Company Quick10K Filing
Quick10K
Knowles
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.25 91 $1,660
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
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 2019-07-24
8-K 2019-06-06 Amend Bylaw, Exhibits
8-K 2019-05-31 Shareholder Vote
8-K 2019-05-09 Enter Agreement, Officers, Other Events, Exhibits
8-K 2019-04-24
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
CUK Carnival 37,890
CPT Camden Property Trust 9,650
ZS Zscaler 8,520
PODD Insulet 6,260
WEYS Weyco Group 338
CVCY Central Valley Community Bancorp 273
GCAP Gain Capital Holdings 177
ARAO Aurasource 0
SFR Steadfast Income REIT 0
AHPA Avista Healthcare Public Acquisition 0
KN 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
EX-3.1 exhibit31q22019.htm
EX-3.2 exhibit32q22019.htm
EX-31.1 a2019630exhibit311.htm
EX-31.2 a2019630exhibit312.htm
EX-32.1 a2019630exhibit321.htm

Knowles Earnings 2019-06-30

KN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

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


FORM 10-Q

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

For the quarterly period ended June 30, 2019.

or

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


Commission File Number: 001-36102

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

Delaware
90-1002689
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1511 Maplewood Drive, Itasca, IL
(Address of Principal Executive Offices)


60143
(Zip Code)

(630) 250-5100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock, $0.01 par value per share
 
KN
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   No 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
Accelerated filer
Non-accelerated filer
 
Small reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The number of shares outstanding of the registrant’s common stock as of July 26, 2019 was 91,115,382.




Knowles Corporation
Form 10-Q
Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 



Table of Contents


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except share and per share amounts)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
205.2


$
188.4

 
$
385.0

 
$
366.9

Cost of goods sold
128.4

 
115.1

 
239.2

 
228.3

Restructuring charges - cost of goods sold
0.4

 
0.1

 
0.9

 
0.1

Gross profit
76.4

 
73.2

 
144.9

 
138.5

Research and development expenses
25.0

 
25.4

 
49.7

 
50.2

Selling and administrative expenses
38.9

 
37.1

 
76.5

 
72.9

Restructuring charges
0.1

 
0.5

 
1.9

 
0.9

Operating expenses
64.0

 
63.0

 
128.1

 
124.0

Operating earnings
12.4

 
10.2

 
16.8

 
14.5

Interest expense, net
3.6

 
4.1

 
7.1

 
8.1

Other (income) expense, net
(0.5
)
 
0.3

 
0.5

 
0.2

Earnings before income taxes and discontinued operations
9.3

 
5.8

 
9.2

 
6.2

Provision for income taxes
3.4

 
1.4

 
6.0

 
2.2

Earnings from continuing operations
5.9

 
4.4

 
3.2

 
4.0

Earnings from discontinued operations, net

 
0.2

 

 
0.3

Net earnings
$
5.9

 
$
4.6

 
$
3.2


$
4.3

 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.06


$
0.05

 
$
0.04


$
0.04

Diluted
$
0.06

 
$
0.05

 
$
0.03

 
$
0.04

 
 
 
 
 
 
 
 
Earnings per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$

 
$

 
$

 
$
0.01

Diluted
$

 
$

 
$

 
$
0.01

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.05

 
$
0.04

 
$
0.05

Diluted
$
0.06

 
$
0.05

 
$
0.03

 
$
0.05

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
91,018,213

 
90,063,089

 
90,780,035


89,893,557

Diluted
92,507,279

 
90,731,760

 
92,184,274


90,718,298



See accompanying Notes to Consolidated Financial Statements


1

Table of Contents


KNOWLES CORPORATION 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net earnings
$
5.9

 
$
4.6

 
$
3.2

 
$
4.3

 
 
 
 
 
 
 
 
Other comprehensive (loss) earnings, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
(2.5
)
 
(7.6
)
 
1.5

 
(2.7
)
 
 
 
 
 
 
 
 
Employee benefit plans:
 
 
 
 
 
 
 
Amortization or settlement of actuarial losses and prior service costs
0.2

 
0.2

 
0.3

 
0.3

Net change in employee benefit plans
0.2

 
0.2

 
0.3

 
0.3

 
 
 
 
 
 
 
 
Changes in fair value of cash flow hedges:
 
 
 
 
 
 
 
Unrealized net (losses) gains arising during period
(0.4
)
 
(2.0
)
 
0.2

 
(1.2
)
Net (gains) losses reclassified into earnings

 
(0.1
)
 
0.1

 
(0.7
)
Total cash flow hedges
(0.4
)
 
(2.1
)
 
0.3

 
(1.9
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) earnings, net of tax
(2.7
)
 
(9.5
)
 
2.1

 
(4.3
)
 
 
 
 
 
 
 
 
Comprehensive earnings (loss)
$
3.2

 
$
(4.9
)
 
$
5.3

 
$


See accompanying Notes to Consolidated Financial Statements


2

Table of Contents


KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)

 
June 30, 2019
 
December 31, 2018
Current assets:
 
 
 
Cash and cash equivalents
$
53.6

 
$
73.5

Receivables, net of allowance of $0.6
135.8

 
140.3

Inventories, net
159.7

 
140.1

Prepaid and other current assets
13.8

 
11.1

Total current assets
362.9

 
365.0

Property, plant, and equipment, net
211.9

 
211.7

Goodwill
891.1

 
887.9

Intangible assets, net
56.6

 
56.7

Operating lease right-of-use assets
38.1

 

Other assets and deferred charges
25.2

 
26.6

Total assets
$
1,585.8

 
$
1,547.9

 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
65.2

 
$
77.2

Accrued compensation and employee benefits
28.9

 
40.2

Operating lease liabilities
9.1

 

Other accrued expenses
19.7

 
20.1

Federal and other taxes on income
4.6

 
4.3

Total current liabilities
127.5

 
141.8

Long-term debt
171.9

 
158.1

Deferred income taxes
2.1

 
2.1

Long-term operating lease liabilities
29.4

 

Other liabilities
27.7

 
34.3

Commitments and contingencies (Note 16)


 


Stockholders' equity:
 
 
 
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued

 

Common stock - $0.01 par value; 400,000,000 shares authorized; 91,115,305 and 90,212,779 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
0.9

 
0.9

Additional paid-in capital
1,556.2

 
1,545.9

Accumulated deficit
(221.0
)
 
(224.2
)
Accumulated other comprehensive loss
(108.9
)
 
(111.0
)
Total stockholders' equity
1,227.2

 
1,211.6

Total liabilities and stockholders' equity
$
1,585.8

 
$
1,547.9


See accompanying Notes to Consolidated Financial Statements


3

Table of Contents


KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at March 31, 2019
$
0.9

 
$
1,548.7

 
$
(226.9
)
 
$
(106.2
)
 
$
1,216.5

Net earnings

 

 
5.9

 

 
5.9

Other comprehensive loss, net of tax

 

 

 
(2.7
)
 
(2.7
)
Stock-based compensation expense

 
7.3

 

 

 
7.3

Common stock issued for exercise of stock options and other

 
0.9

 

 

 
0.9

Tax on restricted stock unit vesting

 
(0.7
)
 

 

 
(0.7
)
Balance at June 30, 2019
$
0.9

 
$
1,556.2

 
$
(221.0
)
 
$
(108.9
)
 
$
1,227.2


 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at March 31, 2018
$
0.9

 
$
1,526.9

 
$
(292.2
)
 
$
(94.8
)
 
$
1,140.8

Net earnings

 

 
4.6

 

 
4.6

Other comprehensive loss, net of tax

 

 

 
(9.5
)
 
(9.5
)
Stock-based compensation expense

 
7.3

 

 

 
7.3

Common stock issued for exercise of stock options

 
0.1

 

 

 
0.1

Tax on restricted stock unit vesting

 
(0.7
)
 

 

 
(0.7
)
Balance at June 30, 2018
$
0.9

 
$
1,533.6

 
$
(287.6
)
 
$
(104.3
)
 
$
1,142.6


 
See accompanying Notes to Consolidated Financial Statements

4

Table of Contents


KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at December 31, 2018
$
0.9

 
$
1,545.9

 
$
(224.2
)
 
$
(111.0
)
 
$
1,211.6

Net earnings

 

 
3.2

 

 
3.2

Other comprehensive earnings, net of tax

 

 

 
2.1

 
2.1

Stock-based compensation expense

 
14.0

 

 

 
14.0

Common stock issued for exercise of stock options and other

 
1.8

 

 

 
1.8

Tax on restricted stock unit vesting

 
(5.5
)
 

 

 
(5.5
)
Balance at June 30, 2019
$
0.9

 
$
1,556.2

 
$
(221.0
)
 
$
(108.9
)
 
$
1,227.2


 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at December 31, 2017
$
0.9

 
$
1,523.1

 
$
(291.9
)
 
$
(100.0
)
 
$
1,132.1

Net earnings

 

 
4.3

 

 
4.3

Other comprehensive loss, net of tax

 

 

 
(4.3
)
 
(4.3
)
Stock-based compensation expense

 
14.3

 

 

 
14.3

Common stock issued for exercise of stock options

 
0.3

 

 

 
0.3

Tax on restricted stock unit vesting

 
(4.1
)
 

 

 
(4.1
)
Balance at June 30, 2018
$
0.9

 
$
1,533.6

 
$
(287.6
)
 
$
(104.3
)
 
$
1,142.6


 
See accompanying Notes to Consolidated Financial Statements


5

Table of Contents


KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net earnings
$
3.2

 
$
4.3

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
Depreciation and amortization
27.0

 
26.6

Stock-based compensation
14.0

 
14.3

Non-cash interest expense and amortization of debt issuance costs
4.1

 
3.8

Loss on disposal of fixed assets

 
0.2

Deferred income taxes
(0.7
)
 
(2.8
)
Other, net
1.1

 
(0.3
)
Changes in assets and liabilities (excluding effects of foreign exchange):
 
 
 
Receivables, net
5.7

 
10.4

Inventories, net
(17.7
)
 
(33.9
)
Prepaid and other current assets
(3.0
)
 
(3.7
)
Accounts payable
(9.1
)
 
5.3

Accrued compensation and employee benefits
(11.2
)
 
(2.6
)
Other accrued expenses
1.0

 
(8.6
)
Accrued taxes
0.8

 
(6.0
)
Other non-current assets and non-current liabilities
(4.3
)
 
2.3

Net cash provided by operating activities
10.9

 
9.3

 
 
 
 
Investing Activities
 

 
 

Additions to property, plant, and equipment
(24.5
)
 
(48.0
)
Acquisitions of business (net of cash acquired)
(11.4
)
 
(17.5
)
Net cash used in investing activities
(35.9
)
 
(65.5
)
 
 
 
 
Financing Activities
 

 
 

Borrowings under revolving credit facility
10.0

 

Tax on restricted stock unit vesting
(5.5
)
 
(4.1
)
Payments of finance lease obligations
(0.9
)
 
(0.9
)
Payment of consideration owed for acquisitions
(0.2
)
 
(0.2
)
Net proceeds from exercise of stock-based awards
1.6

 
0.3

Net cash provided by (used in) financing activities
5.0

 
(4.9
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
0.1

 
0.2

 
 
 
 
Net decrease in cash and cash equivalents
(19.9
)
 
(60.9
)
Cash and cash equivalents at beginning of period
73.5

 
111.7

Cash and cash equivalents at end of period
$
53.6

 
$
50.8

 
 
 
 
Supplemental information - cash paid for:
 
 
 
Income taxes
$
6.9

 
$
6.9

Interest
$
3.8

 
$
4.1


See accompanying Notes to Consolidated Financial Statements


6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 


1. Basis of Presentation

Description of Business - Knowles Corporation (NYSE:KN) is a market leader and global provider of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medical, defense, automotive, and industrial markets. The Company uses its leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. Knowles is also a leader in acoustic components, high-end capacitors, and mmWave radio frequency solutions for a diverse set of markets. The Company's focus on its customers, combined with its unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enable the Company to deliver innovative solutions that optimize the user experience. References to "Knowles," "the Company," "we," "our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.

Financial Statement Presentation - The accompanying unaudited interim Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”) for complete financial statements. These unaudited interim Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The unaudited interim Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods.

During the second quarter of 2019, the Company recorded a correcting entry of $0.5 million related to inventory reserves, which decreased earnings before income taxes and discontinued operations. During the first quarter of 2019, the Company recorded a correcting entry of $0.4 million related to income taxes, which increased tax expense and decreased net earnings. These items are not material to the Consolidated Financial Statements for the historical periods in which the errors originated and are not expected to be material to the Consolidated Financial Statements for the year ended December 31, 2019. Similarly, and as disclosed in the prior year during the second quarter of 2018, the Company recorded a correcting entry of $1.3 million related to pre-spin-off pension obligations, which decreased earnings before income taxes and discontinued operations. During the first quarter of 2018, the Company recorded a correcting entry of $0.7 million related to inventory reserves, which increased earnings before income taxes and discontinued operations. These items were determined not to be material to the Consolidated Financial Statements for the historical periods in which the errors originated and the Consolidated Financial Statements for the year ended December 31, 2018.

On January 3, 2019, the Company acquired substantially all of the assets of DITF Interconnect Technology, Inc. ("DITF"), a thin film components manufacturer. See Note 4. Acquisitions for additional information related to the transaction.

Non-cash Investing Activities - Purchases of property, plant, and equipment included in accounts payable at June 30, 2019 and 2018 were $3.1 million and $5.9 million, respectively. These non-cash amounts are not reflected as outflows to Additions to property, plant, and equipment within investing activities of the Consolidated Statements of Cash Flows for the respective periods.

2. Recent Accounting Standards

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14 to amend disclosure requirements related to defined benefit pension and other postretirement plans. The standard is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption is permitted and retrospective application of the guidance is required. The Company has not yet determined the impact of the standard on its disclosures or its adoption date.


7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 

Recently Adopted Accounting Standards

In February 2018, the FASB issued ASU 2018-02, which allows the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Reform Act. The standard also requires certain disclosures concerning stranded tax effects regardless of the election with respect to stranded tax effects resulting from the Tax Reform Act. The standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the Tax Reform Act were recognized. The Company elected to reclassify the stranded tax effects resulting from the Tax Reform Act upon adoption of the standard on January 1, 2019. The impact of the reclassification from accumulated other comprehensive loss to accumulated deficit was less than $0.1 million. The Company's policy is to release income tax effects from accumulated other comprehensive loss in the period the underlying item expires.

In February 2016, the FASB issued ASU 2016-02 and issued subsequent amendments to the initial guidance within ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20, and ASU 2019-01, which are collectively referred to as Accounting Standards Codification ("ASC") 842. This guidance requires a lessee to recognize a lease liability and right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The Company adopted the standard as of January 1, 2019 under the prospective transition method that did not require comparative period financial statements to be adjusted. See Note 8. Leases for additional information. Periods prior to January 1, 2019 have been presented in accordance with prior guidance (ASC 840). The Company elected the transition package of practical expedients for leases that commenced before the adoption date, which among other things, allowed the Company to carry forward historical lease classifications. The Company also elected the practical expedient to not separate nonlease components from lease components, which increased lease liabilities and right-of-use assets through the inclusion of fixed payments for nonlease components such as maintenance.

The Company assessed its lease portfolio as of the adoption date as well as implemented accounting processes and enhanced internal controls for the continued maintenance of the lease portfolio under the new standard. The Company recognized approximately $40 million of operating lease liabilities and right-of-use assets on its Consolidated Balance Sheets as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842 as finance lease liabilities and right-of-use assets were recognized on the Consolidated Balance Sheets for periods prior to January 1, 2019 under ASC 840. The standard did not materially impact the Consolidated Statements of Earnings or Consolidated Statements of Cash Flows.

3. Disposed and Discontinued Operations

Management and the Board of Directors periodically conduct strategic reviews of the Company's businesses.

On November 28, 2017, the Company completed the sale of its high-end oscillators business ("Timing Device Business"), part of the Precision Devices ("PD") segment, for $130.0 million, plus purchase price adjustments for a net amount of $135.1 million. The Company recorded a gain of $63.9 million as a result of the sale, which included $0.4 million of gain amounts reclassified from Accumulated other comprehensive loss into earnings related to currency translation adjustments. The purchase price included $10.0 million held in escrow that was received during the third quarter of 2018.

In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations and financial position of the Timing Device Business have been reclassified to discontinued operations for all periods presented as the disposal represents a strategic shift that had a major effect on the Company's results of operations.


8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 

Summarized results of the Company's discontinued operations are as follows:
(in millions)
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Revenues
$

 
$

Cost of goods sold

 

Gross profit

 

Selling and administrative expenses
(0.2
)
 
(0.2
)
Operating income
(0.2
)
 
(0.2
)
Other income, net

 
(0.2
)
Earnings from discontinued operations before taxes (1)
0.2

 
0.4

Provision for income taxes

 
0.1

Earnings from discontinued operations, net of tax
$
0.2

 
$
0.3

(1) The Company's policy is to not allocate interest expense to discontinued operations unless it is directly attributable to the operations. The results of operations of the Timing Device Business did not have any such interest expense in the periods presented.

Discontinued operations had no impact on the Company's results of operations for the three and six months ended June 30, 2019. There were no assets and liabilities of discontinued operations as of June 30, 2019 and December 31, 2018. There was no depreciation, amortization of intangible assets, or capital expenditures related to discontinued operations during the six months ended June 30, 2019 and 2018.

4. Acquisitions

DITF Acquisition

On January 3, 2019, the Company acquired substantially all of the assets of DITF for $11.1 million. The acquired business provides thin film components to the defense, telecommunication, industrial, and medical markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the PD segment. Included in the Consolidated Statements of Earnings are DITF's revenues and loss before income taxes of $4.0 million and $0.2 million, respectively, from the date of acquisition through June 30, 2019.

The table below represents a preliminary allocation of the purchase price to net assets acquired as of January 3, 2019:
(in millions)
Receivables
$
1.2

Inventories
0.9

Property, plant, and equipment
2.8

Customer relationships
1.4

Unpatented technologies
1.3

Trademarks and other amortized intangible assets
0.7

Other assets
0.5

Goodwill
3.2

Assumed liabilities
(0.9
)
Total purchase price
$
11.1



Customer relationships, unpatented technologies, and trademarks will be amortized over estimated useful lives of 6 years, 6 years, and 7 years, respectively. The fair value for customer relationships was determined using the excess earnings method under the income approach. The fair values of unpatented technologies and trademarks were determined using the relief from royalty method under the income approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates.


9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 

The excess of the total purchase price over the total fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to the assembled workforce and synergies. None of the goodwill resulting from this acquisition is tax deductible. Goodwill has been allocated to the PD segment, which is the segment expected to benefit from the acquisition.

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

Other Acquisitions

On January 19, 2018, the Company acquired substantially all of the assets of Compex Corporation ("Compex") for $16.0 million, plus purchase price adjustments for a net amount of $18.7 million. The asset purchase agreement relating to the acquisition provided for a $0.6 million post-closing working capital adjustment that settled during the second quarter of 2018 as well as a $1.0 million holdback that will be paid eighteen months from the completion of the acquisition and is recorded in the Other accrued expenses line on the Consolidated Balance Sheets. The acquired business provides single layer electronic components to the telecommunication, fiber optics, defense, and aerospace markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the PD segment. Included in the Consolidated Statements of Earnings are Compex's revenues and earnings before income taxes of $5.8 million and $1.0 million, respectively, from the date of acquisition through June 30, 2018.

On January 11, 2017, the Company completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during the first quarter of 2017. An additional $1.0 million was paid during the year ended December 31, 2018, with the remaining $0.2 million paid in the first quarter of 2019. The financial results of this acquisition were included in the Consolidated Financial Statements from the date of acquisition within the PD segment.

5. Inventories, net

The following table details the major components of inventories, net:
(in millions)
June 30, 2019
 
December 31, 2018
Raw materials
$
79.6

 
$
70.8

Work in progress
32.6

 
30.2

Finished goods
72.5

 
65.3

Subtotal
184.7

 
166.3

Less reserves
(25.0
)
 
(26.2
)
Total
$
159.7

 
$
140.1



6. Property, Plant, and Equipment, net

The following table details the major components of property, plant, and equipment, net:
(in millions)
June 30, 2019
 
December 31, 2018
Land
$
7.6

 
$
7.5

Buildings and improvements
104.0

 
102.3

Machinery, equipment, and other
519.9

 
499.9

Subtotal
631.5

 
609.7

Less accumulated depreciation
(419.6
)
 
(398.0
)
Total
$
211.9

 
$
211.7



Depreciation expense totaled $12.0 million and $11.5 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, depreciation expense totaled $23.5 million and $23.4 million, respectively.


10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 

7. Goodwill and Other Intangible Assets

The changes in carrying value of goodwill by reportable segment for the six months ended June 30, 2019 are as follows:
(in millions)
Audio
 
Precision Devices
 
Total
Balance at December 31, 2018
$
859.9

 
$
28.0

 
$
887.9

Acquisition

 
3.2

 
3.2

Balance at June 30, 2019
$
859.9

 
$
31.2

 
$
891.1



The gross carrying value and accumulated amortization for each major class of intangible assets are as follows:
 
June 30, 2019
 
December 31, 2018
(in millions)
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Trademarks
$
1.2

 
$
0.3

 
$
0.5

 
$
0.2

Patents
40.8

 
29.2

 
40.8

 
26.9

Customer relationships
12.0

 
2.8

 
10.6

 
2.0

Unpatented technologies
3.2

 
0.5

 
4.4

 
2.7

Other
0.2

 

 
0.2

 

Total
57.4

 
32.8

 
56.5

 
31.8

Unamortized intangible assets:
 
 
 
 
 
 
 
Trademarks
32.0

 
 
 
32.0

 
 
Total intangible assets, net
$
56.6

 
 
 
$
56.7

 
 


Amortization expense totaled $1.7 million and $1.6 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, amortization expense was $3.5 million and $3.2 million, respectively. Amortization expense for the next five years, based on current intangible balances, is estimated to be as follows:
(in millions)
 
Q3 - Q4 2019
$
3.5

2020
6.9

2021
6.9

2022
1.6

2023
1.6



8. Leases

The Company determines whether an arrangement is a lease at contract inception. Lease liabilities and right-of-use assets are recognized on the lease commencement date based on the net present value of fixed lease payments over the lease term. The Company includes options to extend or terminate a lease within the lease term when it is reasonably certain the option will be exercised. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. Right-of-use assets include prepaid fixed lease payments and exclude lease incentives. As the Company's leases generally do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate to determine the present value of fixed lease payments based on information available at the lease commencement date.

Fixed lease expense for operating leases and right-of-use asset amortization for finance leases are generally recognized on a straight-line basis over the lease term. Variable lease payments, such as payments based on an index rate or usage, are expensed as incurred and excluded from lease liabilities and right-of-use assets. The Company combines lease components and nonlease components such as maintenance into a single lease component, which results in the capitalization of all fixed payments within lease liabilities and right-of-use assets.

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 


The Company has leases for manufacturing, sales, support, and engineering facilities, certain manufacturing and office equipment, and vehicles. The majority of the leases have remaining terms of 1 to 8 years, some of which include options to extend the leases for up to 6 years, and some of which include options to terminate the leases within 1 year. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company subleases certain facilities to third parties.

The following table details the components of lease cost:
(in millions)
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Operating lease cost (1)
$
2.5

 
$
5.1

Finance lease cost:
 
 
 
Amortization of right-of-use assets
0.7

 
1.0

Interest on lease liabilities

 

Sublease income
(0.7
)
 
(1.5
)
Total lease cost
$
2.5

 
$
4.6

(1) Includes short-term and variable lease costs, which were immaterial.

The components of lease cost other than Interest on lease liabilities are presented within the Cost of goods sold, Research and development expenses, and Selling and administrative expenses lines on the Consolidated Statements of Earnings based on the use of the underlying assets. Interest on lease liabilities is presented within the Interest expense, net line on the Consolidated Statements of Earnings.

The following table presents supplemental balance sheet information related to finance leases:
(in millions)
Balance Sheet Line
June 30, 2019
Finance lease right-of-use assets
Property, plant, and equipment, net
$
12.9

 
 
 
Current finance lease liabilities
Other accrued expenses
$
2.3

Long-term finance lease liabilities
Other liabilities
7.8

Total finance lease liabilities
 
$
10.1



The following table presents supplemental cash flow information related to leases:
(in millions)
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
5.6

Operating cash flows from finance leases
0.3

Financing cash flows from finance leases
0.9

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
2.6

Finance leases
0.2




12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(unaudited)
 

The following table details weighted-average remaining lease terms and discount rates:
(in millions)
June 30, 2019
Weighted-average remaining lease term (in years):
 
Operating leases
4.7

Finance leases
5.6

Weighted-average discount rate:
 
Operating leases
4.3
%
Finance leases
5.6
%


The following table details maturities of lease liabilities as of June 30, 2019:
(in millions)
Operating Leases
 
Finance Leases
Q3-Q4 2019
$
5.7

 
$
1.2

2020
9.6

 
2.4

2021
9.3

 
2.3

2022
8.3

 
2.3

2023
6.3

 
2.3

2024 and thereafter
3.1

 
1.2

Total lease payments
42.3

 
11.7

Less interest
(3.8
)
 
(1.6
)
Present value of lease liabilities
$
38.5

 
$
10.1



The aggregate future minimum lease payments for capital and operating leases as of December 31, 2018 were as follows:
(in millions)
Operating Leases
 
Capital Leases
2019
$
9.7

 
$
2.3

2020
9.3

 
2.3

2021
8.8

 
2.3

2022
8.1

 
2.3

2023
6.1

 
2.3

2024 and thereafter
3.8

 
2.6

Total minimum lease payments
45.8

 
14.1

Less sublease rental income
(8.8
)
 

Net minimum lease payments
$
37.0

 
14.1

Less imputed interest
 
 
(1.6
)
Present value of capital lease obligations
 
 
$
12.5



9. Restructuring and Related Activities

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

During the three and six months ended June 30, 2019, the Company recorded restructuring charges of $0.4 million and $0.9 million