Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018.
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 001-36102
Knowles Corporation
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 90-1002689 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1151 Maplewood Drive | |
Itasca, Illinois | 60143 |
(Address of principal executive offices) | (Zip Code) |
(630) 250-5100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| |
Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares outstanding of the registrant’s common stock as of July 26, 2018 was 90,100,292.
Knowles Corporation
Form 10-Q
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except share and per share amounts)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues | $ | 188.4 |
|
| $ | 164.4 |
| | $ | 366.9 |
| | $ | 332.7 |
|
Cost of goods sold | 115.1 |
| | 100.4 |
| | 228.3 |
| | 205.1 |
|
Impairment charges | — |
| | 1.4 |
| | — |
| | 1.4 |
|
Restructuring charges - cost of goods sold | 0.1 |
| | (0.6 | ) | | 0.1 |
| | 3.7 |
|
Gross profit | 73.2 |
| | 63.2 |
| | 138.5 |
| | 122.5 |
|
Research and development expenses | 25.4 |
| | 24.7 |
| | 50.2 |
| | 48.7 |
|
Selling and administrative expenses | 37.1 |
| | 33.9 |
| | 72.9 |
| | 67.3 |
|
Impairment charges | — |
| | 19.9 |
| | — |
| | 19.9 |
|
Restructuring charges | 0.5 |
| | 2.7 |
| | 0.9 |
| | 3.3 |
|
Operating expenses | 63.0 |
| | 81.2 |
| | 124.0 |
| | 139.2 |
|
Operating earnings (loss) | 10.2 |
| | (18.0 | ) | | 14.5 |
| | (16.7 | ) |
Interest expense, net | 4.1 |
| | 5.1 |
| | 8.1 |
| | 10.3 |
|
Other expense, net | 0.3 |
| | 1.1 |
| | 0.2 |
| | 2.7 |
|
Earnings (loss) before income taxes and discontinued operations | 5.8 |
| | (24.2 | ) | | 6.2 |
| | (29.7 | ) |
Provision for income taxes | 1.4 |
| | 6.7 |
| | 2.2 |
| | 6.2 |
|
Earnings (loss) from continuing operations | 4.4 |
| | (30.9 | ) | | 4.0 |
| | (35.9 | ) |
Earnings from discontinued operations, net | 0.2 |
| | 1.2 |
| | 0.3 |
| | 3.0 |
|
Net earnings (loss) | $ | 4.6 |
| | $ | (29.7 | ) | | $ | 4.3 |
|
| $ | (32.9 | ) |
| | | | | | | |
Earnings (loss) per share from continuing operations: | | | | | | | |
Basic | $ | 0.05 |
|
| $ | (0.35 | ) | | $ | 0.04 |
|
| $ | (0.40 | ) |
Diluted | $ | 0.05 |
| | $ | (0.35 | ) | | $ | 0.04 |
| | $ | (0.40 | ) |
| | | | | | | |
Earnings per share from discontinued operations: | | | | | | | |
Basic | $ | — |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | 0.03 |
|
Diluted | $ | — |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | 0.03 |
|
| | | | | | | |
Net earnings (loss) per share: | | | | | | | |
Basic | $ | 0.05 |
| | $ | (0.33 | ) | | $ | 0.05 |
| | $ | (0.37 | ) |
Diluted | $ | 0.05 |
| | $ | (0.33 | ) | | $ | 0.05 |
| | $ | (0.37 | ) |
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | 90,063,089 |
| | 89,361,352 |
| | 89,893,557 |
|
| 89,168,499 |
|
Diluted | 90,731,760 |
| | 89,361,352 |
| | 90,718,298 |
|
| 89,168,499 |
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net earnings (loss) | $ | 4.6 |
| | $ | (29.7 | ) | | $ | 4.3 |
| | $ | (32.9 | ) |
| | | | | | | |
Other comprehensive (loss) earnings, net of tax | | | | | | | |
| | | | | | | |
Foreign currency translation | (7.6 | ) | | 5.4 |
| | (2.7 | ) | | 20.1 |
|
| | | | | | | |
Employee benefit plans: | | | | | | | |
Amortization or settlement of actuarial losses and prior service costs | 0.2 |
| | — |
| | 0.3 |
| | — |
|
Net change in employee benefit plans | 0.2 |
| | — |
| | 0.3 |
| | — |
|
| | | | | | | |
Changes in fair value of cash flow hedges: | | | | | | | |
Unrealized net (losses) gains arising during period | (2.0 | ) | | 1.0 |
| | (1.2 | ) | | 1.6 |
|
Net (gains) losses reclassified into earnings | (0.1 | ) | | 0.3 |
| | (0.7 | ) | | 1.7 |
|
Total cash flow hedges | (2.1 | ) | | 1.3 |
| | (1.9 | ) | | 3.3 |
|
| | | | | | | |
Other comprehensive (loss) earnings, net of tax | (9.5 | ) | | 6.7 |
| | (4.3 | ) | | 23.4 |
|
| | | | | | | |
Comprehensive loss | $ | (4.9 | ) | | $ | (23.0 | ) | | $ | — |
| | $ | (9.5 | ) |
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Current assets: | | | |
Cash and cash equivalents | $ | 50.8 |
| | $ | 111.7 |
|
Receivables, net of allowances of $0.5 and $0.7 | 130.1 |
| | 137.7 |
|
Inventories, net | 160.6 |
| | 125.6 |
|
Prepaid and other current assets | 23.3 |
| | 19.9 |
|
Total current assets | 364.8 |
| | 394.9 |
|
Property, plant, and equipment, net | 205.1 |
| | 183.0 |
|
Goodwill | 887.9 |
| | 884.9 |
|
Intangible assets, net | 60.0 |
| | 53.5 |
|
Other assets and deferred charges | 34.7 |
| | 31.8 |
|
Assets of discontinued operations | 0.2 |
| | 1.7 |
|
Total assets | $ | 1,552.7 |
| | $ | 1,549.8 |
|
| | | |
Current liabilities: | |
| | |
|
Accounts payable | $ | 89.9 |
| | $ | 85.6 |
|
Accrued compensation and employee benefits | 30.0 |
| | 31.2 |
|
Other accrued expenses | 21.3 |
| | 28.2 |
|
Federal and other taxes on income | 1.2 |
| | 6.6 |
|
Total current liabilities | 142.4 |
| | 151.6 |
|
Long-term debt | 196.1 |
| | 192.6 |
|
Other liabilities | 69.7 |
| | 67.9 |
|
Liabilities of discontinued operations | 1.9 |
| | 5.6 |
|
Commitments and contingencies (Note 15) |
|
| |
|
|
Stockholders' equity: | | | |
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued | — |
| | — |
|
Common stock - $0.01 par value; 400,000,000 shares authorized; 90,098,973 and 89,491,471 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 0.9 |
| | 0.9 |
|
Additional paid-in capital | 1,533.6 |
| | 1,523.1 |
|
Accumulated deficit | (287.6 | ) | | (291.9 | ) |
Accumulated other comprehensive loss | (104.3 | ) | | (100.0 | ) |
Total stockholders' equity | 1,142.6 |
| | 1,132.1 |
|
Total liabilities and stockholders' equity | $ | 1,552.7 |
| | $ | 1,549.8 |
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balance at December 31, 2017 | $ | 0.9 |
| | $ | 1,523.1 |
| | $ | (291.9 | ) | | $ | (100.0 | ) | | $ | 1,132.1 |
|
Net earnings | — |
| | — |
| | 4.3 |
| | — |
| | 4.3 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (4.3 | ) | | (4.3 | ) |
Stock-based compensation expense | — |
| | 14.3 |
| | — |
| | — |
| | 14.3 |
|
Common stock issued for exercise of stock options | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Tax on restricted stock unit vesting | — |
| | (4.1 | ) | | — |
| | — |
| | (4.1 | ) |
Balance at June 30, 2018 | $ | 0.9 |
| | $ | 1,533.6 |
| | $ | (287.6 | ) | | $ | (104.3 | ) | | $ | 1,142.6 |
|
See accompanying Notes to Consolidated Financial Statements
KNOWLES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Operating Activities | | | |
Net earnings (loss) | $ | 4.3 |
| | $ | (32.9 | ) |
Adjustments to reconcile net earnings (loss) to cash from operating activities: | | | |
Depreciation and amortization | 26.6 |
| | 29.9 |
|
Impairment of intangibles | — |
| | 16.2 |
|
Stock-based compensation | 14.3 |
| | 12.4 |
|
Impairment charges on fixed and other assets | — |
| | 5.1 |
|
Non-cash interest expense and amortization of debt issuance costs | 3.8 |
| | 3.7 |
|
Loss on disposal of fixed assets | 0.2 |
| | 0.1 |
|
Deferred income taxes | (2.8 | ) | | 0.8 |
|
Other, net | (0.3 | ) | | 3.2 |
|
Cash effect of changes in assets and liabilities (excluding effects of foreign exchange): | | | |
Receivables, net | 10.4 |
| | 17.1 |
|
Inventories, net | (33.9 | ) | | (32.3 | ) |
Prepaid and other current assets | (3.7 | ) | | (2.4 | ) |
Accounts payable | 5.3 |
| | 2.9 |
|
Accrued compensation and employee benefits | (2.6 | ) | | (5.8 | ) |
Other accrued expenses | (8.6 | ) | | 3.9 |
|
Accrued taxes | (6.0 | ) | | (3.0 | ) |
Other non-current assets and non-current liabilities | 2.3 |
| | 2.5 |
|
Net cash provided by operating activities | 9.3 |
| | 21.4 |
|
| | | |
Investing Activities | |
| | |
|
Additions to property, plant, and equipment | (48.0 | ) | | (31.4 | ) |
Acquisitions of business (net of cash acquired) | (17.5 | ) | | (2.5 | ) |
Proceeds from the sale of property, plant, and equipment | — |
| | 0.1 |
|
Net cash used in investing activities | (65.5 | ) | | (33.8 | ) |
| | | |
Financing Activities | |
| | |
|
Tax on restricted stock unit vesting | (4.1 | ) | | (4.5 | ) |
Payments of capital lease obligations | (0.9 | ) | | (0.7 | ) |
Payment of consideration owed for acquisitions | (0.2 | ) | | — |
|
Net proceeds from exercise of stock-based awards | 0.3 |
| | 3.1 |
|
Principal payments on term loan debt | — |
| | (3.6 | ) |
Net cash used in financing activities | (4.9 | ) | | (5.7 | ) |
| | | |
Effect of exchange rate changes on cash and cash equivalents | 0.2 |
| | 0.5 |
|
| | | |
Net decrease in cash and cash equivalents | (60.9 | ) | | (17.6 | ) |
Cash and cash equivalents at beginning of period | 111.7 |
| | 63.4 |
|
Add: Cash and cash equivalents at beginning of period from discontinued operations | — |
| | 2.8 |
|
Less: Cash and cash equivalents at end of period from discontinued operations | — |
| | (3.6 | ) |
Cash and cash equivalents at end of period | $ | 50.8 |
| | $ | 45.0 |
|
See accompanying Notes to Consolidated Financial Statements
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
1. Basis of Presentation
Description of Business - Knowles Corporation (NYSE:KN) is a market leader and global supplier of advanced micro-acoustic, audio processing, and precision device solutions, serving the mobile consumer electronics, communications, medical, military, aerospace, and industrial markets. The Company uses its leading position in micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience in mobile, ear, and Internet of Things ("IoT") applications. Knowles is also the leader in acoustics components used in hearing aids and has a strong position in high-end capacitors. The Company's focus on its customers, combined with its unique technology, proprietary manufacturing techniques, rigorous testing, and global scale, enable the Company to deliver innovative solutions that optimize the user experience. References to "Knowles," "the Company," "we," "our," and "us" refer to Knowles Corporation and its consolidated subsidiaries.
Financial Statement Presentation - The accompanying unaudited interim Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”) for complete financial statements. These unaudited interim Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The unaudited interim Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods.
During the second quarter of 2018, the Company recorded a correcting entry of $1.3 million related to pre-spin-off pension obligations, which decreased earnings before income taxes and discontinued operations. During the first quarter of 2018, the Company recorded a correcting entry of $0.7 million related to inventory reserves, which increased earnings before income taxes and discontinued operations. These items are not material to any of the Consolidated Financial Statements for the historical periods in which the errors originated and are not expected to be material to the Consolidated Financial Statements for the year ended December 31, 2018. Similarly, and as disclosed in the prior year during the first quarter of 2017, the Company recorded a correcting entry of $1.1 million related to inventory reserves and incentive compensation accruals. These items, which decreased loss before income taxes and discontinued operations, were determined not to be material to the Consolidated Financial Statements for the historical period in which the errors originated and the Consolidated Financial Statements for the year ended December 31, 2017.
On January 19, 2018, the Company acquired substantially all of the assets of Compex Corporation ("Compex"), a capacitors manufacturer. See Note 3. Acquisitions for additional information related to the transaction.
On November 28, 2017, the Company completed its sale of the high-end oscillators business ("Timing Device Business"). In accordance with Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations and related assets and liabilities for the Timing Device Business have been reclassified as discontinued operations for all periods presented. See Note 2. Disposed and Discontinued Operations for additional information related to the transaction.
Non-cash Investing Activities - Purchases of property, plant, and equipment included in accounts payable at June 30, 2018 and 2017 were $5.9 million and $2.7 million, respectively. These non-cash amounts are not reflected as outflows to Additions to property, plant, and equipment within investing activities of the Consolidated Statements of Cash Flows for the respective periods.
Reclassifications - Certain amounts in prior periods have been reclassified to conform to the current period presentation. See Note 17. Recent Accounting Standards for additional information.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
2. Disposed and Discontinued Operations
Management and the Board of Directors periodically conduct strategic reviews of the Company's businesses.
On November 28, 2017, the Company completed the sale of the Timing Device Business, part of the Precision Devices ("PD") segment, to Microsemi Corporation for $130.0 million, plus purchase price adjustments for a net amount of $133.3 million. The Company recorded a gain of $62.3 million as a result of the sale, which included $0.4 million of gain amounts reclassified from Accumulated other comprehensive loss into earnings related to currency translation adjustments. The purchase price includes $10.0 million held in escrow that is expected to be received nine months from the completion of the sale and is recorded in the Prepaid and other current assets line on the Consolidated Balance Sheets.
On July 7, 2016, the Company completed the sale of its speaker and receiver product line ("Speaker and Receiver Product Line"). The Speaker and Receiver Product Line had no effect on the Company's results of operations for the three and six months ended June 30, 2018.
The results of operations and financial positions of the Timing Device Business and Speaker and Receiver Product Line have been reclassified to discontinued operations for all periods presented as these disposals represent strategic shifts that have a major effect on the Company's results of operations.
Summarized results of the Company's discontinued operations are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Revenues | $ | — |
| | $ | 25.8 |
| | $ | — |
| | $ | 51.2 |
|
Cost of goods sold | — |
| | 17.2 |
| | — |
| | 34.3 |
|
Gross profit | — |
| | 8.6 |
| | — |
| | 16.9 |
|
Research and development expenses | — |
| | 2.0 |
| | — |
| | 4.2 |
|
Selling and administrative expenses | (0.2 | ) | | 4.4 |
| | (0.2 | ) | | 9.1 |
|
Restructuring charges | — |
| | 0.1 |
| | — |
| | 0.2 |
|
Operating (income) expenses | (0.2 | ) | | 6.5 |
| | (0.2 | ) | | 13.5 |
|
Other expense (income), net | — |
| | 0.4 |
| | (0.2 | ) | | 1.0 |
|
Earnings from discontinued operations before taxes (1) | 0.2 |
| | 1.7 |
| | 0.4 |
| | 2.4 |
|
Provision for (benefit from) income taxes | — |
| | 0.5 |
| | 0.1 |
| | (0.6 | ) |
Earnings from discontinued operations, net of tax | $ | 0.2 |
| | $ | 1.2 |
| | $ | 0.3 |
| | $ | 3.0 |
|
(1) The Company's policy is to not allocate interest expense to discontinued operations unless it is directly attributable to the operations. The results of operations of the Timing Device Business and Speaker and Receiver Product Line did not have any such interest expense in the periods presented.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
Assets and liabilities of discontinued operations are summarized below:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Assets of discontinued operations: | | | |
Receivables | $ | 0.1 |
| | $ | 1.2 |
|
Prepaid and other current assets | 0.1 |
| | 0.5 |
|
Total current assets | 0.2 |
| | 1.7 |
|
Total assets (1) | $ | 0.2 |
| | $ | 1.7 |
|
| | | |
Liabilities of discontinued operations: | | | |
Accounts payable | $ | — |
| | $ | 0.1 |
|
Other current liabilities | 1.9 |
| | 5.5 |
|
Total current liabilities | 1.9 |
| | 5.6 |
|
Total liabilities (1) | $ | 1.9 |
| | $ | 5.6 |
|
(1) In connection with the sale of the Timing Device Business, the Company retained certain obligations related to employees of the Timing Device Business. This arrangement results in maintaining asset and liability balances, which are expected to be settled during the current fiscal year.
The following table presents the depreciation, amortization, and capital expenditures related to discontinued operations:
|
| | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2018 | | 2017 |
Depreciation | $ | — |
| | $ | 1.3 |
|
Amortization of intangible assets | — |
| | 0.7 |
|
Capital expenditures | — |
| | 1.5 |
|
There were capital expenditures of nil and $0.2 million included in accounts payable at June 30, 2018 and 2017, respectively.
3. Acquisitions
On January 19, 2018, the Company acquired substantially all of the assets of Compex for $16.0 million, plus purchase price adjustments for a net amount of $18.7 million. The asset purchase agreement relating to the acquisition provided for a $0.6 million post-closing working capital adjustment that settled on April 2, 2018 as well as a $1.0 million holdback that will be paid eighteen months from the completion of the acquisition and is recorded in the Other liabilities line on the Consolidated Balance Sheets. The acquired business provides single layer electronic components to the telecommunication, fiber optics, defense, and aerospace markets. The transaction was accounted for under the acquisition method of accounting and the results of operations are included in the Consolidated Financial Statements from the date of acquisition in the PD segment. Included in the Consolidated Statements of Earnings are Compex's revenues and earnings before income taxes of $5.8 million and $1.0 million, respectively, from the date of acquisition through June 30, 2018.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The table below represents a preliminary allocation of the purchase price to net assets acquired as of January 19, 2018:
|
| | | |
(in millions) |
Cash | $ | 0.2 |
|
Receivables | 1.7 |
|
Inventories | 2.1 |
|
Property, plant, and equipment | 2.0 |
|
Customer relationships | 7.3 |
|
Unpatented technologies | 2.0 |
|
Trademarks and other amortized intangible assets | 0.4 |
|
Other assets | 0.2 |
|
Goodwill | 3.0 |
|
Assumed current liabilities | (0.2 | ) |
Total purchase price | $ | 18.7 |
|
The Company recorded a purchase price adjustment related to property, plant, and equipment during the three months ended June 30, 2018, resulting in an increase to goodwill of $0.1 million. The adjustment did not impact the Consolidated Statements of Earnings. The purchase price allocation in the table above is preliminary and subject to the finalization of the Company's analysis.
Compex Intangible Assets Recorded
Customer relationships, unpatented technologies, and trademarks will be amortized over estimated useful lives of 10 years, 8 years, and 5 years, respectively. The fair value for customer relationships was determined using the excess earnings method under the income approach. The fair values of unpatented technologies and trademarks were determined using the relief from royalty method under the income approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates.
The excess of the total purchase price over the total fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to the assembled workforce and synergies. None of the goodwill resulting from this acquisition is tax deductible. Goodwill has been allocated to the PD segment, which is the segment expected to benefit from the acquisition.
Impact of Compex Acquisition and Pro-forma Summary
The following unaudited pro-forma summary presents consolidated financial information as if Compex had been acquired on January 1, 2017. The unaudited pro-forma financial information is based on historical results of operations and financial positions of the Company and Compex. The pro-forma results include estimated amortization of definite-lived intangible assets and the estimated depreciation expense of the fixed asset step-up to fair value. The pro-forma results exclude transaction costs and the estimated cost of the inventory step-up to fair value.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The unaudited pro-forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2017. In addition, the unaudited pro-forma information should not be deemed to be indicative of future results.
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except share and per share amounts) | 2017 | | 2018 | | 2017 |
Revenues from continuing operations: | | | | | |
As reported | $ | 164.4 |
| | $ | 366.9 |
| | $ | 332.7 |
|
Pro-forma | 167.5 |
| | 367.5 |
| | 338.7 |
|
(Loss) earnings from continuing operations: |
|
| | | | |
As reported | $ | (30.9 | ) | | $ | 4.0 |
| | $ | (35.9 | ) |
Pro-forma | (30.3 | ) | | 4.7 |
| | (34.7 | ) |
Basic (loss) earnings per share from continuing operations: |
|
| | | | |
As reported | $ | (0.35 | ) | | $ | 0.04 |
| | $ | (0.40 | ) |
Pro-forma | (0.34 | ) | | 0.05 |
| | (0.39 | ) |
Diluted (loss) earnings per share from continuing operations: |
|
| | | | |
As reported | $ | (0.35 | ) | | $ | 0.04 |
| | $ | (0.40 | ) |
Pro-forma | (0.34 | ) | | 0.05 |
| | (0.39 | ) |
Other Acquisition
On January 11, 2017, the Company completed an acquisition of certain assets of a capacitors manufacturer for cash consideration of $3.7 million, of which $2.5 million was paid during the first quarter of 2017. An additional $0.2 million was paid during the second quarter of 2018, with the remaining $1.0 million to be paid by the first quarter of 2019. This acquisition's operations are included in the PD segment. The financial results of this acquisition were included in our Consolidated Financial Statements beginning January 11, 2017. Pro-forma financial information has not been provided as the acquisition did not have a material impact on the Consolidated Statements of Earnings.
4. Impairments
The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the second quarter of 2017, an updated strategic plan was completed for Audio segment product lines. The updated strategic plan identified a decline of future demand for a specific product line, which indicated projected future cash flows may not be sufficient to recover the carrying value of the associated unpatented technologies and property, plant, and equipment assets. The utilization of undiscounted future cash flows was used to determine recoverability of the long-lived assets. The fair value of the intangibles was determined through the use of discounted cash flows, and the fair value of fixed assets was determined using their liquidation value. As a result of this analysis, the Company concluded that the fair values of these long-lived assets were less than their respective carrying values as of June 30, 2017. The Company recorded total impairment charges of $21.3 million, of which $5.1 million was related to fixed assets and $16.2 million was related to intangible assets. The Company recorded $1.4 million of the charges within Impairment charges in Gross profit and recorded $19.9 million within the Impairment charges line item in Operating expenses within the Consolidated Statements of Earnings.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
5. Inventories, net
The following table details the major components of inventories, net:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Raw materials | $ | 72.7 |
| | $ | 65.9 |
|
Work in progress | 26.5 |
| | 21.3 |
|
Finished goods | 88.1 |
| | 60.8 |
|
Subtotal | 187.3 |
| | 148.0 |
|
Less reserves | (26.7 | ) | | (22.4 | ) |
Total | $ | 160.6 |
| | $ | 125.6 |
|
6. Property, Plant, and Equipment, net
The following table details the major components of property, plant, and equipment, net:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Land | $ | 7.4 |
| | $ | 7.7 |
|
Buildings and improvements | 103.1 |
| | 103.2 |
|
Machinery, equipment, and other | 485.5 |
| | 441.1 |
|
Subtotal | 596.0 |
| | 552.0 |
|
Less accumulated depreciation | (390.9 | ) | | (369.0 | ) |
Total | $ | 205.1 |
| | $ | 183.0 |
|
Depreciation expense totaled $11.5 million and $11.6 million for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, depreciation expense totaled $23.4 million and $23.3 million, respectively.
During the three months ended June 30, 2017, the Company recorded a $5.1 million impairment charge on fixed assets. See Note 4. Impairments for more information.
7. Goodwill and Other Intangible Assets
The changes in carrying value of goodwill by reportable segment for the six months ended June 30, 2018 are as follows:
|
| | | | | | | | | | | |
(in millions) | Audio | | Precision Devices | | Total |
Balance at December 31, 2017 | $ | 859.9 |
| | $ | 25.0 |
| | $ | 884.9 |
|
Acquisition | — |
| | 3.0 |
| | 3.0 |
|
Balance at June 30, 2018 | $ | 859.9 |
| | $ | 28.0 |
| | $ | 887.9 |
|
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The gross carrying value and accumulated amortization for each major class of intangible assets are as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | |
Trademarks | $ | 0.5 |
| | $ | 0.2 |
| | $ | 0.3 |
| | $ | 0.2 |
|
Patents | 40.8 |
| | 24.5 |
| | 40.8 |
| | 22.2 |
|
Customer relationships | 10.6 |
| | 1.3 |
| | 3.3 |
| | 0.7 |
|
Unpatented technologies | 4.4 |
| | 2.5 |
| | 2.4 |
| | 2.2 |
|
Other | 0.2 |
| | — |
| | — |
| | — |
|
Total | 56.5 |
| | 28.5 |
| | 46.8 |
| | 25.3 |
|
Unamortized intangible assets: | | | | | | | |
Trademarks | 32.0 |
| | | | 32.0 |
| | |
Total intangible assets, net | $ | 60.0 |
| | | | $ | 53.5 |
| | |
Amortization expense totaled $1.6 million and $1.9 million for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, amortization expense was $3.2 million and $4.6 million, respectively. Amortization expense for the next five years, based on current intangible balances, is estimated to be as follows:
|
| | | |
(in millions) | |
Q3 - Q4 2018 | $ | 3.3 |
|
2019 | 6.4 |
|
2020 | 6.3 |
|
2021 | 6.3 |
|
2022 | 1.1 |
|
8. Restructuring and Related Activities
Restructuring and related activities are designed to better align the Company's operations with current market conditions through targeted facility consolidations, headcount reductions, and other measures to further optimize operations.
During the three and six months ended June 30, 2018, the Company recorded restructuring charges of $0.1 million within Gross profit for actions associated with rationalizing the workforce in the Precision Devices segment. During the three and six months ended June 30, 2018, the Company recorded restructuring charges of $0.5 million and $0.9 million, respectively, within Operating expenses primarily for actions associated with rationalizing the workforce.
During the three and six months ended June 30, 2017, the Company recorded net restructuring credits of $0.6 million and net restructuring charges of $3.7 million within Gross profit for actions primarily associated with transferring certain operations of hearing health manufacturing to an existing, lower-cost Asian manufacturing facility. A $0.9 million reversal of previously recorded restructuring charges was recorded as a result of subsequent developments that impacted the previously estimated amounts. These charges were recorded within the Audio segment. During the three and six months ended June 30, 2017, the Company also recorded restructuring charges of $2.7 million and $3.3 million within Operating expenses primarily for actions associated with rationalizing the workforce.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The following table details restructuring charges incurred by reportable segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Audio (1) | $ | 0.5 |
| | $ | 0.7 |
| | $ | 0.8 |
| | $ | 5.4 |
|
Precision Devices | 0.1 |
| | — |
| | 0.2 |
| | 0.1 |
|
Corporate | — |
| | 1.4 |
| | — |
| | 1.5 |
|
Total | $ | 0.6 |
| | $ | 2.1 |
| | $ | 1.0 |
| | $ | 7.0 |
|
(1) During the three and six months ended June 30, 2017, the Company reversed $0.9 million of previously recorded restructuring charges in Gross profit due to subsequent developments that impacted the previously estimated amounts.
The following table details the Company’s severance and other restructuring accrual activity: |
| | | | | | | | | | | |
(in millions) | Severance Pay and Benefits | | Contract Termination and Other Costs | | Total |
Balance at December 31, 2017 | $ | 4.7 |
| | $ | 0.4 |
| | $ | 5.1 |
|
Restructuring charges | 1.0 |
| | — |
| | 1.0 |
|
Payments | (5.1 | ) | | (0.1 | ) | | (5.2 | ) |
Balance at June 30, 2018 | $ | 0.6 |
| | $ | 0.3 |
| | $ | 0.9 |
|
The severance and restructuring accruals are recorded in the following line items on the Consolidated Balance Sheets:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Other accrued expenses | $ | 0.7 |
| | $ | 4.8 |
|
Other liabilities (1) | 0.2 |
| | 0.3 |
|
Total | $ | 0.9 |
| | $ | 5.1 |
|
(1) This line represents the long-term portion of the charges associated with lease obligations, net of reasonably obtainable sublease income.
9. Hedging Transactions and Derivative Instruments
The Company is affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as "market risks." The Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks, which are primarily foreign currency risk and interest rate risk related to ongoing business operations.
Cash Flow Hedging
The Company uses cash flow hedges to minimize the variability in cash flows of assets, liabilities, or forecasted transactions caused by fluctuations in foreign currency exchange rates or market interest rates. These derivatives, which are designated cash flow hedges, are carried at fair value. The changes in their fair values are recorded to Accumulated Other Comprehensive Income (Loss) ("AOCI") and reclassified in current earnings when the hedge contract matures or becomes ineffective.
To manage its exposure to foreign currency exchange rates, the Company has entered into currency deliverable forward contracts. These derivative instruments allow the Company to hedge portions of its forecasted intercompany sales, which are expected to occur within the next twelve months and are denominated in non-functional currencies. The Company maintains a foreign currency cash flow hedging program primarily to reduce the risk that the net U.S. dollar cash inflows from non-U.S. dollar sales and non-U.S. dollar net cash outflows from procurement activities will be adversely affected by changes in foreign currency exchange rates. At June 30, 2018 and December 31, 2017, the notional value of the derivatives related to currency forward contracts, principally the Chinese yuan, Malaysian ringgit, and Philippine peso, was $46.3 million and $17.9 million, respectively.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
To manage its exposure to market risk for changes in interest rates, the Company entered into an interest rate swap on November 12, 2014 to convert variable interest rate payments into a fixed rate on a notional amount of $100.0 million of debt for monthly interest payments that began in January 2016 and ends in July 2018. In December 2017, the Company entered into a partial termination of the interest rate swap and reduced the notional amount to $50.0 million. The Company designated the swap as a cash flow hedge with re-measurement gains and losses recorded through AOCI.
Economic (Non-Designated) Hedging
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency risk. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effectively economic hedges. The changes in fair value of these economic hedges are immediately recognized in earnings.
The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in non-functional currencies. The Company does not enter into these hedges for speculative reasons. These derivatives are carried at fair value with changes in fair value immediately recognized in earnings within Other expense, net. In addition, these derivative instruments minimize the impact of exchange rate movements on the Company’s balance sheet, as the gains or losses on these derivatives are intended to offset gains and losses from the reduction of the hedged assets and liabilities. At June 30, 2018 and December 31, 2017, the notional value of the derivatives related to economic hedging was $18.8 million and $6.4 million, respectively.
The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates, or other financial indices. The Company does not view the fair values of its derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions or other exposures. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
Fair Value Measurements
All derivatives are carried at fair value on the Company’s Consolidated Balance Sheets. ASC 820, Fair Value Measurement, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 - Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company determines the fair values of its derivatives based on standard valuation models or observable market inputs such as quoted market prices, foreign currency exchange rates, or interest rates; therefore, the Company classifies the derivatives within Level 2 of the valuation hierarchy.
The Company early adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2017-12 as of January 1, 2018. The standard requires adoption of the amended presentation and disclosure requirements on a prospective basis. With respect to presentation requirements, the Company began presenting the impact of foreign exchange contracts qualifying as cash flow hedges within the Cost of goods sold line on the Consolidated Statements of Earnings as of January 1, 2018. These amounts were classified in the Other expense, net line in prior periods. This change aligns the presentation of the impact of these hedges with the same line on the Consolidated Statements of Earnings that is used to present the earnings effect of the hedged item. With respect to disclosure requirements, the Company has enhanced the tabular disclosures below to align with the standard. See Note 17. Recent Accounting Standards for additional information on the adoption of this standard.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The fair values of derivative instruments held by the Company are as follows (in millions):
|
| | | | | | | | | |
| | | Derivative Assets (Liabilities) |
Hedge Type | Contract Type | Balance Sheet Line | June 30, 2018 | | December 31, 2017 |
Derivatives designated as hedging instruments: | | | |
Cash flow hedges | Foreign exchange contracts | Prepaid and other current assets | $ | — |
| | $ | 0.6 |
|
Cash flow hedges | Foreign exchange contracts | Other accrued expenses | (1.6 | ) | | — |
|
| | | | | |
Derivatives not designated as hedging instruments: | | | |
Economic hedges | Foreign exchange contracts | Other accrued expenses | (0.2 | ) | | — |
|
The pre-tax amount of unrealized (loss) gain recognized in accumulated other comprehensive loss on derivatives designated as hedging instruments is as follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
Hedge Type | Contract Type | | 2018 | | 2017 | | 2018 | | 2017 |
Cash flow hedges | Foreign exchange contracts | | $ | (2.5 | ) | | $ | 1.1 |
| | $ | (1.5 | ) | | $ | 1.8 |
|
Cash flow hedges | Interest rate contracts | | — |
| | — |
| | 0.1 |
| | 0.1 |
|
The table above excludes a tax benefit of $0.5 million and tax expense of $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and a tax benefit of $0.2 million and tax expense of 0.3 million for the six months ended June 30, 2018 and 2017, respectively.
The pre-tax impact of derivatives on the Consolidated Statements of Earnings is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, |
| | | 2018 | | 2017 |
Hedge Type | Contract Type | | Cost of goods sold | Interest expense, net | Other expense, net | | Interest expense, net | Other expense, net |
Total amounts per Consolidated Statements of Earnings | | $ | 115.1 |
| $ | 4.1 |
| $ | 0.3 |
| | $ | 5.1 |
| $ | 1.1 |
|
| | | | | | | | |
Effect of derivatives designated as hedging instruments |
Amount of (gain) loss reclassified from accumulated other comprehensive loss into earnings: | | |
Cash flow hedges | Foreign exchange contracts | | — |
| — |
| — |
| | — |
| 0.2 |
|
Cash flow hedges | Interest rate contracts | | — |
| (0.1 | ) | — |
| | 0.2 |
| — |
|
| | | | | | | | |
Effect of derivatives not designated as hedging instruments |
Amount of loss (gain) recognized in earnings: | | | | | | | |
Economic hedges | Foreign exchange contracts | | — |
| — |
| 0.8 |
| | — |
| (0.2 | ) |
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
|
| | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2018 | | 2017 |
Hedge Type | Contract Type | | Cost of goods sold | Interest expense, net | Other expense, net | | Interest expense, net | Other expense, net |
Total amounts per Consolidated Statements of Earnings | | $ | 228.3 |
| $ | 8.1 |
| $ | 0.2 |
| | $ | 10.3 |
| $ | 2.7 |
|
| | | | | | | | |
Effect of derivatives designated as hedging instruments |
Amount of (gain) loss reclassified from accumulated other comprehensive loss into earnings: | | |
Cash flow hedges | Foreign exchange contracts | | (0.8 | ) | — |
| — |
| | — |
| 1.3 |
|
Cash flow hedges | Interest rate contracts | | — |
| — |
| — |
| | 0.5 |
| — |
|
| | | | | | | | |
Effect of derivatives not designated as hedging instruments |
Amount of loss (gain) recognized in earnings: | | | | | | | |
Economic hedges | Foreign exchange contracts | | — |
| — |
| 0.4 |
| | — |
| (0.3 | ) |
10. Borrowings
Borrowings (net of debt issuance costs, debt discount, and amortization) consist of the following:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
3.25% convertible senior notes | $ | 145.4 |
| | $ | 141.9 |
|
Revolving credit facility | 50.7 |
| | 50.7 |
|
Total | 196.1 |
| | 192.6 |
|
Less current maturities (1) | — |
| | — |
|
Total long-term debt | $ | 196.1 |
| | $ | 192.6 |
|
(1) There are no required principal payments due under the 3.25% convertible senior notes or the revolving credit facility until maturities in November 2021 and October 2022, respectively.
Total debt principal payments over the next five years are as follows:
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Q3-Q4 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Debt principal payments | $ | — |
| | $ | — |
| | $ | — |
| | $ | 172.5 |
| | $ | 50.7 |
|
3.25% Convertible Senior Notes Due November 1, 2021
In May 2016, the Company issued $172.5 million aggregate principal amount of 3.25% convertible senior notes due November 1, 2021 ("the Notes"), unless earlier repurchased by the Company or converted pursuant to their terms. Interest is payable semiannually in arrears on May 1 and November 1 each year and commenced on November 1, 2016.
The Notes are governed by an Indenture (the "Indenture") between the Company, as issuer, and U.S. Bank National Association as trustee. Upon conversion, the Company will pay or deliver cash, shares of the Company's common stock, or a combination of cash and shares of common stock, at the Company's election. The initial conversion rate is 54.2741 shares of common stock per $1,000 principal amount of Notes. The initial conversion price is $18.4250 per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), the Company may be required, in certain circumstances, to increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
Prior to the close of business on the business day immediately preceding August 1, 2021, the Notes will be convertible only under the following circumstances:
|
| |
= | during any calendar quarter and only during such calendar quarters, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
= | during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or |
= | upon the occurrence of specified corporate events. |
On or after August 1, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. As of June 30, 2018, no event has occurred that would permit the conversion of the Notes. The Notes are the Company’s senior unsecured obligations.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the liability component, totaling $5.0 million, are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component, totaling $1.3 million, were netted with the equity component in stockholders' equity. Additionally, the Company recorded a deferred tax asset of $0.5 million on a portion of the equity component transaction costs which are deductible for tax purposes and immediately recorded a valuation allowance against this deferred tax asset.
The Notes consist of the following:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Liability component: | | | |
Principal | $ | 172.5 |
| | $ | 172.5 |
|
Less debt issuance costs and debt discount, net of amortization | (27.1 | ) | | (30.6 | ) |
Total | 145.4 |
| | 141.9 |
|
Less current maturities (1) | — |
| | — |
|
Long-term portion | $ | 145.4 |
| | $ | 141.9 |
|
| | | |
Equity component (2) | $ | 29.9 |
| | $ | 29.9 |
|
(1) There are no required principal payments due until maturity in November 2021.
(2) Recorded in the Consolidated Balance Sheets within additional paid-in capital, inclusive of the $1.3 million of issuance costs in equity.
The total estimated fair value of the Notes at June 30, 2018 was $193.7 million. The fair value was determined based on the closing trading price of the Notes as of the last trading day for the second quarter of 2018.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The following table sets forth total interest expense recognized related to the Notes:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
3.25% coupon | $ | 1.4 |
| | $ | 1.4 |
| | $ | 2.8 |
| | $ | 2.8 |
|
Amortization of debt issuance costs | 0.2 |
| | 0.2 |
| | 0.4 |
| | 0.4 |
|
Amortization of debt discount | 1.6 |
| | 1.5 |
| | 3.1 |
| | 2.9 |
|
Total | $ | 3.2 |
| | $ | 3.1 |
| | $ | 6.3 |
| | $ | 6.1 |
|
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions (the “Note Hedges”) with respect to its common stock. In the second quarter of 2016, the Company paid an aggregate amount of $44.5 million for the Note Hedges. The Note Hedges will expire upon maturity of the Notes. The Note Hedges are intended to offset the potential dilution upon conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes in the event that the market value per share of the Company's common stock, as measured under the Note Hedges, is greater than the strike price of the Note Hedges, which initially corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. The Note Hedges are separate transactions entered into by the Company, and are not part of the Notes or the Warrants, and have been accounted for as part of additional paid-in capital. Holders of the Notes do not have any rights with respect to the Note Hedges.
Warrants
In addition to the Note Hedges, in the second quarter of 2016, the Company entered into warrant transactions, whereby the Company sold warrants to acquire shares of the Company's common stock at a strike price of $21.1050 per share (the “Warrants”). The Company received aggregate proceeds of $39.1 million from the sale of the Warrants. If the market price per share of the Company's common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants could have a dilutive effect on the Company's common stock, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. The Warrants are separate transactions entered into by the Company, and are not part of the Notes or the Note Hedges, and have been accounted for as part of additional paid-in capital. Holders of the Notes and Note Hedges do not have any rights with respect to the Warrants.
Revolving Credit Facility
Revolving credit facility borrowings consist of the following:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
$400.0 million revolving credit facility due October 2022 | $ | 50.7 |
| | $ | 50.7 |
|
Less current maturities (1) | — |
| | — |
|
Long-term portion | $ | 50.7 |
| | $ | 50.7 |
|
(1) There are no required principal payments due until maturity in October 2022.
On October 11, 2017, the Company entered into a Revolving Credit Facility Agreement (the "New Credit Facility"). The New Credit Facility contains a five-year senior secured revolving credit facility providing for borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. The New Credit Facility serves as refinancing of indebtedness and terminates the Company's Amended and Restated Credit Agreement dated as of January 27, 2014, as amended and restated as of December 31, 2014 and supplemented from time to time (“Prior Credit Facilities”).
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The New Credit Facility includes requirements, to be tested quarterly, that the Company maintains (i) a minimum ratio of Consolidated EBITDA to consolidated interest expense of 3.25 to 1.0 (the "Interest Coverage Ratio"), (ii) a maximum ratio of Consolidated total indebtedness to Consolidated EBITDA of 3.75 to 1.0 ("the Leverage Ratio"), and (iii) a maximum ratio of senior secured indebtedness to Consolidated EBITDA of 3.25 to 1.0 (the "Senior Secured Leverage Ratio"). For these ratios, Consolidated EBITDA and consolidated interest expense are calculated using the most recent four consecutive fiscal quarters in a manner defined in the New Credit Facility. At June 30, 2018, the Company was in compliance with these covenants and it expects to remain in compliance with all of its debt covenants over the next twelve months.
The interest rate under the New Credit Facility is variable based on LIBOR at the time of the borrowing and the Company’s leverage as measured by a total indebtedness to Consolidated EBITDA ratio. Based upon the Company’s total indebtedness to Consolidated EBITDA ratio, the Company’s borrowing rate could range from LIBOR + 1.25% to LIBOR + 2.25%. In addition, a commitment fee accrues on the average daily unused portion of the New Credit Facility at a rate of 0.20% to 0.35%.
The weighted-average interest rate on the Company's borrowings under the New Credit Facility and Prior Credit Facilities was 3.49% and 3.67% for the six months ended June 30, 2018 and 2017, respectively. The weighted-average interest rate on the Company's borrowings under the New Credit Facility and Prior Credit Facilities for the six months ended June 30, 2018 and 2017 includes interest expense related to the monthly interest rate swap settlements. The weighted-average commitment fee on the revolving line of credit was 0.25% and 0.39% for the six months ended June 30, 2018 and 2017, respectively.
For supplemental cash flow purposes, cash paid for interest was $4.1 million and $5.8 million for the six months ended June 30, 2018 and 2017, respectively.
See Note 9. Hedging Transactions and Derivative Instruments for information on derivatives used to manage interest rate risk.
11. Other Comprehensive Earnings
The amounts recognized in other comprehensive (loss) earnings were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| June 30, 2018 | | June 30, 2017 |
(in millions) | Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation | $ | (7.6 | ) | | $ | — |
| | $ | (7.6 | ) | | $ | 5.4 |
| | $ | — |
| | $ | 5.4 |
|
Employee benefit plans | 0.2 |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
|
Changes in fair value of cash flow hedges | (2.6 | ) | | 0.5 |
| | (2.1 | ) | | 1.5 |
| | (0.2 | ) | | 1.3 |
|
Total other comprehensive (loss) earnings | $ | (10.0 | ) | | $ | 0.5 |
| | $ | (9.5 | ) | | $ | 6.9 |
| | $ | (0.2 | ) | | $ | 6.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2018 | | June 30, 2017 |
(in millions) | Pre-tax | | Tax | | Net of tax | | Pre-tax | | Tax | | Net of tax |
Foreign currency translation | $ | (2.7 | ) | | $ | — |
| | $ | (2.7 | ) | | $ | 20.1 |
| | $ | — |
| | $ | 20.1 |
|
Employee benefit plans | 0.3 |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
|
Changes in fair value of cash flow hedges | (2.2 | ) | | 0.3 |
| | (1.9 | ) | | 3.7 |
| | (0.4 | ) | | 3.3 |
|
Total other comprehensive (loss) earnings | $ | (4.6 | ) | | $ | 0.3 |
| | $ | (4.3 | ) | | $ | 23.8 |
| | $ | (0.4 | ) | | $ | 23.4 |
|
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The following tables summarize the changes in balances of each component of accumulated other comprehensive loss, net of tax during the six months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
(in millions) | Cash flow hedges | | Employee benefit plans | | Cumulative foreign currency translation adjustments | | Total |
Balance at December 31, 2017 | $ | 0.5 |
| | $ | (15.3 | ) | | $ | (85.2 | ) | | $ | (100.0 | ) |
Other comprehensive (loss) earnings, net of tax | (1.9 | ) |
| 0.3 |
| | (2.7 | ) | | (4.3 | ) |
Balance at June 30, 2018 | $ | (1.4 | ) | | $ | (15.0 | ) | | $ | (87.9 | ) | | $ | (104.3 | ) |
|
| | | | | | | | | | | | | | | |
(in millions) | Cash flow hedges | | Employee benefit plans | | Cumulative foreign currency translation adjustments | | Total |
Balance at December 31, 2016 | $ | (3.2 | ) | | $ | (16.6 | ) | | $ | (112.3 | ) | | $ | (132.1 | ) |
Other comprehensive earnings, net of tax | 3.3 |
| | — |
| | 20.1 |
| | 23.4 |
|
Balance at June 30, 2017 | $ | 0.1 |
| | $ | (16.6 | ) | | $ | (92.2 | ) | | $ | (108.7 | ) |
The following tables summarize the amounts reclassified from accumulated other comprehensive loss to earnings:
|
| | | | | | | | |
| | Three Months Ended June 30, |
(in millions) | Statement of Earnings Line | 2018 | | 2017 |
Pension and post-retirement benefit plans: | | | | |
Amortization or settlement of actuarial losses and prior service costs |
Other expense, net | $ | 0.2 |
| | $ | — |
|
Tax | Provision for income taxes | — |
| | — |
|
Net of tax | | $ | 0.2 |
| | $ | — |
|
| | | | |
Cash flow hedges: | | | | |
Net (gains) losses reclassified into earnings | Various (1) | $ | (0.1 | ) | | $ | 0.4 |
|
Tax | Provision for income taxes | — |
| | (0.1 | ) |
Net of tax | | $ | (0.1 | ) | | $ | 0.3 |
|
|
| | | | | | | | |
| | Six Months Ended June 30, |
(in millions) | Statement of Earnings Line | 2018 | | 2017 |
Pension and post-retirement benefit plans: | | | | |
Amortization or settlement of actuarial losses and prior service costs |
Other expense, net | $ | 0.3 |
| | $ | — |
|
Tax | Provision for income taxes | — |
| | — |
|
Net of tax | | $ | 0.3 |
| | $ | — |
|
| | | | |
Cash flow hedges: | | | | |
Net (gains) losses reclassified into earnings | Various (1) | $ | (0.8 | ) | | $ | 1.8 |
|
Tax | Provision for income taxes | 0.1 |
| | (0.1 | ) |
Net of tax | | $ | (0.7 | ) | | $ | 1.7 |
|
(1) See Note 9. Hedging Transactions and Derivative Instruments for additional information.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
12. Income Taxes
Income taxes for the interim periods presented have been included in the accompanying Consolidated Financial Statements on the basis of an estimated annual effective tax rate ("ETR"). The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings or loss, tax laws, and changes resulting from tax audits can affect the overall ETR, which impacts the level of income tax expense or benefit and net income or loss. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain and therefore, actual results could differ materially from projections. The year-to-date ETR deviates from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which the Company and its foreign subsidiaries generate taxable income or loss, the favorable impact of its significant tax holiday in Malaysia, and judgments as to the realizability of the Company’s deferred tax assets.
The Company's ETR from continuing operations for the three and six months ended June 30, 2018 was a 24.1% provision and a 35.5% provision, respectively. During the three and six months ended June 30, 2018, the ETR from continuing operations was impacted by discrete items totaling $0.4 million and $0.2 million of expense, respectively. The Company settled its 2014 pre-spin-off U.S. federal income tax examination during the period and recognized $0.3 million of benefit. Additionally, the Company recorded a $0.3 million tax expense resulting from an increase to its uncertain tax position reserves. Absent the discrete items, the ETR from continuing operations for the three and six months ended June 30, 2018 was a 17.2% provision and a 32.3% provision, respectively.
The Company's ETR from continuing operations for the three and six months ended June 30, 2017 was a 27.7% provision and a 20.9% provision, respectively. During the three and six months ended June 30, 2017, the ETR from continuing operations was impacted by discrete items totaling $2.2 million and $3.0 million of expense, respectively. The Company settled its 2013 pre-spin-off U.S. federal income tax examination during the period and recognized $2.9 million of expense. Additionally, the Company recorded a $0.6 million tax benefit resulting from a reduction to its uncertain tax position reserves. Absent the discrete items, the ETR from continuing operations for the three and six months ended June 30, 2017 was an 18.6% provision and a 10.8% provision, respectively.
The changes in ETR were due to the mix of earnings and losses by taxing jurisdictions. The ETR is favorably impacted by two tax holidays granted to the Company in Malaysia effective through December 31, 2021. These tax holidays are subject to the Company's satisfaction of certain conditions, including investment and sales thresholds. If the Company fails to satisfy such conditions, the Company's ETR may be significantly adversely impacted. The continuing operations benefit of our tax holidays in Malaysia for the three and six months ended June 30, 2018 was approximately $2.6 million and $4.1 million, respectively, or $0.03 and $0.05 on a per share basis. The continuing operations benefit of these incentives for the three and six months ended June 30, 2017 was approximately $4.4 million and $3.9 million, respectively, or $0.05 and $0.04 on a per share basis.
At June 30, 2018, the Company has not completed its accounting for all of the tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects, and therefore, recorded provisional adjustments associated with the deemed repatriation tax, the change in the beginning of year valuation allowance, and the benefit for the remeasurement of deferred tax assets and liabilities. The Internal Revenue Service (“IRS”) issued interpretive guidance related to the deemed repatriation tax on April 2, 2018 in Notice 2018-26. The Company has recorded the immaterial tax impact of the guidance during the three months ended June 30, 2018. The Company has not made any additional measurement period adjustments related to these items during the three and six months ended June 30, 2018. The Company continues to gather additional information to complete the accounting for these items and expects to complete the accounting within the prescribed Staff Accounting Bulletin No. 118 (“SAB 118”) measurement period, which is no later than the fourth quarter of 2018.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
13. Equity Incentive Program
Stock-based compensation expense recognized in the Consolidated Statements of Earnings totaled $7.3 million and $6.2 million for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, stock-based compensation expense was $14.3 million and $12.1 million, respectively.
Stock Options
The expense related to stock options granted in the six months ended June 30, 2018 and 2017 was estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions shown in the table below:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Risk-free interest rate | 2.59% | | 1.73% | to | 1.93% |
Dividend yield | —% | | —% |
Expected life (years) | 4.5 | | 4.5 |
Volatility | 41.2% | | 38.1% | to | 38.8% |
Fair value at date of grant | $4.83 | to | $5.39 | | $6.07 | to | $6.73 |
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The following table summarizes the Company's stock-settled stock appreciation right ("SSAR") and stock option activity for the six months ended June 30, 2018 (in millions, except share and per share amounts): |
| | | | | | | | | | | | | | | | | | | | | |
| SSARs | | Stock Options |
| Number of Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Term (Years) | | Number of Shares | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at December 31, 2017 | 850,516 |
| | $ | 21.54 |
| | | | | | 4,901,739 |
| | $ | 18.36 |
| | | | |
Granted | — |
| | — |
| | | | | | 923,283 |
| | 14.28 |
| | | | |
Exercised | (30,624 | ) | | 12.26 |
| | | | | | (26,595 | ) | | 11.02 |
| | | | |
Forfeited | — |
| | — |
| | | | | | (47,918 | ) | | 15.91 |
| | | | |
Expired | (37,897 | ) | | 22.79 |
| | | | | | (140,839 | ) | | 21.27 |
| | | | |
Outstanding at June 30, 2018 | 781,995 |
| | $ | 21.85 |
| | $0.1 | | 3.6 | | 5,609,670 |
| | $ | 17.67 |
| | $7.5 | | 4.6 |
| | | | | | | | | | | | | | | |
Exercisable at June 30, 2018 | 781,995 |
| | $ | 21.85 |
| | $0.1 | | 3.6 | | 3,555,319 |
| | $ | 19.37 |
| | $4.3 | | 3.9 |
There was no unrecognized compensation expense related to SSARs at June 30, 2018. At June 30, 2018, unrecognized compensation expense related to stock options not yet exercisable of $8.6 million is expected to be recognized over a weighted-average period of 1.4 years.
RSUs
The following table summarizes the Company's restricted stock unit ("RSU") balances for the six months ended June 30, 2018:
|
| | | | | | |
| Share units | | Weighted-average grant date fair value |
Unvested at December 31, 2017 | 2,202,576 |
| | $ | 16.54 |
|
Granted | 1,569,435 |
| | 14.14 |
|
Vested | (896,114 | ) | | 17.10 |
|
Forfeited | (193,995 | ) | | 15.37 |
|
Unvested at June 30, 2018 | 2,681,902 |
| | $ | 15.05 |
|
At June 30, 2018, $33.0 million of unrecognized compensation expense related to RSUs is expected to be recognized over a weighted-average period of 1.5 years.
PSUs
In February 2018 and 2017, the Company granted performance stock units ("PSUs") to senior management. In each case, the awards will cliff vest three years following the grant date and the number of PSUs that may be earned and vest is based on the Company's revenues and stock price performance over a three year performance period. PSUs will be settled in shares of the Company's common stock. Depending on the Company's overall performance relative to revenues and stock price, the size of the PSU awards are subject to adjustment, up or down, resulting in awards at the end of the performance period that can range from 0% to 225% of the initial grant value. The Company will ratably recognize the expense over the applicable service period for each grant of PSUs and adjust the expense as appropriate. The fair value of the PSUs is determined by using a Monte Carlo simulation.
|
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| (unaudited) | |
The following table summarizes the Company's PSU balances for the six months ended June 30, 2018:
|
| | | | | | |
| Share units | | Weighted-average grant date fair value |
Unvested at December 31, 2017 | 176,000 |
| | $ | 15.32 |
|
Granted | 381,967 |
| | 13.78 |
|
Vested | — |
| | — |
|
Forfeited | — |
| | — |
|
Unvested at June 30, 2018 | 557,967 |
| | $ | 14.27 |
|
At June 30, 2018, $8.4 million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted-average period of 2.4 years.
14. Earnings per Share
Basic and diluted earnings per share were computed as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except share and per share amounts) | 2018 | | 2017 | | 2018 | | 2017 |
Earnings (loss) from continuing operations | $ | 4.4 |
| | $ | (30.9 | ) | | $ | 4.0 |
| | $ | (35.9 | ) |
Earnings from discontinued operations, net | 0.2 |
| | 1.2 |
| | 0.3 |
| | 3.0 |
|
Net earnings (loss) | $ | 4.6 |
| | $ | (29.7 | ) | | $ | 4.3 |
| | $ | (32.9 | ) |
| | | | | | | |
Basic earnings (loss) per common share: | | | | | | | |
Earnings (loss) from continuing operations | $ | 0.05 |
| | $ | (0.35 | ) | | $ | 0.04 |
| | $ | (0.40 | ) |
Earnings from discontinued operations, net | — |
| | 0.02 |
| | 0.01 |
| | 0.03 |
|
Net earnings (loss) | $ | 0.05 |
| | $ | (0.33 | ) | | $ | 0.05 |
| | $ | (0.37 | ) |
| | | | | | | |
Weighted-average shares outstanding | 90,063,089 |
| | 89,361,352 |
| | 89,893,557 |
| | 89,168,499 |
|
| | | | | | | |
Diluted earnings (loss) per common share: | |
| | |
| | | | |
Earnings (loss) from continuing operations | $ | 0.05 |
| | $ | (0.35 | ) | | $ | 0.04 |
| | $ | (0.40 | ) |
Earnings from discontinued operations, net | — |
| | 0.02 |
| | 0.01 |
| | 0.03 |
|
Net earnings (loss) | $ | 0.05 |
| | $ | (0.33 | ) | | $ | 0.05 |
| | $ | (0.37 | ) |
| | |