Knowles Corp: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a market leader and global provider of high performance electronics for demanding applications, including ceramic capacitors and radio frequency ("RF") filters, advanced medtech microphones, balanced armature speakers, advanced micro-acoustic microphones, and audio solutions, serving the medtech, defense, electric vehicle, industrial, communications, and consumer electronics markets. Our focus on the customer, combined with unique technology, proprietary manufacturing techniques, and global operational expertise, enables us to deliver innovative solutions across multiple applications. References to "Knowles," the "Company," "we," "our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.

We sell our products directly to original equipment manufacturers ("OEMs") and to their contract manufacturers and suppliers and through distributors worldwide.

Recent Developments

On September 18, 2023, we announced that we are reviewing strategic alternatives for the CMM business. This review includes a range of possibilities, such as: a potential sale, restructuring the business, as well as continuing to operate the business as is. No assurance can be given that any transaction or other strategic outcomes will result from the review. However, in connection with our strategic alternatives review, in the second quarter of 2024 we determined that it was more likely than not that the fair value of the CMM reporting unit was below its carrying value, resulting in a goodwill impairment charge. While the review continues to progress, we have not set a timetable for its conclusion and do not intend to comment on or provide updates regarding these matters unless and until we determine that further disclosure is appropriate or required. For additional information about the goodwill impairment charge, refer to Note 6. Goodwill and Other Intangible Assets to our Consolidated Financial Statements under Part I, Item 1, "Financial Statements."

Non-GAAP Financial Measures

In addition to the GAAP financial measures included in this item, we have presented certain non-GAAP financial measures. We use non-GAAP measures as supplements to our GAAP results of operations in evaluating certain aspects of our business, and our executive management team and Board of Directors focus on non-GAAP items as key measures of our performance for business planning purposes. These measures assist us in comparing our performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in our opinion, do not reflect our core operating performance. We believe that our presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that we use internally for purposes of assessing our core operating performance. The Company does not consider these non-GAAP financial measures to be a substitute for the information provided by GAAP financial results. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, see the reconciliation included herein.

Results of Operations for the Three Months Ended June 30, 2024 compared with the Three Months Ended June 30, 2023

(in millions, except per share amounts)

Revenues

Revenues for the second quarter of 2024 were $204.7 million, compared with $173.0 million for the second quarter of 2023, an increase of $31.7 million or 18.3%. PD revenues increased $26.3 million due to our acquisition of the CD business and higher demand from the medtech market in our legacy PD business, partially offset by lower demand from the industrial and communication markets in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory. CMM revenues increased $6.5 million, primarily due to higher demand in the mobile, ear, and IoT markets, partially offset by lower average pricing on mature products. MSA revenues decreased $1.1 million, primarily due to lower shipping volumes into the specialty audio market, partially offset by higher shipping volumes of hearing health products driven by stronger end market demand.

Cost of Goods Sold

Cost of goods sold ("COGS") for the second quarter of 2024 was $127.9 million, compared with $105.8 million for the second quarter of 2023, an increase of $22.1 million or 20.9%. This increase was primarily due to our acquisition of CD and higher shipping volumes, partially offset by product cost reductions and favorable foreign currency changes.

Gain on Sale of Fixed Assets

As a result of transitioning to our next generation of MEMS wafer manufacturing technology, we sold certain machinery and equipment related to the CMM segment in the second quarter of 2023 and recorded a gain of $4.8 million. During the second quarter of 2024, we recorded an additional gain on the sale of these assets of approximately $1.1 million. For additional information, refer to Note 5. Property, Plant, and Equipment, net to our Consolidated Financial Statements.

Restructuring Charges

During the second quarter of 2024, we recorded restructuring charges of $0.3 million within Gross profit for costs associated with transferring certain capacitors manufacturing to existing facilities to further optimize operations, and a credit of $0.1 million within Operating expenses related to previous headcount reductions, all within the PD segment. For additional information, refer to Note 7. Restructuring and Related Activities to our Consolidated Financial Statements.

During the second quarter of 2023, we recorded a $0.9 million gain on the sale of certain machinery and equipment that was previously written off through restructuring charges and a $0.8 million reversal of restructuring charges related to a change in estimate, all within Gross profit and the CMM segment. We also recorded restructuring charges of $0.6 million in Operating expenses for severance pay and benefits to rationalize our CMM segment. For additional information, refer to Note 7. Restructuring and Related Activities to our Consolidated Financial Statements.

Gross Profit and Non-GAAP Gross Profit

Gross profit for the second quarter of 2024 was $77.6 million, compared with $73.7 million for the second quarter of 2023, an increase of $3.9 million or 5.3%. Gross profit margin (gross profit as a percentage of revenues) for the second quarter of 2024 was 37.9%, compared with 42.6% for the second quarter of 2023. The increase in gross profit was primarily due to our acquisition of CD, product cost reductions, higher shipping volumes, and favorable foreign currency changes, partially offset by lower average pricing on mature products primarily shipped into the mobile market, the decrease in gain on sale of fixed assets, and restructuring charges. The decrease in gross profit margin was primarily due to lower average pricing on mature products shipped into the mobile market, the decrease in gain on sale of fixed assets, impacts of the acquisition of CD, and restructuring charges, partially offset by product cost reductions and favorable foreign currency changes.

Non-GAAP gross profit for the second quarter of 2024 was $79.7 million, compared with $72.7 million for the second quarter of 2023, an increase of $7.0 million or 9.6%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the second quarter of 2024 was 38.9%, compared with 42.0% for the second quarter of 2023. The increase in non-GAAP gross profit was primarily due to our acquisition of CD, product cost reductions, higher shipping volumes, and favorable foreign currency changes, partially offset by lower average pricing on mature products primarily shipped into the mobile market, and the decrease in gain on sale of fixed assets. The decrease in non-GAAP gross profit margin was primarily due to lower average pricing on mature products shipped into the mobile market, the decrease in gain on sale of fixed assets, and impacts of the acquisition of CD, partially offset by product cost reductions, and favorable foreign currency changes.

Research and Development Expenses

Research and development expenses for the second quarter of 2024 were $20.9 million, compared with $19.7 million for the second quarter of 2023, an increase of $1.2 million or 6.1%. Research and development expenses as a percentage of revenues for the second quarter of 2024 and 2023 were 10.2% and 11.4%, respectively. The increase in expenses was primarily driven by our acquisition of the CD business that increased expenses in our PD segment, partially offset by reduced spending in our CMM segment driven by the benefits of prior year restructuring actions as we continue to shift our spending to higher margin businesses. The decrease in expenses as a percentage of revenues was driven by our higher revenues.

Selling and Administrative Expenses

Selling and administrative expenses for the second quarter of 2024 were $43.0 million, compared with $36.5 million for the second quarter of 2023, an increase of $6.5 million or 17.8%. Selling and administrative expenses as a percentage of revenues for the second quarter of 2024 and 2023 were 21.0% and 21.1%, respectively. The increase in expenses was primarily driven by our acquisition of CD, partially offset by lower professional service fees. The decrease in expenses as a percentage of revenues was driven by higher revenues.

Goodwill Impairment

In the second quarter of 2024, we recorded a goodwill impairment charge of $249.4 million within the CMM segment. For additional information related to this impairment charge, refer to Note 6. Goodwill and Other Intangible Assets to our Consolidated Financial Statements.

Interest Expense, net

Interest expense for the second quarter of 2024 was $4.6 million, compared with $0.8 million for the second quarter of 2023, an increase of $3.8 million. The increase is primarily due to imputed interest expense on our Seller Note from the CD acquisition and a higher outstanding revolving credit facility balance during the second quarter of 2024. For additional information on borrowings and interest expense, refer to Note 8. Borrowings to our Consolidated Financial Statements.

Other Expense (Income), net

Other expense for the second quarter of 2024 was $0.3 million, compared with income of $1.3 million for the second quarter of 2023, a change of $1.6 million. Expense in 2024 primarily represents unfavorable foreign currency changes. Income in the second quarter of 2023 represents favorable foreign currency changes and the unrealized gains in our investment balances.

Provision for Income Taxes and Non-GAAP Provision for Income Taxes

The effective tax rate ("ETR") for the second quarter of 2024 and 2023 was (7.8)% and 21.8%, respectively. The ETR for the second quarter of 2024 and 2023 includes discrete items totaling $0.1 million of tax expense in both periods. The discrete items impacting the tax provision for 2024 and 2023 are primarily attributable to stock-based compensation. Absent the discrete items, the ETR for the second quarter of 2024 and 2023 was (7.8)% and 21.3%, respectively. The Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions, which resulted in the provision for the second quarter of 2024 and 2023. The change in the ETR was mainly due to the book goodwill impairment recorded in the second quarter of 2024, as well as the mix of earnings and losses by taxing jurisdictions and net discrete items.

The non-GAAP ETR for the second quarter of 2024 and 2023 was 9.6% and 18.6%, respectively. The non-GAAP ETR includes discrete items totaling $0.1 million of tax expense for the second quarter of 2024. Absent the discrete items, the non-GAAP ETR for the second quarter of 2024 and 2023 was 9.2% and 18.6%, respectively. The change in the non-GAAP ETR was primarily due to increased utilization of foreign tax credits compared to the prior year.

Net (Loss) Earnings

Net loss for the second quarter of 2024 was $259.3 million, compared with earnings of $13.6 million for the second quarter of 2023, a decrease of $272.9 million. As described above, the decrease is primarily due to the goodwill impairment charge recorded in 2024 and higher income tax expense, operating expenses, and interest expense, partially offset by higher gross profit.

(Loss) Earnings and Adjusted Earnings Before Interest and Income Taxes

Loss before interest and income taxes for the second quarter of 2024 was $235.9 million, compared with earnings of $18.2 million for the second quarter of 2023, a decrease of $254.1 million. The change is primarily due to the goodwill impairment charge recorded in 2024 and higher operating expenses, partially offset by higher gross profit.

Adjusted earnings before interest and income taxes ("Adjusted EBIT") for the second quarter of 2024 was $29.5 million, compared with $27.7 million for the second quarter of 2023, an increase of $1.8 million. Adjusted EBIT margin (Adjusted EBIT as a percentage of revenues) for the second quarter of 2024 was 14.4%, compared with 16.0% for the second quarter of 2023. The increase in Adjusted EBIT was primarily due to higher non-GAAP gross profit, partially offset by higher non-GAAP operating expenses. The decrease in Adjusted EBIT margin was driven by higher revenues.

Diluted (Loss) Earnings per Share and Non-GAAP Diluted Earnings per Share

Diluted loss per share was $2.90 for the second quarter of 2024, compared with earnings per share of $0.15 for the second quarter of 2023, a decrease of $3.05. As described above, the decrease is primarily due to the goodwill impairment charge recorded in 2024 and higher income tax expense, operating expenses, and interest expense, partially offset by higher gross profit.

Non-GAAP diluted earnings per share was $0.24 for the second quarter of 2024, compared with $0.23 for the second quarter of 2023, an increase of $0.01. As described above, the increase was due to higher non-GAAP gross profit and lower non-GAAP income tax expense, partially offset by higher non-GAAP operating expenses and interest expense.

Results of Operations for the Six Months Ended June 30, 2024 compared with the Six Months Ended June 30, 2023

(in millions, except per share amounts)

Revenues

Revenues for the six months ended June 30, 2024 were $401.1 million, compared with $317.3 million for the six months ended June 30, 2023, an increase of $83.8 million or 26.4%. PD revenues increased $46.9 million due to our acquisition of the CD business, partially offset by lower demand from the industrial, communication, and medtech markets in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory. CMM revenues increased $26.4 million, primarily due to higher demand in the mobile, ear, IoT, and computing markets, partially offset by lower average pricing on mature products. MSA revenues increased $10.5 million, primarily due to higher shipping volumes of hearing health products driven by stronger end market demand, partially offset by lower shipping volumes into the specialty audio market. In addition, revenues in the six months ended June 30, 2023 were unfavorably impacted by financial incentives offered to customers in the fourth quarter of 2022, which resulted in higher shipping volumes in the fourth quarter of 2022 and lower revenues in the first quarter of 2023.

Cost of Goods Sold

COGS for the six months ended June 30, 2024 was $253.4 million, compared with $196.2 million for the six months ended June 30, 2023, an increase of $57.2 million or 29.2%. This increase was primarily due to our acquisition of CD, higher shipping volumes, and lower factory capacity utilization in our legacy PD business, partially offset by product cost reductions and favorable foreign currency changes.

Gain on Sale of Fixed Assets

As a result of transitioning to our next generation of MEMS wafer manufacturing technology, we sold certain machinery and equipment related to the CMM segment in the six months ended June 30, 2023 and recorded a gain of $4.8 million. During the six months ended June 30, 2024, we recorded an additional gain on the sale of these assets of approximately $1.1 million. For additional information, refer to Note 5. Property, Plant, and Equipment, net to our Consolidated Financial Statements.

Restructuring Charges

During the six months ended June 30, 2024, we recorded restructuring charges of $1.7 million related to headcount reductions and $1.0 million for costs associated with transferring certain capacitors manufacturing to existing facilities to further optimize operations, all within our PD segment. These actions resulted in restructuring charges of $1.3 million within Gross profit and $1.4 million within Operating expenses. For additional information, refer to Note 7. Restructuring and Related Activities to our Consolidated Financial Statements.

During the six months ended June 30, 2023, we recorded a $0.9 million gain on the sale of certain machinery and equipment that was previously written off through restructuring charges and a $0.8 million reversal of restructuring charges related to a change in estimate, all within Gross profit and the CMM Segment. We also recorded restructuring charges of $1.4 million in Operating expenses for severance pay and benefits to rationalize our CMM segment, and $0.3 million for other costs. For additional information, refer to Note 7. Restructuring and Related Activities to our Consolidated Financial Statements.

Gross Profit and Non-GAAP Gross Profit

Gross profit for the six months ended June 30, 2024 was $147.5 million, compared with $127.5 million for the six months ended June 30, 2023, an increase of $20.0 million or 15.7%. Gross profit margin for the six months ended June 30, 2024 was 36.8%, compared with 40.2% for the six months ended June 30, 2023. The increase in gross profit was primarily due to our acquisition of CD, higher shipping volumes, product cost reductions, favorable foreign currency changes, and higher factory capacity utilization in our CMM segment, partially offset by lower average pricing on mature products shipped primarily into the mobile market, the decrease in gain on sale of fixed assets, lower factory capacity utilization in our legacy PD business, our acquisition-related costs of CD, and restructuring charges. The decrease in gross profit margin was primarily due to lower average pricing on mature products shipped into the mobile market, impacts of the acquisition of CD, the decrease in gain on sale of fixed assets, lower factory capacity utilization in our legacy PD business, our acquisition-related costs of CD, and restructuring charges, partially offset by product cost reductions, favorable foreign currency changes, and higher factory capacity utilization in our CMM segment.

Non-GAAP gross profit for the six months ended June 30, 2024 was $154.4 million, compared with $127.1 million for the six months ended June 30, 2023, an increase of $27.3 million or 21.5%. Non-GAAP gross profit margin for the six months ended June 30, 2024 was 38.5%, compared with 40.1% for the six months ended June 30, 2023. The increase in non-GAAP gross profit was primarily due to our acquisition of CD, higher shipping volumes, product cost reductions, favorable foreign currency changes, and higher factory capacity utilization in our CMM segment, partially offset by lower average pricing on mature products primarily shipped into the mobile market, the decrease in gain on sale of fixed assets, and lower factory capacity utilization in our legacy PD business. The decrease in non-GAAP gross profit margin was primarily due to lower average pricing on mature products shipped into the mobile market, impacts of the acquisition of CD, the decrease in gain on sale of fixed assets, and lower factory capacity utilization in our legacy PD business, partially offset by product cost reductions, favorable foreign currency changes, and higher factory capacity utilization in our CMM segment.

Research and Development Expenses

Research and development expenses for the six months ended June 30, 2024 were $41.5 million, compared with $39.7 million for the six months ended June 30, 2023, an increase of $1.8 million or 4.5%. Research and development expenses as a percentage of revenues for the six months ended June 30, 2024 and 2023 were 10.3% and 12.5%, respectively. The increase in expenses was primarily driven by our acquisition of the CD business that increased expenses in our PD segment, partially offset by reduced spending in our CMM segment driven by the benefits of prior year restructuring actions as we continue to shift our spending to our higher margin businesses. The decrease in expenses as a percentage of revenues was driven by our higher revenues.

Selling and Administrative Expenses

Selling and administrative expenses for the six months ended June 30, 2024 were $86.5 million, compared with $70.3 million for the six months ended June 30, 2023, an increase of $16.2 million or 23.0%. Selling and administrative expenses as a percentage of revenues for the six months ended June 30, 2024 and 2023 were 21.6% and 22.2%, respectively. The increase in expenses was primarily driven by our acquisition of CD, partially offset by lower professional service fees. The decrease in expenses as a percentage of revenues was driven by higher revenues.

Goodwill Impairment

In the six months ended June 30, 2024, we recorded a goodwill impairment charge of $249.4 million within the CMM segment. For additional information related to this impairment charge, refer to Note 6. Goodwill and Other Intangible Assets to our Consolidated Financial Statements.

Interest Expense, net

Interest expense for the six months ended June 30, 2024 was $9.0 million, compared with $1.6 million for the six months ended June 30, 2023, an increase of $7.4 million. The increase is primarily due to imputed interest expense on our Seller Note from the CD acquisition and a higher outstanding revolving credit facility balance during the six months ended June 30, 2024. For additional information on borrowings and interest expense, refer to Note 8. Borrowings to our Consolidated Financial Statements.

Other (Income) Expense, net

Other income for the six months ended June 30, 2024 was $0.1 million, compared with expense of $1.0 million for the six months ended June 30, 2023, a change of $1.1 million. Income in 2024 primarily represents unrealized gains in our investment balances, partially offset by unfavorable foreign currency changes. Expense in 2023 represents unfavorable foreign currency changes, partially offset by the unrealized gains in our investment balances.

Gain on Sale of Asset, net

The gain on sale of asset of $5.4 million is related to the sale of intellectual property previously used in the Intelligent Audio product line, which is included within the CMM segment. For additional information, refer to Note 6. Goodwill and Other Intangible Assets.

Provision for Income Taxes and Non-GAAP Provision for Income Taxes

The ETR for the six months ended June 30, 2024 and 2023 was (9.4)% and 36.8%, respectively. The ETR for the six months ended June 30, 2024 and 2023 includes discrete items totaling $0.9 million and $0.7 million of tax expense, respectively. The discrete items impacting the tax provision for 2024 and 2023 are primarily attributable to stock-based compensation. Absent the discrete items, the ETR for the six months ended June 30, 2024 and 2023 was (9.0)% and 31.6%, respectively. The Company accrues taxes in various countries where it generates income and applies a valuation allowance in other jurisdictions, which resulted in the provision for the six months ended June 30, 2024 and 2023. The change in the ETR was mainly due to the book goodwill impairment recorded in the second quarter of 2024, as well as the mix of earnings and losses by taxing jurisdictions and net discrete items.

The non-GAAP ETR for the six months ended June 30, 2024 and 2023 was 11.0% and 21.1%, respectively. The non-GAAP ETR includes discrete items totaling $0.8 million and $0.9 million of tax expense for the six months ended June 30, 2024 and 2023, respectively. Absent the discrete items, the non-GAAP ETR for the six months ended June 30, 2024 and 2023 was 9.3% and 18.4%, respectively. The change in the non-GAAP ETR was primarily due to increased utilization of foreign tax credits compared to the prior year.

Net (Loss) Earnings

Net loss for the six months ended June 30, 2024 was $256.8 million, compared with earnings of $8.4 million for the six months ended June 30, 2023, a decrease of $265.2 million. As described above, the decrease is primarily due to the goodwill impairment charge recorded in 2024 and higher operating expenses, income tax expense, and interest expense, partially offset by higher gross profit and the gain on sale of asset.

(Loss) Earnings and Adjusted Earnings Before Interest and Income Taxes

Loss before interest and income taxes for the six months ended June 30, 2024 was $225.8 million, compared with earnings of $14.9 million for the six months ended June 30, 2023, a decrease of $240.7 million. The change is is primarily due to the goodwill impairment charge recorded in 2024 and higher operating expenses, partially offset by higher gross profit and the gain on sale of asset.

Adjusted EBIT for the six months ended June 30, 2024 was $55.2 million, compared with $35.8 million for the six months ended June 30, 2023, an increase of $19.4 million. Adjusted EBIT margin for the six months ended June 30, 2024 was 13.8%, compared with 11.3% for the six months ended June 30, 2023. The increases were primarily due to higher non-GAAP gross profit, partially offset by higher non-GAAP operating expenses.

Diluted (Loss) Earnings per Share and Non-GAAP Diluted Earnings per Share

Diluted loss per share was $2.87 for the six months ended June 30, 2024, compared with earnings per share of $0.09 for the six months ended June 30, 2023, a decrease of $2.96. As described above, the decrease is primarily due to the goodwill impairment charge recorded in 2024 and higher operating expenses, income tax expense, and interest expense, partially offset by higher gross profit and the gain on sale of asset.

Non-GAAP diluted earnings per share was $0.44 for the six months ended June 30, 2024, compared with $0.28 for the six months ended June 30, 2023, an increase of $0.16. As described above, the increase was primarily due to higher non-GAAP gross profit, partially offset by higher non-GAAP operating expenses and interest expense.

Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures (1)

(in millions, except per share amounts)

31

(1) In addition to the GAAP financial measures included herein, Knowles has presented certain non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable GAAP measures. Knowles believes that non-GAAP measures are useful as supplements to its GAAP results of operations to evaluate certain aspects of its operations and financial performance, and its management team primarily focuses on non-GAAP items in evaluating Knowles' performance for business planning purposes. Knowles also believes that these measures assist it with comparing its performance between various reporting periods on a consistent basis, as these measures remove from operating results the impact of items that, in Knowles' opinion, do not reflect its core operating performance. Knowles believes that its presentation of non-GAAP financial measures is useful because it provides investors and securities analysts with the same information that Knowles uses internally for purposes of assessing its core operating performance.

(2) Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities primarily within the United States. These amounts are included in the corresponding Gross profit and (Loss) earnings before interest and income taxes for each period presented.

(3) These expenses are related to the acquisition of CD by the PD segment. These expenses include ongoing costs to facilitate integration, the amortization of fair value adjustments to inventory, and costs incurred by the Company to carry out this transaction.

(4) Other expenses include non-recurring professional service fees related to an execution of various reorganization projects, foreign currency exchange rate impacts on restructuring balances, and the ongoing net lease cost (income) related to facilities not used in operations.

(5) This gain is related to the sale of intellectual property previously used in the Intelligent Audio product line, which is included within the CMM segment.

(6) Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments.

(7) The non-GAAP reconciling adjustments are those adjustments made to reconcile (Loss) earnings before interest and income taxes to Adjusted earnings before interest and income taxes.

(8) The number of shares used in the diluted per share calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method.

Segment Results of Operations for the Three Months Ended June 30, 2024 compared with the Three Months Ended June 30, 2023

The following is a summary of the results of operations of our three reportable segments: Precision Devices, Medtech & Specialty Audio, and Consumer MEMS Microphones.

See Note 14. Segment Information to the Consolidated Financial Statements for (i) a reconciliation of segment revenues to our consolidated revenues and (ii) a reconciliation of segment earnings before interest and income taxes to our consolidated earnings.

Precision Devices

(in millions)

Revenues

PD revenues were $74.1 million for the second quarter of 2024, compared with $47.8 million for the second quarter of 2023, an increase of $26.3 million or 55.0%. Revenues increased due to our acquisition of the CD business and higher demand from the medtech market in our legacy PD business, partially offset by lower demand from the industrial and communication markets in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory.

Earnings and Adjusted Earnings Before Interest and Income Taxes

PD Earnings before interest and income taxes ("EBIT") was $4.2 million for the second quarter of 2024, compared with $4.8 million for the second quarter of 2023, a decrease of $0.6 million. EBIT margin for the second quarter of 2024 was 5.7%, compared to 10.0% for the second quarter of 2023. The decreases were primarily due to increased operating expenses, partially offset by higher gross profit. The increase in operating expenses was primarily driven by the acquisition of the CD business, which includes higher intangible amortization expenses of $2.8 million. The gross profit increase was primarily driven by our acquisition of CD, partially offset by lower gross profit margins. The lower gross profit margins were impacted by the acquisition of CD, acquisition-related costs, and production transfer costs.

PD Adjusted EBIT was $11.8 million for the second quarter of 2024, compared with $7.3 million for the second quarter of 2023, an increase of $4.5 million. Adjusted EBIT margin for the second quarter of 2024 was 15.9%, compared with 15.3% for the second quarter of 2023. The increases were primarily due to higher non-GAAP gross profit, partially offset by increased non-GAAP operating expenses. The non-GAAP gross profit increase was primarily driven by our acquisition of CD, partially offset by lower non-GAAP gross profit margins. The lower non-GAAP gross profit margins were impacted by the acquisition of CD. The increase in non-GAAP operating expenses was primarily driven by the acquisition of the CD business.

MedTech & Specialty Audio

(in millions)

Revenues

MSA revenues were $59.5 million for the second quarter of 2024, compared with $60.6 million for the second quarter of 2023, a decrease of $1.1 million or 1.8%. Revenues decreased primarily due to lower shipping volumes into the specialty audio market, partially offset by higher shipping volumes of hearing health products driven by stronger end market demand.

Earnings and Adjusted Earnings Before Interest and Income Taxes

MSA EBIT was $24.0 million for the second quarter of 2024, compared with $23.6 million for the second quarter of 2023, an increase of $0.4 million or 1.7%. EBIT margin for the second quarter of 2024 was 40.3%, compared with 38.9% for the second quarter of 2023. The increases were primarily due to higher gross profit margins and lower operating expenses, partially offset by lower revenues. The higher gross profit margin was driven by favorable mix, product cost reductions, and favorable foreign currency changes.

MSA Adjusted EBIT was $25.0 million for the second quarter of 2024, compared with $24.4 million for the second quarter of 2023, an increase of $0.6 million. Adjusted EBIT margin for the second quarter of 2024 was 42.0%, compared to 40.3% for the second quarter of 2023. The increases were primarily due to higher non-GAAP gross profit margins and lower operating expenses, partially offset by lower revenues. The higher non-GAAP gross profit margin was driven by favorable mix, product cost reductions, and favorable foreign currency changes.

Consumer MEMS Microphones

(in millions)

Revenues

CMM revenues were $71.1 million for the second quarter of 2024, compared with $64.6 million for the second quarter of 2023, an increase of $6.5 million or 10.1%. Revenues increased primarily due to higher demand in the mobile, ear, and IoT markets, partially offset by lower average pricing on mature products.

(Loss) Earnings and Adjusted Earnings Before Interest and Income Taxes

CMM loss before interest and income taxes was $246.4 million for the second quarter of 2024, compared with earnings of $6.3 million for the second quarter of 2023, a decrease of $252.7 million. The decrease was primarily due to the goodwill impairment charge recorded in 2024 and lower gross profit margins, partially offset by higher revenues. The lower gross profit margin was driven by lower average pricing on mature products primarily shipped into the mobile market and the decrease in gain on sale of fixed assets, partially offset by product cost reductions and favorable foreign currency changes.

CMM Adjusted EBIT was $6.2 million for the second quarter of 2024, compared with $8.4 million for the second quarter of 2023, a decrease of $2.2 million. Adjusted EBIT margin for the second quarter of 2024 was 8.7%, compared to 13.0% for the second quarter of 2023. The decreases in Adjusted EBIT were primarily due to lower non-GAAP gross profit margins, partially offset by higher revenues. The lower non-GAAP gross profit margin was driven by lower average pricing on mature products primarily shipped into the mobile market and the decrease in gain on sale of fixed assets, partially offset by product cost reductions and favorable foreign currency changes.

Segment Results of Operations for the Six Months Ended June 30, 2024 compared with the Six Months Ended June 30, 2023

Precision Devices

(in millions)

Revenues

PD revenues were $148.4 million for the six months ended June 30, 2024, compared with $101.5 million for the six months ended June 30, 2023, an increase of $46.9 million or 46.2%. Revenues increased due to our acquisition of the CD business, partially offset by lower demand from the industrial, communication, and medtech markets in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory.

Earnings and Adjusted Earnings Before Interest and Income Taxes

PD EBIT was $2.1 million for the six months ended June 30, 2024, compared with $15.5 million for the six months ended June 30, 2023, a decrease of $13.4 million. EBIT margin for the six months ended June 30, 2024 was 1.4%, compared to 15.3% for the six months ended June 30, 2023. The decreases were primarily due to increased operating expenses, partially offset by higher gross profit. The increase in operating expenses was primarily driven by the acquisition of the CD business, which includes higher intangible amortization expenses of $5.8 million. The gross profit increase was primarily driven by our acquisition of CD, partially offset by lower gross profit margins. The lower gross profit margins were impacted by the acquisition of CD, acquisition-related costs, lower factory capacity utilization in our legacy PD business, restructuring charges, and production transfer costs.

PD Adjusted EBIT was $21.6 million for the six months ended June 30, 2024, compared with $20.3 million for the six months ended June 30, 2023, an increase of $1.3 million. Adjusted EBIT margin for the six months ended June 30, 2024 was 14.6%, compared with 20.0% for the six months ended June 30, 2023. The increase in Adjusted EBIT was primarily due to higher revenues and non-GAAP gross profit, partially offset by higher non-GAAP operating expenses and lower non-GAAP gross profit margins. The decrease in adjusted EBIT margin was primarily due to higher non-GAAP operating expenses and lower non-GAAP gross profit margins. The increase in operating expenses was primarily driven by the acquisition of the CD business. The lower non-GAAP gross profit margins were impacted by the acquisition of CD and lower factory capacity utilization in our legacy PD business.

MedTech & Specialty Audio

(in millions)

Revenues

MSA revenues were $116.6 million for the six months ended June 30, 2024, compared with $106.1 million for the six months ended June 30, 2023, an increase of $10.5 million or 9.9%. Revenues increased primarily due to higher shipping volumes of hearing health products driven by stronger end market demand, partially offset by lower shipping volumes into the specialty audio market. In addition, revenues in the six months ended June 30, 2023 were unfavorably impacted by financial incentives offered to customers in the fourth quarter of 2022, which resulted in higher shipping volumes in the fourth quarter of 2022 and lower revenues in the first quarter of 2023.

Earnings and Adjusted Earnings Before Interest and Income Taxes

MSA EBIT was $46.7 million for the six months ended June 30, 2024, compared with $35.0 million for the six months ended June 30, 2023, an increase of $11.7 million or 33.4%. EBIT margin for the six months ended June 30, 2024 was 40.1%, compared with 33.0% for the six months ended June 30, 2023. The increases were primarily due to higher revenues and gross profit margin. The higher gross profit margin was driven by favorable product mix, product cost reductions, and favorable foreign currency changes.

MSA Adjusted EBIT was $48.7 million for the six months ended June 30, 2024, compared with $36.7 million for the six months ended June 30, 2023, an increase of $12.0 million. Adjusted EBIT margin for the six months ended June 30, 2024 was 41.8%, compared to 34.6% for the six months ended June 30, 2023. The increases were primarily due to higher revenues and non-GAAP gross profit margin. The higher non-GAAP gross profit margin was driven by favorable product mix, product cost reductions, and favorable foreign currency changes.

Consumer MEMS Microphones

(in millions)

Revenues

CMM revenues were $136.1 million for the six months ended June 30, 2024, compared with $109.7 million for the six months ended June 30, 2023, an increase of $26.4 million or 24.1%. Revenues increased primarily due to higher demand in the mobile, ear, IoT, and computing markets, partially offset by lower average pricing on mature products.

(Loss) Earnings and Adjusted Earnings Before Interest and Income Taxes

CMM loss before interest and income taxes was $241.1 million for the six months ended June 30, 2024, compared with a $1.9 million loss for the six months ended June 30, 2023, a decrease of $239.2 million. The decrease was primarily due to the goodwill impairment charge recorded in 2024, lower gross profit margin, partially offset by higher revenues and the gain on sale of asset. The lower gross profit margin was driven by lower average pricing on mature products primarily shipped into the mobile market, the decrease in gain on sale of fixed assets, and unfavorable product mix, partially offset by product cost reductions, increased factory capacity utilization, and favorable foreign currency changes.

CMM Adjusted EBIT was $9.2 million for the six months ended June 30, 2024, compared with $3.8 million for the six months ended June 30, 2023, an increase of $5.4 million. Adjusted EBIT margin for the six months ended June 30, 2024 was 6.8%, compared to 3.5% for the six months ended June 30, 2023. The increases in Adjusted EBIT were primarily due to higher revenues, partially offset by lower non-GAAP gross profit margin. The lower non-GAAP gross profit margin was driven by lower average pricing on mature products primarily shipped into the mobile market, the decrease in gain on sale of fixed assets, and unfavorable product mix, partially offset by product cost reductions, increased factory capacity utilization, and favorable foreign currency changes.

Liquidity and Capital Resources

Historically, we have generated and expect to continue to generate positive cash flow from operations. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access to capital markets. We believe that our future cash flow from operations and access to capital markets will provide adequate resources to fund our working capital needs, capital expenditures, strategic investments, and share repurchases. We have secured a revolving line of credit in the United States from a syndicate of commercial banks to provide additional liquidity. Furthermore, if we were to require additional cash above and beyond our cash on the balance sheet, the free cash flow generated by the business, and availability under our revolving credit facility, we would most likely seek to raise long-term financing through the U.S. debt or bank markets.

Due to the global nature of our operations, a significant portion of our cash is generated and typically held outside the United States. Our cash and cash equivalents totaled $84.0 million and $87.3 million at June 30, 2024 and December 31, 2023, respectively. Of these amounts, cash held by our non-U.S. operations totaled $34.7 million and $71.8 million as of June 30, 2024 and December 31, 2023, respectively. To the extent we repatriate these funds to the U.S., we may be required to pay U.S. state income taxes and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. Management will continue to reassess our need to repatriate the earnings of our foreign subsidiaries. We expect to reduce our cash balance in the second half of the year, primarily driven by the payment of the Seller Note related to the CD acquisition and debt reduction, partially offset by cash generated from operations.

On November 1, 2023, we acquired (i) all the issued and outstanding shares of Kaplan Electronics, Inc. and (ii) certain assets of Cornell Dubilier Electronics, Inc. and CD Aero, LLC (collectively, "Cornell Dubilier" or "CD") for aggregate consideration of $259.8 million, which equated to a total fair value of consideration transferred of $246.8 million. This acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisition to our Consolidated Financial Statements.

On September 25, 2023, the Company amended its Amended and Restated Credit Agreement (the "A&R Credit Agreement") to, among other things, (a) permit the Company in connection with the acquisition of Cornell Dubilier, to incur senior priority seller financing indebtedness (the “Seller Note”) in an aggregate principal amount of $122.9 million secured by certain assets (including equity interests) acquired in connection with such acquisition and the capital stock of Cornell Dubilier, LLC (the “Acquisition Assets”), which shall mature two years after the effective date of such Seller Note (the “Seller Note Maturity Date”), (b) extends the requirement to pledge the Acquisition Assets that would otherwise constitute collateral under the Credit Agreement to the date that is 90 days after the Seller Note Maturity Date, and (c) restricts, until the Seller Note Maturity Date, the amount of dispositions and investments from the Company and certain of its subsidiaries into Cornell Dubilier, LLC and the acquired subsidiaries that constitute Acquisition Assets from exceeding $80.0 million the aggregate. All other terms remain the same as the A&R Credit Agreement dated February 8, 2023.

On February 8, 2023, we entered into the A&R Credit Agreement that amends and restates the prior Credit Agreement (the "2020 Credit Agreement"), which provides for a senior secured revolving credit facility with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. As of June 30, 2024, outstanding borrowings under the Credit Facility were $146.0 million. At any time during the term of the Credit Facility, we will be permitted to increase the commitments under the Credit Facility or to establish one or more incremental term loan facilities under the New Credit Facility in an aggregate principal amount not to exceed $200.0 million for all such incremental facilities. Commitments under the Credit Facility will terminate, and loans outstanding thereunder will mature, on February 8, 2028. For additional information, refer to Note 8. Borrowings to our Consolidated Financial Statements.

On February 24, 2020, we announced that our Board of Directors had authorized a share repurchase program of up to $100 million of our common stock. On April 28, 2022, we announced that our Board of Directors had increased the authorization by up to $150 million in additional aggregate value. At June 30, 2024, we have $72.7 million remaining that may yet be repurchased under our share repurchase program. The timing and amount of any shares repurchased will be determined by us based on our evaluation of market conditions and other factors, and will be made in accordance with applicable securities laws in either the open market or in privately negotiated transactions. We are not obligated to purchase any shares under the program, and the program may be suspended or discontinued at any time. The actual timing, number, and share price of shares repurchased will depend on a number of factors, including the market price of our common stock, general market and economic conditions, and applicable legal requirements. Any shares repurchased will be held as treasury stock. During the six months ended June 30, 2024 and 2023, the Company repurchased 1,432,989 and 733,438 shares of common stock, respectively, for a total of $25.0 million and of $12.5 million, respectively.

Cash flows from operating, investing, and financing activities as reflected in our Consolidated Statements of Cash Flows are summarized in the following table:

(in millions)

Operating Activities

Cash provided by operating activities adjusts net earnings for certain non-cash items, including impairment charges, depreciation expense, amortization of intangible assets, stock-based compensation, changes in deferred income taxes, and the effects of changes in operating assets and liabilities. Excluding non-cash items, the increase in cash provided by operating activities in 2024 is primarily due to an increase in net earnings driven by higher revenues and gross profit. In addition, cash provided by operating activities was favorably impacted by a reduction in working capital, partially offset by higher restructuring and incentive compensation payments in 2024.

Investing Activities

The cash provided by investing activities during 2024 was primarily driven by proceeds from the sale of intellectual property. In addition, capital expenditures were lower in 2024 as compared to 2023. The cash provided by investing activities during 2023 was primarily driven by proceeds from the sale of certain machinery and equipment, partially offset by capital expenditures to support product innovation and cost savings.

In 2024, we expect capital expenditures to be in the range of 2.0% to 3.0% of revenues.

Financing Activities

Cash used in financing activities during 2024 was primarily related to the $25.0 million of repurchases of common stock, the $14.0 million net borrowings of the revolving credit facility, and the $5.9 million payment of taxes related to net share settlement of equity awards. Cash used in financing activities during 2023 was primarily related to the $12.5 million of repurchases of common stock, the $6.1 million payment of taxes related to net share settlement of equity awards, and the $1.9 million payment of debt issuance costs, partially offset by proceeds of $1.6 million from the exercise of options.

Contingent Obligations

We are involved in various legal proceedings, claims, and investigations arising in the ordinary course of business. Legal contingencies are discussed in Note 13. Commitments and Contingent Liabilities to our Consolidated Financial Statements.

Critical Accounting Estimates

This discussion and analysis of results of operations and financial condition is based on our Consolidated Financial Statements, which have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses, and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates are revised periodically. Actual results could differ from these estimates.

The information concerning our critical accounting estimates can be found under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on February 21, 2024. There are no material changes in our previously reported critical accounting estimates.

Recent Accounting Standards

The issuance of recent accounting standards, as included in Note 2. Recent Accounting Standards to our Consolidated Financial Statements, is not expected to have a significant impact on our revenue, earnings, or liquidity.

During the six months ended June 30, 2024, there were no material changes to the information on market risk exposure disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. For a discussion of our exposure to market risk as of December 31, 2023, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in our Annual Report on Form 10-K for the year ended December 31, 2023.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our chief executive officer ("CEO") and chief financial officer ("CFO"), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the second quarter of 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company is in the process of reviewing the internal control structure of an acquired business and, if necessary, will make appropriate changes as we incorporate our controls and procedures into the recently acquired business.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by intentionally falsified documentation, by collusion of two or more individuals within Knowles or third parties, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

There have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.