Knowles Corp (KN) FY 2024 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.

Our Business

We are a leading manufacturer of specialty electronic components. We design parts that perform unique and critical functions for innovative technologies. Through extreme reliability, custom engineering, and scalable manufacturing, we enable businesses to succeed in the most demanding applications across medtech, defense, and industrial markets. Our high performance capacitors, radio frequency ("RF") and microwave filters, advanced medtech microphones, and balanced armature speakers, enhance the performance of our customers products to change, improve, and save lives. 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 December 27, 2024, the Company consummated the sale and assignment of certain assets and liabilities of the Company’s Consumer MEMS Microphones (“CMM”) business to Syntiant Corp. ("Syntiant") for approximately $150.0 million in total consideration, consisting of $70.0 million cash ($58.0 million in net cash received) as adjusted for agreed deductions for indebtedness, and working capital and $80.0 million in Syntiant Series D-2 preferred stock (with a fair value of $77.2 million), par value $0.0001. The Company provided $6.4 million in financing, which was utilized to fund Syntiant's requirement to have $40.0 million of cash on its balance sheet at closing. The Company will also share in certain separation costs pursuant to a credit, which Syntiant may apply to specified separation costs post-closing. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Part I, Item 1, "Financial Statements."

The CMM divestiture represents a strategic shift that will have a major effect on our operations and financial results. As a result, we have reclassified the results of operations and financial position of CMM to discontinued operations for all periods presented. Unless otherwise noted, our results of operations discussed below relate to continuing operations and will be impacted by the CMM divestiture.

This divestiture supports Knowles' continued transformation into an industrial technology company, consisting of its Precision Devices ("PD") and MedTech & Specialty Audio ("MSA") segments, primarily serving the defense, medtech, industrial, and electrification markets. We may incur some amount of dis-synergies following the sale of the CMM business due to the reduced size of our company and, as a result, we may undertake actions to help ensure that our cost structure is appropriate to support our remaining businesses.

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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. The acquired business is a manufacturer of film, electrolytic, and mica capacitors used in medtech, defense, and industrial electrification applications. 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."

Our Business Segments

At December 31, 2024, we had two reporting segments: (i) PD and (ii) MSA. These segments were determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 280 - Segment Reporting. We previously reflected our CMM business as a reportable segment; however, CMM's results were reclassified to discontinued operations in 2024 based on the Company's intention and eventual divestiture of this business. The results of operations and the related assets and liabilities for CMM have been classified as discontinued operations for all periods presented. The remaining 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, electrification, 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 balanced armature speakers and microphones 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.

Revenues for the year ended December 31, 2022 were significantly impacted by lower end market demand and an inventory correction in the 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 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.

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, 2024 compared with the Year Ended December 31, 2023

Revenues

2024 Versus 2023

Revenues for the year ended December 31, 2024 were $553.5 million, compared with $456.8 million for the year ended December 31, 2023, an increase of $96.7 million or 21.2%. PD revenues increased $78.6 million, primarily due to our acquisition of the CD business, partially offset by lower demand from the industrial market in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory. MSA revenues increased $18.1 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 and lower average pricing on mature products. In addition, revenues in the year ended December 31, 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.

2023 Versus 2022

Revenues for the year ended December 31, 2023 were $456.8 million, compared with $478.8 million for the year ended December 31, 2022, a decrease of $22.0 million or 4.6%. PD revenues decreased $21.5 million, primarily due to lower demand from the industrial, medtech, and defense markets as a result of continued demand weakness associated with excess customer and channel inventory and timing of shipments into the defense market, partially offset by our acquisition of CD. MSA revenues decreased $0.5 million primarily due to lower shipping volumes into the specialty audio market as customers reduced their inventory levels, partially offset by higher shipping volumes into the hearing health market. In addition, shipping volumes were unfavorably impacted in 2023 by financial incentives offered to customers resulting in higher shipping volumes in the fourth quarter of 2022.

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Cost of Goods Sold

2024 Versus 2023

Cost of goods sold ("COGS") for the year ended December 31, 2024 was $316.8 million, compared with $251.9 million for the year ended December 31, 2023, an increase of $64.9 million or 25.8%. This increase was primarily due to our acquisition of CD and lower factory capacity utilization in our legacy PD business, partially offset by product cost reductions and favorable MSA product mix.

2023 Versus 2022

Cost of goods sold ("COGS") for the year ended December 31, 2023 was $251.9 million, compared with $251.8 million for the year ended December 31, 2022, an increase of $0.1 million. This increase was primarily due to lower factory capacity utilization and our acquisition of CD, partially offset by product cost reductions, lower shipping volumes, and favorable foreign currency exchange rate changes.

Restructuring Charges

2024

During the year ended December 31, 2024, we recorded restructuring charges of $2.0 million related to headcount reductions and $1.4 million for costs associated with transferring certain capacitors manufacturing to existing facilities to further optimize operations within our PD segment. These actions resulted in restructuring charges of $1.9 million within Gross profit and $1.5 million within Operating expenses. For additional information, refer to Note 9. Restructuring and Related Activities to our Consolidated Financial Statements.

2023

During the year ended December 31, 2023, we recorded restructuring charges of $2.5 million for severance pay and benefits related to headcount reductions within our PD segment, and $0.8 million for other costs. For additional information, refer to Note 9. Restructuring and Related Activities to our Consolidated Financial Statements.

2022

During the year ended December 31, 2022, we recorded restructuring charges of $0.6 million for other costs within Operating expenses. For additional information, refer to Note 9. Restructuring and Related Activities to our Consolidated Financial Statements.

Gross Profit and Non-GAAP Gross Profit

2024 Versus 2023

Gross profit for the year ended December 31, 2024 was $234.8 million, compared with $203.8 million for the year ended December 31, 2023, an increase of $31.0 million or 15.2%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2024 was 42.4%, compared with 44.6% for the year ended December 31, 2023. The increase in gross profit was primarily due to our acquisition of CD, product cost reductions, favorable MSA product mix, and higher shipping volumes, partially offset by lower factory capacity utilization in our legacy PD business, lower average pricing on mature products in our MSA business, higher production transfer costs, and the amortization of fair value adjustments to inventory for the CD acquisition. The decrease in gross profit margin was primarily due to impacts of the acquisition of CD. Excluding the impacts of CD, gross profit margins increased primarily due to product cost reductions and favorable MSA product mix, partially offset by lower factory capacity utilization in our legacy PD business, lower average pricing on mature products in our MSA business, higher production transfer costs, and the amortization of fair value adjustments to inventory for the CD acquisition.

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Non-GAAP gross profit for the year ended December 31, 2024 was $245.4 million, compared with $207.7 million for the year ended December 31, 2023, an increase of $37.7 million or 18.2%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2024 was 44.3%, compared with 45.5% for the year ended December 31, 2023. The increase in non-GAAP gross profit was primarily due to our acquisition of CD, product cost reductions, favorable MSA product mix, and higher shipping volumes, partially offset by lower factory capacity utilization in our legacy PD business and lower average pricing on mature products in our MSA business. The decrease in non-GAAP gross profit margin was primarily due to impacts of the acquisition of CD. Excluding the impacts of CD, non-GAAP gross profit margins increased primarily due to product cost reductions and favorable MSA product mix, partially offset by lower factory capacity utilization in our legacy PD business and lower average pricing on mature products in our MSA business.

2023 Versus 2022

Gross profit for the year ended December 31, 2023 was $203.8 million, compared with $227.0 million for the year ended December 31, 2022, a decrease of $23.2 million or 10.2%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2023 was 44.6%, compared with 47.4% for the year ended December 31, 2022. The decrease in gross profit was primarily due to lower factory capacity utilization, lower shipping volumes, unfavorable product mix, and higher restructuring charges, partially offset by product cost reductions and favorable foreign currency exchange rate changes. The decrease in gross profit margin was primarily due to lower factory capacity utilization and unfavorable product mix product, partially offset by product cost reductions and favorable foreign currency exchange rate changes.

Non-GAAP gross profit for the year ended December 31, 2023 was $207.7 million, compared with $228.1 million for the year ended December 31, 2022, a decrease of $20.4 million or 8.9%. Non-GAAP gross profit margin for the year ended December 31, 2023 was 45.5%, compared with 47.6% for the year ended December 31, 2022. The decrease in non-GAAP gross profit was primarily due to lower factory capacity utilization, lower shipping volumes, and unfavorable product mix, partially offset by product cost reductions and favorable foreign currency exchange rate changes. The decrease in non-GAAP gross profit margin was primarily due to lower factory capacity utilization and unfavorable product mix, partially offset by product cost reductions and favorable foreign currency exchange rate changes.

Research and Development Expenses

2024 Versus 2023

Research and development expenses for the years ended December 31, 2024 and 2023 were $39.5 million and $32.4 million, respectively, an increase of $7.1 million or 21.9%. Research and development expenses as a percentage of revenues for the years ended December 31, 2024 and 2023 was 7.1%. The increase in expenses was primarily driven by our acquisition of the CD business, which increased expenses in our PD segment and additional development activities in our MSA segment. Expenses as a percentage of revenues remained constant.

2023 Versus 2022

Research and development expenses for the years ended December 31, 2023 and 2022 were $32.4 million and $29.3 million, respectively, an increase of $3.1 million or 10.6%. Research and development expenses as a percentage of revenues for the years ended December 31, 2023 and 2022 were 7.1% and 6.1%, respectively. The increase in expenses was primarily driven by additional development activities in both our MSA and PD segments as we continue to invest in our businesses. In addition, our acquisition of the CD business increased expenses in our PD segment. The increase in expenses as a percentage of revenues was driven by our increased investment and lower revenues.

Selling and Administrative Expenses

2024 Versus 2023

Selling and administrative expenses for the year ended December 31, 2024 were $142.0 million, compared with $125.8 million for the year ended December 31, 2023, an increase of $16.2 million or 12.9%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2024 and 2023 were 25.7% and 27.5%, respectively. The increase in expenses was primarily driven by our acquisition of CD, partially offset by lower professional fees and the benefits of PD restructuring actions taken in the prior year. The decrease in expenses as a percentage of revenues was driven by higher revenues, lower professional fees, and the benefits of PD restructuring actions taken in the prior year.

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2023 Versus 2022

Selling and administrative expenses for the year ended December 31, 2023 were $125.8 million, compared with $106.3 million for the year ended December 31, 2022, an increase of $19.5 million or 18.3%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2023 and 2022 were 27.5% and 22.2%, respectively. The increase in expenses was primarily driven by higher professional service fees and our acquisition of CD. The increase in expenses as a percentage of revenues was driven by an increase in expenses and our lower revenues.

Interest Expense, net

2024 Versus 2023

Interest expense, net for the year ended December 31, 2024 was $16.3 million, compared with $5.4 million for the year ended December 31, 2023, an increase of $10.9 million or 201.9%. The increase was primarily due to imputed interest expense on our Seller Note and a higher outstanding revolving credit facility balance as a result of the acquisition of CD. For additional information on borrowings and interest expense, refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

2023 Versus 2022

Interest expense, net for the year ended December 31, 2023 was $5.4 million, compared with $3.5 million for the year ended December 31, 2022, an increase of $1.9 million or 54.3%. The increase was primarily due to imputed interest expense on our Seller Note and a higher outstanding revolving credit facility balance as a result of the acquisition of CD. For additional information on borrowings and interest expense, refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Other Expense (Income), net

2024 Versus 2023

Other expense for the year ended December 31, 2024 was $0.8 million, compared with $0.7 million for the year ended December 31, 2023, a change of $0.1 million. Expense in both 2024 and 2023 is primarily due to unfavorable foreign currency exchange rate changes.

2023 Versus 2022

Other expense for the year ended December 31, 2023 was $0.7 million, compared with income of $0.4 million for the year ended December 31, 2022, a change of $1.1 million. Expense in 2023 primarily represents unfavorable foreign currency exchange rate impacts. Income in 2022 primarily represents favorable impacts from foreign currency exchange rate changes, partially offset by an adjustment to pre-spin-off pension obligations.

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

2024 Versus 2023

The effective tax rate ("ETR") for the year ended December 31, 2024 was 32.6% or a $11.3 million tax provision, compared with (75.9)% or a $28.3 million tax benefit for the year ended December 31, 2023. The change in the ETR was primarily due to the release of a portion of the valuation allowance in the U.S. and the impact of intangible property transfers recorded during 2023. 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, 2024 was 8.4% or a $7.7 million tax provision, compared with 22.1% or a $18.3 million tax provision for the year ended December 31, 2023. The change in the non-GAAP ETR was primarily due to increased utilization of foreign tax credits compared to the prior year. After the foreign tax credits have been fully utilized, we expect the future non-GAAP ETR to increase.

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2023 Versus 2022

The ETR for the year ended December 31, 2023 was (75.9)% or a $28.3 million tax benefit, compared with 24.3% or a $21.3 million tax provision for the year ended December 31, 2022. The change in the ETR was primarily due to the release of a portion of the valuation allowance in the U.S. and the impact of intangible property transfers in 2023. 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, 2023 was 22.1% or a $18.3 million tax provision, compared with 17.0% or a $20.4 million tax provision for the year ended December 31, 2022. The increase in the non-GAAP ETR was primarily due to lower pre-tax earnings and the loss of our Malaysian tax holiday.

Earnings from Continuing Operations

2024 Versus 2023

Earnings from continuing operations for the year ended December 31, 2024 was $23.4 million, compared with $65.6 million for the year ended December 31, 2023, a decrease of $42.2 million. As described above, the decrease is primarily due to income tax expense in 2024 compared to a benefit in 2023, higher operating expenses, and higher interest expense, partially offset by higher gross profit.

2023 Versus 2022

Earnings from continuing operations for the year ended December 31, 2023 was $65.6 million, compared with $66.4 million for the year ended December 31, 2022, a decrease of $0.8 million or 1.2%. As described above, the decrease is primarily due to lower gross profit, higher operating expenses, increased interest expense, and unfavorable foreign currency exchange rate impacts, partially offset by a favorable change in income taxes.

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

2024 Versus 2023

Earnings before interest and income taxes from continuing operations ("EBIT") for the year ended December 31, 2024 was $51.0 million, compared with $42.7 million for the year ended December 31, 2023, an increase of $8.3 million or 19.4%. EBIT margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2024 was 9.2%, compared with 9.3% for the year ended December 31, 2023. The increase in EBIT is primarily due to higher gross profit from the acquisition of CD, partially offset by higher operating expenses from the acquisition of CD. The decrease in EBIT margin is primarily due to higher operating expenses and impacts of the acquisition of CD on gross margins, partially offset by higher gross profit.

Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2024 was $107.9 million, compared with $88.2 million for the year ended December 31, 2023, an increase of $19.7 million or 22.3%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2024 was 19.5%, compared with 19.3% for the year ended December 31, 2023. The increase in Adjusted EBIT is primarily due to higher non-GAAP gross profit from the acquisition of CD, partially offset by higher non-GAAP operating expenses from the acquisition of CD. The increase in Adjusted EBIT margin was primarily due to higher non-GAAP gross profit, partially offset by higher non-GAAP operating expenses, and impacts of the acquisition of CD on gross margins.

2023 Versus 2022

EBIT for the year ended December 31, 2023 was $42.7 million, compared with $91.2 million for the year ended December 31, 2022, a decrease of $48.5 million or 53.2%. EBIT margin for the year ended December 31, 2023 was 9.3%, compared with 19.0% for the year ended December 31, 2022. The change is primarily due to lower gross profit, higher operating expenses, and unfavorable foreign currency exchange rate impacts.

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Adjusted EBIT from continuing operations for the year ended December 31, 2023 was $88.2 million, compared with $123.4 million for the year ended December 31, 2022, a decrease of $35.2 million or 28.5%. Adjusted EBIT margin for the year ended December 31, 2023 was 19.3%, compared with 25.8% for the year ended December 31, 2022. The decreases were primarily due to lower non-GAAP gross profit, higher non-GAAP operating expenses, and unfavorable foreign currency exchange rate impacts.

(Loss) Earnings from Discontinued Operations, net

2024 Versus 2023

Loss from discontinued operations for the year ended December 31, 2024 was $261.2 million, compared with earnings of $6.8 million for the year ended December 31, 2023. The decrease in earnings from discontinued operations was primarily driven by our goodwill impairment charges and unfavorable income tax changes, partially offset by the gain on sale of the CMM business and reduction in stock-based compensation expense. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements.

2023 Versus 2022

Earnings from discontinued operations for the year ended December 31, 2023 was $6.8 million, compared with a loss of $496.5 million for the year ended December 31, 2022. The increase in earnings from discontinued operations was primarily due to our goodwill impairment charges in 2022 that did not recur in 2023 and higher gross profit. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements.

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

2024 Versus 2023

Diluted earnings per share from continuing operations was $0.26 for the year ended December 31, 2024, compared with $0.72 for the year ended December 31, 2023, a decrease of $0.46. As described above, the decrease is primarily due to unfavorable income tax changes, higher operating expenses, and increased interest expense, partially offset by higher gross profit.

Non-GAAP diluted earnings per share for the year ended December 31, 2024 was $0.91, compared with $0.69 for the year ended December 31, 2023, an increase of $0.22. As described above, the increase was primarily due to higher non-GAAP gross profit and favorable income tax changes, partially offset by higher non-GAAP operating expenses and interest expense.

2023 Versus 2022

Diluted earnings per share from continuing operations was $0.72 for the years ended December 31, 2023 and 2022. As described above, the lower gross profit, higher operating expenses, increased interest expense, and unfavorable foreign currency exchange rate impacts were offset by a favorable change in income taxes.

Non-GAAP diluted earnings per share for the year ended December 31, 2023 was $0.69, compared with $1.05 for the year ended December 31, 2022, a decrease of $0.36. As described above, the decrease was primarily due to lower non-GAAP gross profit, higher non-GAAP operating expenses, increased interest expense, and unfavorable foreign currency exchange rate impacts.

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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 consolidate or migrate manufacturing to facilities primarily within the United States. These amounts are included in the corresponding Gross profit and Earnings from continuing operations before interest and income taxes for each period presented.

(3)    These expenses are related to the acquisition of Cornell Dubilier by the Precision Devices 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)    In 2024 and 2023, other expenses include non-recurring professional service fees related to the execution of various reorganization projects and foreign currency exchange rate impacts on restructuring balances. In 2022, Other expenses represent an adjustment to pre-spin-off pension obligations of $3.4 million, which was recorded in Other (income) expense, net, and the ongoing net lease cost related to facilities not used in operations.

(5)     Income tax effects of non-GAAP reconciling adjustments are calculated using the applicable tax rates in the jurisdictions of the underlying adjustments. In 2023, these adjustments include one-time tax benefits.

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

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

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Segment Results of Operations for the Year Ended December 31, 2024 Compared with the Year Ended December 31, 2023

Precision Devices

Revenues

2024 Versus 2023

PD revenues were $300.0 million for the year ended December 31, 2024, compared with $221.4 million for the year ended December 31, 2023, an increase of $78.6 million or 35.5%. Revenues increased due to our acquisition of the CD business, partially offset by lower demand from the industrial market in our legacy PD business as a result of continued demand weakness associated with excess customer and channel inventory.

2023 Versus 2022

PD revenues were $221.4 million for the year ended December 31, 2023, compared with $242.9 million for the year ended December 31, 2022, a decrease of $21.5 million or 8.9%. Revenues decreased primarily due to lower demand from the industrial, medtech, and defense markets, as a result of continued demand weakness associated with excess customer and channel inventory and timing of shipments into the defense market, partially offset by our acquisition of CD.

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

2024 Versus 2023

PD EBIT from continuing operations was $14.8 million for the year ended December 31, 2024, compared with $25.0 million for the year ended December 31, 2023, a decrease of $10.2 million or 40.8%. EBIT margin for the year ended December 31, 2024 was 4.9%, compared with 11.3% for the year ended December 31, 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. 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, lower factory capacity utilization in our legacy PD business, production transfer costs, and the amortization of fair value adjustments to inventory for the CD acquisition, partially offset by product cost reductions and factory productivity improvements in our legacy PD business.

PD Adjusted EBIT was $50.0 million for the year ended December 31, 2024, compared with $40.5 million for the year ended December 31, 2023, an increase of $9.5 million or 23.5%. Adjusted EBIT margin for the year ended December 31, 2024 was 16.7%, compared with 18.3% for the year ended December 31, 2023. The increase in Adjusted EBIT was primarily due to higher non-GAAP gross profit driven by the acquisition of CD, partially offset by higher non-GAAP operating expenses and lower non-GAAP gross profit margins from the acquisition of CD. The decrease in adjusted EBIT margin was primarily due to higher non-GAAP operating expenses and lower non-GAAP gross profit margins driven by the acquisition of CD. The increase in non-GAAP operating expenses was 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, partially offset by product cost reductions and factory productivity improvements in our legacy PD business.

2023 Versus 2022

PD EBIT from continuing operations was $25.0 million for the year ended December 31, 2023, compared with $56.1 million for the year ended December 31, 2022, a decrease of $31.1 million or 55.4%. EBIT margin for the year ended December 31, 2023 was 11.3%, compared with 23.1% for the year ended December 31, 2022. The decreases were primarily due to lower revenues, lower gross profit margin, and increased operating expenses, partially offset by the absence of adjustments to pre-spin-off pension obligations in 2023. The gross profit margin decrease was primarily driven by lower factory capacity utilization, partially offset by product cost reductions and a decrease in precious metal costs.

PD Adjusted EBIT was $40.5 million for the year ended December 31, 2023, compared with $67.9 million for the year ended December 31, 2022, a a decrease of $27.4 million or 40.4%. Adjusted EBIT margin for the year ended December 31, 2023 was 18.3%, compared with 28.0% for the year ended December 31, 2022. The decreases were primarily due to lower revenues and non-GAAP gross profit margin. The non-GAAP gross profit margin decrease was primarily driven by lower factory capacity utilization, partially offset by product cost reductions and a decrease in precious metal costs.

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MedTech & Specialty Audio

Revenues

2024 Versus 2023

MSA revenues were $253.5 million for the year ended December 31, 2024, compared with $235.4 million for the year ended December 31, 2023, an increase of $18.1 million or 7.7%. 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 and lower average pricing on mature products. In addition, revenues in the year ended December 31, 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.

2023 Versus 2022

MSA revenues were $235.4 million for the year ended December 31, 2023, compared with $235.9 million for the year ended December 31, 2022, a decrease of $0.5 million or 0.2%. Revenues decreased primarily due to lower shipping volumes into the specialty audio market and lower average pricing on mature products, partially offset by higher shipping volumes of hearing health products driven by stronger end market demand. In addition, revenues in the year ended December 31, 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 from Continuing Operations Before Interest and Income Taxes

2024 Versus 2023

MSA EBIT from continuing operations was $97.5 million for the year ended December 31, 2024, compared with $86.5 million for the year ended December 31, 2023, an increase of $11.0 million or 12.7%. EBIT margin for the year ended December 31, 2024 was 38.5%, compared with 36.7% for the year ended December 31, 2023. The increases were primarily due to due to improved operating leverage and the impacts of higher gross profit margins driven by favorable product mix, product cost reductions and favorable foreign currency exchange rates, partially offset by lower average pricing on mature products.

MSA Adjusted EBIT was $102.3 million for the year ended December 31, 2024, compared with $90.0 million for the year ended December 31, 2023, an increase of $12.3 million or 13.7%. Adjusted EBIT margin for the year ended December 31, 2024 was 40.4%, compared with 38.2% for the year ended December 31, 2023. The increases were primarily due to improved operating leverage and the impacts of higher non-GAAP gross profit margin driven by favorable product mix, product cost reductions and favorable foreign currency exchange rates, partially offset by lower average pricing on mature products.

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2023 Versus 2022

MSA EBIT from continuing operations was $86.5 million for the year ended December 31, 2023, compared with $85.7 million for the year ended December 31, 2022, an increase of $0.8 million or 0.9%. EBIT margin for the year ended December 31, 2023 was 36.7%, compared with 36.3% for the year ended December 31, 2022. The increases were primarily due to higher gross profit margin, partially offset by higher operating expenses. The higher gross profit margin was driven by product cost reductions and favorable foreign currency exchange rates, partially offset by lower factory capacity utilization.

MSA Adjusted EBIT was $90.0 million for the year ended December 31, 2023, compared with $88.6 million for the year ended December 31, 2022, an increase of $1.4 million or 1.6%. Adjusted EBIT margin for the year ended December 31, 2023 was 38.2%, compared with 37.6% for the year ended December 31, 2022. The increases were primarily due to higher non-GAAP gross profit margin, partially offset by higher non-GAAP operating expenses. The higher non-GAAP gross profit margin was driven by product cost reductions and favorable foreign currency exchange rates, partially offset by lower factory capacity utilization.

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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 typically held outside the United States. Our cash and cash equivalents totaled $130.1 million and $87.3 million at December 31, 2024 and 2023, respectively. Of these amounts, cash held by our non-U.S. operations totaled $92.4 million and $71.8 million as of December 31, 2024 and 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.

On December 27, 2024, we completed the sale of the CMM segment to Syntiant Corp. for approximately $142.4 million in total consideration, consisting of $58.0 million in net cash received, $1.6 million for estimated working capital adjustments, and Series D-2 preferred stock of Syntiant with a fair value of $77.2 million. We will also share in certain separation costs pursuant to a credit for up to $13.5 million, which the buyer may apply to specified separation costs post-closing. For additional information, refer to Note 2. Disposed and Discontinued Operations to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data.

On June 17, 2024 in anticipation of the CMM transaction, we entered into a Consent Memorandum with the administrative agent and our lenders under the A&R Credit Agreement (as defined below) regarding consents to certain conditions applicable to the disposition of assets. For additional information refer to Note 11. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data.".

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 under Item 8, "Financial Statements and Supplementary Data."

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 in 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 December 31, 2024, outstanding borrowings under the Credit Facility were $134.0 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 Revolving 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 11. Borrowings to our Consolidated Financial Statements.

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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 December 31, 2024, we have $44.0 million remaining that may yet be purchased 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 years ended December 31, 2024, 2023, and 2022 we repurchased 2,987,697, 2,851,604, and 2,339,045 shares of common stock, respectively, for a total of $53.7 million, $47.5 million, and $44.0 million, respectively.

On February 13, 2025, the Company announced that its Board of Directors had increased its share repurchase authorization by an additional $150 million in additional aggregate value.

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 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 higher revenues and gross profit. The increase was partially offset by higher 2024 payments for restructuring, interest, and income taxes.

Investing Activities

The cash provided by investing activities in 2024 is driven by the proceeds from the sale of our CMM business and proceeds from the sale of intellectual property, partially offset by capital expenditures and payments to finance the seller loan to Syntiant in conjunction with the sale of our CMM business. The cash used in investing activities during 2023 was primarily driven by the acquisition of CD and capital expenditures, partially offset by proceeds from the sale of certain machinery and equipment. The 2024 and 2023 capital expenditures supported product innovation and cost savings.

Our 2024, 2023, and 2022 capital expenditures attributable to continuing operations as a percentage of revenues (see Adjusted free cash flows below) were 2.1%, 2.7%, and 3.1%, respectively. In 2025, we expect capital expenditures to be in the range of 3% to 5% of revenues. We expect to fund these capital expenditures through our existing cash balances and cash flows from operating activities.

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Financing Activities

Cash used in financing activities during 2024 is primarily related to $53.7 million of repurchases of common stock, the $50.0 million payment on the CD Seller Note, $26.0 million net payments on the revolving credit facility, and $6.6 million payment of taxes related to net share settlement of equity awards, partially offset by proceeds of $5.8 million from the exercise of options. Cash provided by financing activities during 2023 is primarily related to $115.0 million net borrowings of revolving credit facility, partially offset by $47.5 million of repurchases of common stock and $6.2 million payment of taxes related to net share settlement of equity awards.

Adjusted Free Cash Flow

In addition to measuring cash flow generation based on the operating, investing, and financing classifications included in the Consolidated Statement of Cash Flows (including discontinued operations), Knowles also measures adjusted free cash flow and adjusted free cash flow as a percentage of revenues. Adjusted free cash flow is defined as non-GAAP net cash attributable to continuing operations less non-GAAP capital expenditures attributable to continuing operations. Non-GAAP net cash attributable to continuing operations is defined as net cash provided by operating activities less amounts attributable to discontinued operations. Non-GAAP capital expenditures attributable to continuing operations is defined as capital expenditures less amounts attributable to discontinued operations. Knowles believes these measures are helpful in measuring its cash generated from its continuing operations that is available to repay debt, fund acquisitions, and repurchase Knowles common stock. Adjusted free cash flow and adjusted 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, adjusted free cash flow and adjusted 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.

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

In 2024, we generated adjusted free cash flow of $93.8 million compared to adjusted free cash flow in 2023 of $66.9 million. The increase in adjusted free cash flow in 2024 compared to 2023 was primarily due to higher adjusted earnings from continuing operations before interest and income taxes. The increase was partially offset by higher 2024 cash payments for interest and income taxes.

In 2023, we generated adjusted free cash flow of $66.9 million compared to adjusted free cash flow in 2022 of $81.2 million. The decrease in adjusted free cash flow in 2023 compared to 2022 was primarily due to lower adjusted earnings from continuing operations before interest and income taxes. In addition, adjusted free cash flow was lower due to higher 2023 cash payments for income taxes and interest.

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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 14. 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, 2024 and the years when these obligations are expected to be due is as follows:

[table omitted - see filing]