contents


Segment Results of Operations for the Year Ended December 31, 2018 Compared with the Years Ended December 31, 2017 and 2016

Audio
 
 
Years Ended December 31,
(in millions)
 
2018
 
Percent of Revenues
 
2017
 
Percent of Revenues
 
2016
 
Percent of Revenues
Revenues
 
$
682.2

 
 
 
$
637.4

 
 
 
$
661.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
 
$
105.1

 
15.4%
 
$
75.8

 
11.9%
 
$
88.4

 
13.4%
Other income, net
 
(0.6
)
 
 
 
(0.3
)
 
 
 
(0.4
)
 
 
Earnings from continuing operations before interest and income taxes
 
$
105.7

 
15.5%
 
$
76.1

 
11.9%
 
$
88.8

 
13.4%
Stock-based compensation expense
 
13.4

 
 
 
11.5

 
 
 
9.7

 
 
Intangibles amortization expense
 
4.7

 
 
 
6.5

 
 
 
18.0

 
 
Impairment charges
 

 
 
 
21.3

 
 
 
0.5

 
 
Restructuring charges
 
1.4

 
 
 
8.1

 
 
 
7.1

 
 
Production transfer costs (1)
 
1.0

 
 
 
6.3

 
 
 
1.0

 
 
Other
 

 
 
 

 
 
 
0.1

 
 
Adjusted earnings from continuing operations before interest and income taxes
 
$
126.2

 
18.5%
 
$
129.8

 
20.4%
 
$
125.2

 
18.9%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Production transfer costs represent duplicate costs incurred to migrate manufacturing to existing facilities in Asia. These amounts are included in earnings from continuing operations before interest and income taxes for each period presented.

Revenues

2018 Versus 2017

Audio revenues were $682.2 million for the year ended December 31, 2018, compared with $637.4 million for the year ended December 31, 2017, an increase of $44.8 million or 7.0%. Revenues increased primarily due to higher shipments of MEMS microphones to Chinese OEMs and key North American OEMs. In addition, we had higher shipments of intelligent audio solutions and hearing health transducers, partially offset by lower average selling prices on mature products, lower royalties as a result of a settlement in 2017, and lower shipments to a key Korean OEM.

2017 Versus 2016

Audio revenues were $637.4 million for the year ended December 31, 2017, compared with $661.9 million for the year ended December 31, 2016, a decrease of $24.5 million or 3.7%. Revenues decreased primarily due to lower average selling prices on mature products in the Audio segment. In addition, shipments of hearing health transducers decreased from the prior year as we have been more disciplined with our pricing. The decreases were partially offset by the $13.6 million of revenue from a settlement of a royalty dispute and higher shipments of MEMS microphones to the IoT market and higher shipments of MEMS microphones to the IoT market.






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Table of Contents


Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes

2018 Versus 2017

Audio EBIT from continuing operations was $105.7 million for the year ended December 31, 2018, compared with $76.1 million for the year ended December 31, 2017, an increase of $29.6 million or 38.9%. EBIT margin for the year ended December 31, 2018 was 15.5%, compared to 11.9% for the year ended December 31, 2017. The increase was primarily due to higher shipment volumes, the absence of impairment charges in 2018, material cost savings, productivity initiatives, reduced restructuring charges, lower production transfer costs, and a settlement of a supplier warranty claim. The increases were partially offset by lower average selling prices on mature products, a settlement of a royalty dispute in 2017, foreign currency exchange rate changes, and higher ramp costs associated with new product launches at our largest customer.

Audio Adjusted EBIT was $126.2 million for the year ended December 31, 2018, compared with $129.8 million for the year ended December 31, 2017, a decrease of $3.6 million or 2.8%. Adjusted EBIT margin for the year ended December 31, 2018 was 18.5%, compared with 20.4% for the year ended December 31, 2017. The decrease was primarily due to lower average selling prices on mature products, a settlement of a royalty dispute in 2017, foreign currency exchange rate changes, and higher ramp costs associated with new product launches at our largest customer. The decreases were partially offset by higher shipment volumes, material cost savings, productivity initiatives, and a settlement of a supplier warranty claim. The Adjusted EBIT margin decreased primarily due to a settlement of a royalty dispute in 2017.

2017 Versus 2016

Audio EBIT from continuing operations was $76.1 million for the year ended December 31, 2017, compared with $88.8 million for the year ended December 31, 2016, a decrease of $12.7 million or 14.3%. EBIT margin for the year ended December 31, 2017 was 11.9%, compared to 13.4% for the year ended December 31, 2016. The decrease was primarily due to lower average selling prices on mature products, higher impairments of long-lived assets, lower fixed overhead absorption, higher production transfer costs, increased stock-based compensation, and higher restructuring charges. These decreases were partially offset by benefits from our productivity initiatives, $19.2 million received from a settlement of a royalty dispute, lower amortization expenses, benefits of our operating cost reduction initiatives, favorable impacts from foreign currency exchange rate changes, and higher shipments of MEMS microphones.

Audio Adjusted EBIT was $129.8 million for the year ended December 31, 2017, compared with $125.2 million for the year ended December 31, 2016, an increase of $4.6 million or 3.7%. Adjusted EBIT margin for the year ended December 31, 2017 was 20.4%, compared with 18.9% for the year ended December 31, 2016. The increase was primarily due to benefits from our productivity initiatives, $19.2 million received from a settlement of a royalty dispute, benefits of our operating cost reduction initiatives, favorable impacts from foreign currency exchange rate changes, and higher shipments of MEMS microphones. These increases were partially offset by lower average selling prices on mature products and lower fixed overhead absorption.


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Table of Contents


Precision Devices
 
 
Years Ended December 31,
(in millions)
 
2018
 
Percent of Revenues
 
2017
 
Percent of Revenues
 
2016
 
Percent of Revenues
Revenues
 
$
144.7

 
 
 
$
106.8

 
 
 
$
93.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
 
$
27.7

 
19.1%
 
$
18.4

 
17.2%
 
$
12.2

 
13.0%
Other expense (income), net
 
0.2

 
 
 
(0.8
)
 
 
 
(0.2
)
 
 
Earnings from continuing operations before interest and income taxes
 
$
27.5

 
19.0%
 
$
19.2

 
18.0%
 
$
12.4

 
13.2%
Stock-based compensation expense
 
0.8

 
 
 
0.4

 
 
 
0.3

 
 
Intangibles amortization expense
 
1.8

 
 
 
0.8

 
 
 
0.2

 
 
Restructuring charges
 
0.5