Knowles Corp (KN) FY 2022 MD&A

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

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

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

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

Our Business

We are a market leader and global provider of advanced micro-acoustic microphones and balanced armature speakers, audio solutions, and high performance capacitors and radio frequency ("RF") filtering products, serving the medtech, defense, consumer electronics, electric vehicle, industrial, and communications 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.

Our Business Segments

During the fourth quarter of 2022, we determined each operating segment represents a single reportable segment; thus, we now report three segments. These segments were determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 280 - Segment Reporting and are comprised of (i) PD, (ii) MSA, and (iii) CMM. The segments are aligned around similar product applications serving our key end markets to enhance focus on end market growth strategies.

•PD Segment

Our PD segment specializes in the design and delivery of high performance capacitor products and RF solutions primarily serving the defense, medtech, electric vehicle, and industrial markets. PD has sales, support, and engineering facilities in North America, Europe, and Asia as well as manufacturing facilities in North America and Asia.

•MSA Segment

Our MSA segment designs and manufactures microphones and balanced armature speakers used in applications that serve the hearing health and premium audio markets. MSA has sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.

•CMM Segment

Our CMM segment designs and manufactures micro-electro-mechanical systems ("MEMS") microphones and audio solutions used in applications that primarily serve the ear, Internet of Things ("IoT"), computing, and smartphone markets. CMM has sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.

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

Revenues for the year ended December 31, 2022 were significantly impacted by lower consumer electronics end market demand and an inventory correction in both consumer electronics and hearing health markets in the second half of 2022. As a result, the Company offered financial incentives to customers in the fourth quarter of 2022 for certain dual-sourced products. The Company expects continued weak consumer end market demand and customer inventory adjustments in the first quarter of 2023. The additional revenues as a result of these financial incentives in the fourth quarter of 2022 were less than 2% of revenues for the year ended December 31, 2022 and could have an unfavorable impact to revenues in the first quarter of 2023.

COVID-19 Impact

The COVID-19 pandemic continues to have widespread, rapidly-evolving, and unpredictable impacts in the U.S. and international markets. During 2022, continued containment and mitigation measures, particularly in China, resulted in global business disruption. These measures have impacted our business operations, results of operations, customer demand, and the productivity of our facilities.

The situation related to COVID-19 continues to be complex and dynamic. We cannot reasonably estimate the duration of the pandemic or fully ascertain its impact to our future results. As the COVID-19 pandemic evolves, we will continue to actively monitor developments and business conditions and may take actions that alter business operations as may be required by applicable authorities or that we determine are in the best interests of our employees, customers, suppliers, stockholders, and communities. It is not clear what potential effects any such alterations or modifications may have on our business, including the effects on our financial results.

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to Part II, Item 7. 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, 2021, which was filed with the SEC on February 9, 2022.

Non-GAAP Financial Measures

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

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Results of Operations for the Year Ended December 31, 2022 compared with the Year Ended December 31, 2021

Revenues

Revenues for the year ended December 31, 2022 were $764.7 million, compared with $868.1 million for the year ended December 31, 2021, a decrease of $103.4 million or 11.9%. CMM revenues decreased $143.8 million, primarily due to lower demand for MEMS microphones in the mobile, computing, and IoT markets. The decreases in these markets were primarily driven by weak global demand for consumer electronics, COVID-19 related shutdowns in China, excess inventory in the supply chain, and our shift away from commoditized products, partially offset by higher shipping volumes associated with customer incentives. CMM revenues were also impacted by lower average pricing on mature products. MSA revenues decreased $1.4 million, primarily due to lower average pricing on mature products and lower demand for premium audio products, partially offset by higher shipping volumes into the hearing health market, which were associated with customer incentives. PD revenues increased $41.8 million due to growth from the defense, medtech, communications, and industrial markets, along with our acquisition of IMC.

Cost of Goods Sold

Cost of goods sold ("COGS") for the year ended December 31, 2022 was $456.2 million, compared with $508.6 million for the year ended December 31, 2021, a decrease of $52.4 million or 10.3%. This decrease was primarily due to lower shipping volumes, product cost reductions, benefits of the CMM restructuring actions, and favorable foreign currency exchange rate changes, partially offset by lower factory capacity utilization in our CMM segment.

Restructuring Charges

We undertake restructuring programs from time to time to better align our operations with current market conditions. Such activities include facility consolidations, headcount reductions, and other measures to further optimize operations. We may have restructuring charges in the future as we continuously evaluate our operational footprint. Details regarding restructuring programs undertaken during the reporting period are as follows:

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During the year ended December 31, 2022, we committed to two restructuring programs within our CMM segment designed to rightsize manufacturing capacity and operating expenses in the MEMS microphones product line. These actions were taken in light of the current decline in demand and the reduction in the expected future growth for global consumer electronics. In addition, these restructuring programs further the Company's previously announced strategy to reduce exposure to commodity microphones and increase emphasis on high-value solutions. These actions resulted in the settlement of supplier obligations, non-cash fixed asset write-offs, and severance pay. We recorded restructuring charges of $39.0 million related to these actions and $0.6 million for other costs. In addition, we recorded restructuring charges of $2.2 million to rationalize the Intelligent Audio product line workforce, which is also included within the CMM segment. As a result, we recorded total restructuring charges of $32.2 million within Gross profit and $9.6 million within Operating expenses. For additional information, refer to Note 10. Restructuring and Related Activities to our Consolidated Financial Statements.

During the year ended December 31, 2021, there were $0.5 million in restructuring charges within Operating expenses related to a reduction in workforce. These charges were primarily for actions associated with our Intelligent Audio product line, which is included in our CMM segment.

Gross Profit and Non-GAAP Gross Profit

Gross profit for the year ended December 31, 2022 was $276.3 million, compared with $359.5 million for the year ended December 31, 2021, a decrease of $83.2 million or 23.1%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2022 was 36.1%, compared with 41.4% for the year ended December 31, 2021. The decreases were primarily due to restructuring charges, lower factory capacity utilization in our CMM segment, and lower average pricing on mature products, partially offset by product cost reductions, benefits of the CMM segment restructuring actions, and net favorable foreign currency exchange rate changes.

Non-GAAP gross profit for the year ended December 31, 2022 was $310.1 million, compared with $362.1 million for the year ended December 31, 2021, a decrease of $52.0 million or 14.4%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2022 was 40.6%, compared with 41.7% for the year ended December 31, 2021. The decreases were primarily due to lower factory capacity utilization in our CMM segment and lower average pricing on mature products, partially offset by product cost reductions, benefits of the CMM segment restructuring actions, and net favorable foreign currency exchange rate changes.

Research and Development Expenses

Research and development expenses for the years ended December 31, 2022 and 2021 were $81.7 million and $92.8 million, respectively, a decrease of $11.1 million or 12.0%. Research and development expenses as a percentage of revenues for the years ended December 31, 2022 and 2021 were 10.7%. The decrease in expenses was primarily driven by reduced development activities and lower incentive compensation costs in our CMM segment, partially offset by increased development activities in our PD and MSA segments.

Selling and Administrative Expenses

Selling and administrative expenses for the year ended December 31, 2022 were $128.9 million, compared with $146.4 million for the year ended December 31, 2021, a decrease of $17.5 million or 12.0%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2022 and 2021 were 16.9%. The decrease in expenses were primarily driven by lower incentive compensation costs, intangible amortization, stock-based compensation, a reduction of our deferred compensation liability, and lower legal expenses related to the protection of our intellectual property. For additional information on stock-based compensation, refer to Note 14. Equity Incentive Program to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." These decreases were partially offset by the normal operational expenses related to our IMC acquisition and increased travel activity.

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Impairment Charges

Impairment charges for the year ended December 31, 2022 were $470.9 million, related to goodwill impairment charges for the CMM reporting unit. The impairment charges for the year ended December 31, 2021 were $4.0 million and related to facilities in our Intelligent Audio product line. For additional information related to these impairment charges, refer to Note 4. Impairment Charges to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Interest Expense, net

Interest expense, net for the year ended December 31, 2022 was $3.9 million, compared with $14.2 million for the year ended December 31, 2021, a decrease of $10.3 million or 72.5%. The decrease was primarily due to lower outstanding borrowings. For additional information on borrowings and interest expense, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Other Income, net

Other income for the year ended December 31, 2022 was $0.5 million, compared with income of $3.0 million for the year ended December 31, 2021, a change of $2.5 million. The change is primarily due an adjustment to pre-spin-off pension obligations and the unrealized losses in our investment balances, partially offset by favorable impacts from foreign currency exchange rate changes.

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

The effective tax rate ("ETR") for the year ended December 31, 2022 was (2.8)% or a $11.9 million tax provision, compared with (43.6)% or a $45.6 million tax benefit for the year ended December 31, 2021. The change in the ETR was primarily due to the nondeductible goodwill impairment recorded during 2022 compared to the $59.1 million benefit in 2021 related to the release of a significant portion of the valuation allowance in the U.S. The change in ETR was also impacted by the mix of earnings and losses by taxing jurisdictions.

The non-GAAP ETR for the year ended December 31, 2022 was 13.9% or a $19.2 million tax provision, compared with 11.9% or a $19.8 million tax provision for the year ended December 31, 2021. The increase in the non-GAAP ETR was primarily due to the mix of earnings and losses by taxing jurisdictions, combined with lowered earnings in taxing jurisdictions with tax holidays.

The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions where we generate taxable income or loss and the favorable impact of our tax holidays in Malaysia and China. During the fourth quarter of 2021, our existing significant tax holiday in Malaysia was extended through December 31, 2026, while our tax holiday in China granted during 2022 will expire on December 31, 2023. In order to maintain these reduced rates, the Company is subject to our annual satisfaction of certain conditions. The conditions related to our Chinese holiday were met, however, as a result of the rapid decline in current demand for global consumer electronics during 2022, we will not satisfy all the conditions of our tax holiday in Malaysia. As such, we are not including this tax holiday benefit in our 2022 GAAP effective tax rate. We are currently in appeal discussions with the Malaysian tax authorities regarding revised conditions. The Company has no reason to believe that it will not be successful in negotiating revised conditions with the Malaysian tax authorities to secure a favorable rate in the jurisdiction through 2026. However, there can be no assurance that we will be successful in reaching an agreement with the Malaysian authorities. If we are unsuccessful in reaching an agreement to extend our tax holiday in Malaysia, we anticipate that our effective tax rate in future years will be negatively impacted. For additional information on these tax holidays, see Note 13. Income Taxes to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data."

(Loss) Earnings from Continuing Operations

Loss from continuing operations for the year ended December 31, 2022 was $430.1 million, compared with earnings of $150.2 million for the year ended December 31, 2021, a decrease of $580.3 million. As described above, the decrease is primarily due to increased impairment charges and lower gross profit.

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(Loss) Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes

Loss before interest and income taxes from continuing operations for the year ended December 31, 2022 was $414.3 million, compared with earnings of $118.8 million for the year ended December 31, 2021, a decrease of $533.1 million or 448.7%. (Loss) earnings from continuing operations before interest and income taxes ("EBIT") margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2022 was (54.2)%, compared with 13.7% for the year ended December 31, 2021. The decrease was primarily due to increased impairment charges and lower gross profit.

Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2022 was $142.4 million, compared with $174.3 million for the year ended December 31, 2021, a decrease of $31.9 million or 18.3%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2022 was 18.6%, compared with 20.1% for the year ended December 31, 2021. The decrease in Adjusted EBIT and Adjusted EBIT margin was primarily due to lower non-GAAP gross profit, partially offset by lower non-GAAP operating expenses.

Earnings from Discontinued Operations, net

There was no activity during 2022. We recorded a tax benefit of $0.2 million for the year ended December 31, 2021, related to the Speaker and Receiver Product Line.

Diluted (Loss) Earnings per Share from Continuing Operations and Non-GAAP Diluted Earnings per Share

Diluted loss per share from continuing operations was $4.69 for the year ended December 31, 2022, compared with earnings of $1.59 for the year ended December 31, 2021, a decrease of $6.28. As described above, the decrease was primarily due to increased impairment charges and lower gross profit.

Non-GAAP diluted earnings per share for the year ended December 31, 2022 was $1.26, compared with $1.53 for the year ended December 31, 2021, a decrease of $0.27. As described above, the decrease was primarily due to lower non-GAAP gross profit, partially offset by lower non-GAAP operating expenses.

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

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

(2)    Production transfer costs represent duplicate costs incurred to migrate manufacturing to facilities primarily in Asia. These amounts are included in the corresponding Gross profit and Earnings from continuing operations before interest and income taxes for each period presented.

(3)    In 2022, Other expenses represent an adjustment to pre-spin-off pension obligations of $3.4 million, which was recorded during the second quarter of 2022 in the Other (income) expense, net line on the Consolidated Statements of Earnings, and the ongoing net lease cost related to facilities not used in operations. In 2021, Other expenses represent the ongoing net lease cost related to facilities not used in operations and expenses related to the acquisition of IMC by the PD segment. In 2020, Other expenses represent the ongoing net lease cost related to facilities not used in operations and expenses related to shareholder activism.

(4) Under GAAP in effect for the Company through 2021, certain convertible debt instruments that may be settled in cash (or other assets) upon conversion were required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflected the issuer’s nonconvertible debt borrowing rate. Accordingly, for GAAP purposes we were required to recognize imputed interest expense on the Company’s $172.5 million of convertible senior notes due November 1, 2021 that were issued in a private placement in May 2016. The imputed interest rate for the convertible notes was 8.12%, while the actual coupon interest rate of the notes was 3.25%. The difference between the imputed interest expense and the coupon interest expense was excluded from management’s assessment of the Company’s operating performance because management believes that this non-cash expense was not indicative of its core, ongoing operating performance.

(5)    Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments. In 2021, these adjustments include a valuation allowance release of $59.1 million for our U.S. subsidiaries.

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

(7)    The number of shares used in the diluted per share calculations on a non-GAAP basis excludes the impact of stock-based compensation expense expected to be incurred in future periods and not yet recognized in the financial statements, which would otherwise be assumed to be used to repurchase shares under the GAAP treasury stock method. In addition, the Company entered into convertible note hedge transactions that expired upon maturity of the convertible notes to offset any potential dilution from the convertible notes. Although the anti-dilutive impact of the convertible note hedges is not reflected under GAAP, the Company includes the anti-dilutive impact of the convertible note hedges in non-GAAP diluted average shares outstanding, if applicable.

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Segment Results of Operations for the Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

Precision Devices

Revenues

2022 Versus 2021

PD revenues were $242.9 million for the year ended December 31, 2022, compared with $201.1 million for the year ended December 31, 2021, an increase of $41.8 million or 20.8%. Revenues increased due to growth from the defense, medtech, communications, and industrial markets, along with our acquisition of IMC.

2021 Versus 2020

PD revenues were $201.1 million for the year ended December 31, 2021, compared with $173.1 million for the year ended December 31, 2020, an increase of $28.0 million or 16.2%. Revenues increased due to organic growth and our acquisition of IMC. The organic growth was driven by higher demand from the industrial, medtech, and electric vehicle markets, partially offset by decreased demand in the communications and defense markets. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.

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

2022 Versus 2021

PD EBIT from continuing operations was $56.1 million for the year ended December 31, 2022, compared with $43.7 million for the year ended December 31, 2021, an increase of $12.4 million or 28.4%. EBIT margin for the year ended December 31, 2022 was 23.1%, compared with 21.7% for the year ended December 31, 2021. The increases were primarily due to higher revenues and higher gross profit margins, partially offset by an increase in operating expenses and an adjustment to pre-spin-off pension obligations. The gross profit margin increase was primarily driven by product cost reductions, contributions from our acquisition of IMC, and favorable product mix.

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PD Adjusted EBIT was $67.9 million for the year ended December 31, 2022, compared with $52.5 million for the year ended December 31, 2021, an increase of $15.4 million or 29.3%. Adjusted EBIT margin for the year ended December 31, 2022 was 28.0%, compared with 26.1% for the year ended December 31, 2021. The increases were primarily due to higher revenues and higher non-GAAP gross profit margins, partially offset by an increase in non-GAAP operating expenses. The non-GAAP gross profit margin increase was primarily driven by product cost reductions, contributions from our acquisition of IMC, and favorable product mix.

2021 Versus 2020

PD EBIT from continuing operations was $43.7 million for the year ended December 31, 2021, compared with $31.7 million for the year ended December 31, 2020, an increase of $12.0 million or 37.9%. EBIT margin for the year ended December 31, 2021 was 21.7%, compared with 18.3% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher gross profit margin, and contributions from our acquisition of IMC, partially offset by increases in intangible amortization, stock-based compensation, and incentive compensation. The gross profit margin increase was driven by benefits of productivity initiatives, net favorable inventory reserve adjustments, an increase in average selling prices, and higher factory utilization, partially offset by higher precious metals cost and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

PD Adjusted EBIT was $52.5 million for the year ended December 31, 2021, compared with $35.2 million for the year ended December 31, 2020, an increase of $17.3 million or 49.1%. Adjusted EBIT margin for the year ended December 31, 2021 was 26.1%, compared with 20.3% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher non-GAAP gross profit margin, and contributions from our acquisition of IMC, partially offset by increases in incentive compensation. The non-GAAP gross profit margin increase was driven by benefits of productivity initiatives, net favorable inventory reserve adjustments, an increase in average selling prices, and higher factory utilization, partially offset by higher precious metals cost and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

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MedTech & Specialty Audio

Revenues

2022 Versus 2021

MSA revenues were $229.9 million for the year ended December 31, 2022, compared with $231.3 million for the year ended December 31, 2021, a decrease of $1.4 million or 0.6%. Revenues decreased primarily due to lower average pricing on mature products and lower demand for premium audio products, partially offset by higher shipping volumes into the hearing health market, which were associated with customer incentives.

2021 Versus 2020

MSA revenues were $231.3 million for the year ended December 31, 2021, compared with $173.6 million for the year ended December 31, 2020, an increase of $57.7 million or 33.2%. Revenues increased primarily due to higher shipping volumes as market conditions improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by increased shipments into the hearing health market, exceeding pre-pandemic levels.

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

2022 Versus 2021

MSA EBIT from continuing operations was $84.6 million for the year ended December 31, 2022, compared with $77.0 million for the year ended December 31, 2021, an increase of $7.6 million or 9.9%. EBIT margin for the year ended December 31, 2022 was 36.8%, compared with 33.3% for the year ended December 31, 2021. The increases were primarily due to higher gross profit margin and a reduction in legal expenses in connection with the protection of our intellectual property. The higher gross profit margin was driven by product cost reductions, favorable foreign currency exchange rate changes, and product mix, partially offset by lower average pricing on mature products, inflationary impacts, and increased depreciation expense.

MSA Adjusted EBIT was $87.5 million for the year ended December 31, 2022, compared with $79.5 million for the year ended December 31, 2021, an increase of $8.0 million or 10.1%. Adjusted EBIT margin for the year ended December 31, 2022 was 38.1%, compared with 34.4% for the year ended December 31, 2021. The increases were primarily due to higher non-GAAP gross profit margin and a reduction in legal expenses in connection with the protection of our intellectual property. The higher non-GAAP gross profit margin was driven by product cost reductions, favorable foreign currency exchange rate changes, and product mix, partially offset by lower average pricing on mature products, inflationary impacts, and increased depreciation expense.

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2021 Versus 2020

MSA EBIT from continuing operations was $77.0 million for the year ended December 31, 2021, compared with $22.3 million for the year ended December 31, 2020, an increase of $54.7 million or 245.3%. EBIT margin for the year ended December 31, 2021 was 33.3%, compared with 12.8% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher gross profit margin, and lower legal expenses in connection with the protection of our intellectual property, partially offset by increases in incentive compensation. The gross profit margin increase was driven by favorable product mix, product cost reductions, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

MSA Adjusted EBIT was $79.5 million for the year ended December 31, 2021, compared with $26.0 million for the year ended December 31, 2020, an increase of $53.5 million or 205.8%. Adjusted EBIT margin for the year ended December 31, 2021 was 34.4%, compared with 15.0% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher non-GAAP gross profit margin, and lower legal expenses in connection with the protection of our intellectual property, partially offset by increases in incentive compensation. The non-GAAP gross profit margin increase was driven by favorable product mix, product cost reductions, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

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Consumer MEMS Microphones

Revenues

2022 Versus 2021

CMM revenues were $291.9 million for the year ended December 31, 2022, compared with $435.7 million for the year ended December 31, 2021, a decrease of $143.8 million or 33.0%. Revenues decreased primarily due to lower demand for MEMS microphones in the mobile, computing, and IoT markets. The decreases in these markets were primarily driven by weak global demand for consumer electronics, COVID-19 related shutdowns in China, excess inventory in the supply chain, and our shift away from commoditized products, partially offset by higher shipping volumes associated with customer incentives. Revenues were also impacted by lower average pricing on mature products.

2021 Versus 2020

CMM revenues were $435.7 million for the year ended December 31, 2021, compared with $417.6 million for the year ended December 31, 2020, an increase of $18.1 million or 4.3%. Revenues increased primarily due to higher shipping volumes as market conditions improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by increased shipments into the IoT and computing markets, with the computing market benefiting from the work-from-home and remote-learning trends. The increased demand was partially offset by lower average pricing on mature products and supply constraints.

(Loss) Earnings and Adjusted Earnings from Continuing Operations Before Interest and Income Taxes

2022 Versus 2021

CMM loss before interest and income taxes from continuing operations was $504.5 million for the year ended December 31, 2022, compared with EBIT of $60.0 million for the year ended December 31, 2021, a decrease of $564.5 million or 940.8%. EBIT margin for the year ended December 31, 2022 was a loss of 172.8%, compared to 13.8% for the year ended December 31, 2021. The decrease was primarily due to higher impairment charges, lower revenues, increased restructuring charges, and lower gross profit margin, partially offset by lower operating expenses and reduced intangible amortization. The lower gross profit margin was driven by increased restructuring charges, lower factory capacity utilization, unfavorable product mix, and lower average pricing on mature products, partially offset by benefits of the restructuring actions, favorable foreign currency exchange rate changes, and product cost reductions.

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CMM Adjusted EBIT was $20.0 million for the year ended December 31, 2022, compared with $84.1 million for the year ended December 31, 2021, a decrease of $64.1 million or 76.2%. Adjusted EBIT margin for the year ended December 31, 2022 was 6.9%, compared with 19.3% for the year ended December 31, 2021. The decrease was primarily due to lower revenues and lower non-GAAP gross profit margin, partially offset by lower non-GAAP operating expenses. The lower non-GAAP gross profit margin was driven by lower factory capacity utilization, unfavorable product mix, and lower average pricing on mature products, partially offset by benefits of the restructuring actions, favorable foreign currency exchange rate changes, and product cost reductions.

2021 Versus 2020

CMM EBIT from continuing operations was $60.0 million for the year ended December 31, 2021, compared with $22.6 million for the year ended December 31, 2020, an increase of $37.4 million or 165.5%. EBIT margin for the year ended December 31, 2021 was 13.8%, compared to 5.4% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher gross profit margin, lower restructuring charges, reduced operating expenses, and a reduction of impairment charges. The gross profit margin increase was driven by product cost reductions, favorable product mix, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line.

CMM Adjusted EBIT was $84.1 million for the year ended December 31, 2021, compared with $59.0 million for the year ended December 31, 2020, an increase of $25.1 million or 42.5%. Adjusted EBIT margin for the year ended December 31, 2021 was 19.3%, compared with 14.1% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced non-GAAP operating expenses. The non-GAAP gross profit margin increase was driven by product cost reductions, favorable product mix, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity improved due to our factories returning to pre-pandemic production levels. Our reduction in non-GAAP operating expenses was primarily driven by headcount reductions in our Intelligent Audio product line.

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Liquidity and Capital Resources

Historically, we have generated and expect to continue to generate positive cash flow from operations. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access to capital markets. We believe that our future cash flow from operations and access to capital markets will provide adequate resources to fund our working capital needs, capital expenditures, strategic investments, and share repurchases. We have secured a revolving line of credit 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 $48.2 million and $68.9 million at December 31, 2022 and 2021, respectively. Of these amounts, cash held by our non-U.S. operations totaled $40.0 million and $64.9 million as of December 31, 2022 and 2021, 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.

On May 3, 2021, we acquired all of the outstanding shares of common stock of IMC for $81.4 million. The acquired business provides RF filters to the defense, industrial, and communications markets. The acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisition to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

On September 4, 2020, we entered into a Credit Agreement (the "2020 Credit Agreement"), which provided for a senior secured revolving credit facility (the "2020 Credit Facility") with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. At any time during the term of the 2020 Credit Facility, we were permitted to increase the commitments under the 2020 Credit Facility or to establish one or more incremental term loan facilities under the 2020 Credit Facility in an aggregate principal amount not to exceed $200.0 million for all such incremental facilities. Commitments under the 2020 Credit Facility were set to terminate, and loans outstanding thereunder were set to mature, on January 2, 2024. On February 8, 2023 we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") that, among other things, amends and restates the 2020 Credit Agreement and extends the maturity date of the 2020 Credit Facility to February 8, 2028. For additional information, refer to Note 12. Borrowings and Note 20. Subsequent Events to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

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. 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 years ended December 31, 2022, 2021, and 2020 we repurchased 2,339,045, 2,139,413, and 1,078,363 shares of common stock, respectively, for a total of $44.0 million, $44.5 million, and $16.2 million, respectively.

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Cash flows from operating, investing, and financing activities as reflected in our Consolidated Statements of Cash Flows are presented on a consolidated basis (including discontinued operations). Cash flows are summarized in the following table:

Operating Activities

Cash provided by operating activities reflects net earnings adjusted for certain non-cash items, including impairment charges, depreciation expense, amortization of intangible assets, stock-based compensation, restructuring charges, changes in deferred income taxes, and the effects of changes in operating assets and liabilities. The decrease in cash provided by operating activities for 2022 as compared to 2021 was primarily due to the lower net earnings compared to the prior period and the unfavorable changes in working capital. The lower net earnings were largely driven by lower revenues and the unfavorable changes in working capital were primarily driven by a decrease in accounts payable, partially offset by a decrease in accounts receivable. These working capital changes are attributable to the timing of vendor payments and lower customer demand in the fourth quarter. In addition, incentive compensation payments were larger in 2022 when compared to 2021.

Investing Activities

Cash used in investing activities is primarily used for capital expenditures and acquisitions. Capital expenditures support our manufacturing capacity expansion, development of new products, advances in our technology, future growth, and achievement of operating efficiencies. Capital expenditures were $32.1 million and $48.6 million for the years ended December 31, 2022 and 2021, respectively. The cash used in investing activities during 2022 was primarily driven by capital expenditures to support our development of new products and operating efficiencies. The cash used in investing activities during 2021 was driven by the acquisition of IMC and capital expenditures to support our manufacturing capacity expansion. Our investment activities in 2022 and 2021 were funded by our positive cash flow from operating activities.

Our 2022 and 2021 capital expenditures as a percentage of revenues were 4.2% and 5.6%, respectively. In 2023, we expect capital expenditures to be in the range of 4.0% to 5.0% of revenues. We expect to fund these capital expenditures through our existing cash balances and cash flows from operating activities.

Financing Activities

Cash used in financing activities during 2022 is primarily related to the $44.0 million of repurchases of common stock, $25.0 million net repayment of revolving credit facility, and the $6.9 million payment of taxes related to net share settlement of equity awards, partially offset by proceeds of $7.5 million from the exercise of options. Cash used in financing activities during 2021 was primarily related to the $172.5 million principal payment on the convertible senior notes, the $44.5 million used to repurchase shares of our common stock in the open market, and the $7.7 million payment of taxes related to net share settlement of equity awards, partially offset by the $70.0 million of borrowings under our revolving credit facility and proceeds of $25.6 million from the exercise of options.

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Free Cash Flow

In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure free cash flow and free cash flow as a percentage of revenues. Free cash flow is calculated as cash flow provided by operating activities less capital expenditures. Our management believes these measures are useful in measuring our cash generated from operations that is available to repay debt, fund acquisitions, and repurchase Knowles’ common stock. Free cash flow and free cash flow as a percentage of revenues are not presented in accordance with GAAP and may not be comparable to similarly titled measures used by other companies in our industry. As such, free cash flow and free cash flow as a percentage of revenues should not be considered in isolation from, or as an alternative to, any other liquidity measures determined in accordance with GAAP.

Our PD segment is not typically subject to seasonality. Our MSA segment tends to have stronger revenues in the fourth quarter of each fiscal year, while our CMM segment, which serves the consumer electronics market, varies based on the timing of OEM product launches and can impact our quarterly revenues, earnings, and cash flow.

The following table reconciles our free cash flow to cash flow provided by operating activities:

In 2022, we generated free cash flow of $54.2 million, representing 7.1% of revenues, compared to free cash flow in 2021 of $133.5 million, representing 15.4% of revenues. The decrease in free cash flow in 2022 compared to 2021 was primarily due to lower net earnings and the unfavorable changes in working capital, partially offset by a decrease in capital expenditures.

Contingent Obligations

From time to time, we are involved in various legal proceedings and claims arising in the ordinary course of its business. Legal contingencies are discussed in Note 15. Commitments and Contingent Liabilities to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Contractual Obligations and Off-Balance Sheet Arrangements

A summary of our significant contractual obligations and commitments as of December 31, 2022 and the years when these obligations are expected to be due is as follows:

[table omitted - see filing]