Knowles Corp (KN) FY 2021 MD&A

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

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

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

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

Our Business

We are a market leader and global provider of advanced micro-acoustic microphones and balanced armature speakers, audio solutions, and high performance capacitors and radio frequency ("RF") products, serving the consumer electronics, medtech, defense, electric vehicle, industrial, and communications markets. We use our leading position in SiSonic™ micro-electro-mechanical systems ("MEMS") microphones and strong capabilities in audio processing technologies to optimize audio systems and improve the user experience across consumer applications. We are also a leader in hearing health acoustics, high performance capacitors, and RF solutions for a diverse set of markets. Our focus on the customer, combined with unique technology, proprietary manufacturing techniques, and global operational expertise, enables us to deliver innovative solutions across multiple applications. References to "Knowles," the "Company," "we," "our," or "us" refer to Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires.

Our Business Segments

We are organized into two reportable segments based on how management analyzes performance, allocates capital, and makes strategic and operational decisions. These segments were determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 280 - Segment Reporting and are comprised of (i) Audio and (ii) Precision Devices ("PD"). The segments are aligned around similar product applications serving our key end markets, to enhance focus on end market growth strategies.

•Audio Segment

Our Audio group designs and manufactures innovative audio products, including microphones, balanced armature speakers, and audio processors used in applications that serve the mobile, hearing health, True Wireless Stereo ("TWS"), Internet of Things ("IoT"), and computing markets. Audio has sales, support, and engineering facilities in North America, Europe, and Asia, as well as manufacturing facilities in Asia.

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•PD Segment

Our PD group specializes in the design and delivery of high performance capacitor products and RF solutions for technically demanding applications. Our high performance capacitor products are used in applications such as power supplies and medical implants, which sell to a diverse set of customers for mission critical applications across the defense, medtech, industrial, electric vehicle, and communications markets. Our RF solutions solve a broad range of frequency filtering challenges for our customers, who use them in satellite communications and radar systems for defense applications. RF solutions are also used in mmWave 5G communications equipment. PD has sales, support, and engineering facilities in North America, Europe, and Asia as well as manufacturing facilities in North America and Asia.

We sell our products directly to original equipment manufacturers ("OEMs") and to their contract manufacturers and suppliers and through distributors worldwide. We have recently been experiencing demand in excess of available capacity. During the second half of 2021, we experienced shortages of raw materials used in producing MEMS microphones and capacitor products due to supply chain constraints associated with the COVID-19 pandemic. While we anticipate those shortages will continue to impact production during 2022, the duration and full extent of the impact of such disruptions is uncertain and depends upon many factors outside of our control.

COVID-19 Impact

The COVID-19 pandemic continues to have widespread, rapidly-evolving, and unpredictable impacts in the U.S. and international markets. During 2021, many countries continued applying containment and mitigation measures, resulting in global business disruption. These measures have impacted our business operations, results of operations, customer demand, and the productivity of our facilities, particularly in China, Malaysia, and the Philippines.

Protecting the health and safety of our employees remains one of our top priorities. We have implemented enhanced safety measures, including screenings, social distancing, use of personal protective equipment, and increased frequency in cleaning and disinfecting. We will continue to monitor and evaluate the effects of the pandemic and will continue to take appropriate steps to mitigate the impacts to our employees and on our business results.

Despite economic challenges due to the COVID-19 pandemic, customer demand has returned to pre-pandemic levels. The recovery during fiscal 2021 was partly due to increased demand for our hearing health products from customers who had either decreased or delayed their orders in the prior year in response to the early stages of the pandemic.

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

Recent Developments

On May 3, 2021, we acquired all of the outstanding shares of common stock of Integrated Microwave Corporation ("IMC") for $80.7 million. The acquired business provides RF filters to the defense, industrial, and communications markets. The acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2020 compared to the year ended December 31, 2019, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 10, 2021 and is incorporated by reference herein.

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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, 2021 compared with the Year Ended December 31, 2020

Revenues

Revenues for the year ended December 31, 2021 were $868.1 million, compared with $764.3 million for the year ended December 31, 2020, an increase of $103.8 million or 13.6%. Audio revenues increased $75.8 million, primarily due to higher shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by increased shipments into the hearing health market, exceeding pre-pandemic levels. In addition, MEMS microphone demand in the IoT and computing markets was above pre-pandemic levels, with the computing market benefiting from the work-from-home and remote-learning trends. The increased demand was partially offset by lower average pricing on mature products and supply constraints. PD revenues increased $28.0 million due to organic growth and our acquisition of IMC. The organic growth was driven by higher demand from the industrial, medtech, and electric vehicle markets, partially offset by decreased demand in the communications and defense markets. The medtech market, which includes our high-reliability products used in implantable devices and MRI machines, was impacted by the COVID-19 pandemic in the previous period as hospitals had reduced elective procedures. The demand for our medtech products has returned to pre-pandemic levels.

Cost of Goods Sold

Cost of goods sold ("COGS") for the year ended December 31, 2021 was $508.6 million, compared with $490.8 million for the year ended December 31, 2020, an increase of $17.8 million or 3.6%. This increase was primarily the result of higher shipping volumes, unfavorable foreign currency exchange rate changes, and higher precious metal costs, partially offset by product cost reductions, higher factory capacity utilization, favorable mix, and net favorable inventory reserve adjustments.

Restructuring Charges

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

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During the year ended December 31, 2021, we recorded restructuring charges of $0.5 million within Operating expenses. These charges were primarily for actions associated with our Intelligent Audio product line, which is included in our Audio segment. During the first quarter of 2022, we committed to additional restructuring actions within the Audio segment to further optimize operations.

During the year ended December 31, 2020, we restructured our Intelligent Audio product line. This resulted in a reduction in workforce and the refocusing of certain research and development activities. As a result, we recorded restructuring charges of $1.5 million within Gross profit, primarily for fixed asset write-off costs directly associated with the product line. In addition, we recorded restructuring charges of $6.8 million within Operating expenses, primarily for rationalizing the research and development workforce and contract termination costs associated with the product line.

In addition, during the year ended December 31, 2020, we recorded restructuring charges of $0.8 million within Gross profit, primarily for actions to rationalize the remainder of the Audio segment workforce, as a direct result of the lower demand we experienced from the COVID-19 pandemic for our remaining Audio products. We also recorded restructuring charges of $3.2 million within Operating expenses, primarily for actions associated with rationalizing the remaining Audio workforce.

Gross Profit and Non-GAAP Gross Profit

Gross profit for the year ended December 31, 2021 was $359.5 million, compared with $271.2 million for the year ended December 31, 2020, an increase of $88.3 million or 32.6%. Gross profit margin (gross profit as a percentage of revenues) for the year ended December 31, 2021 was 41.4%, compared with 35.5% for the year ended December 31, 2020. The increases were primarily due to higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and net favorable inventory reserve adjustments, partially offset by lower average pricing on mature products, unfavorable foreign currency exchange rate changes, and higher precious metals cost. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

Non-GAAP gross profit for the year ended December 31, 2021 was $362.1 million, compared with $275.4 million for the year ended December 31, 2020, an increase of $86.7 million or 31.5%. Non-GAAP gross profit margin (non-GAAP gross profit as a percentage of revenues) for the year ended December 31, 2021 was 41.7%, as compared with 36.0% for the year ended December 31, 2020. The increases were primarily due to higher shipping volumes, product cost reductions, higher factory capacity utilization, favorable mix, and net favorable inventory reserve adjustments, partially offset by lower average pricing on mature products, unfavorable foreign currency exchange rate changes, and higher precious metals cost. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels.

Research and Development Expenses

Research and development expenses for the years ended December 31, 2021 and 2020 were $92.8 million and $92.9 million, respectively, a decrease of $0.1 million or 0.1%. Research and development expenses as a percentage of revenues for the years ended December 31, 2021 and 2020 were 10.7% and 12.2%, respectively. Our expenses have remained consistent, however we have increased development activities in our precision devices, hearing health, and MEMS microphones product lines, which were offset by a reduction in development activities in our Intelligent Audio product line. The decrease in expenses as a percentage of revenues was due to the increase in our revenues.

Selling and Administrative Expenses

Selling and administrative expenses for the year ended December 31, 2021 were $146.4 million, compared with $131.5 million for the year ended December 31, 2020, an increase of $14.9 million or 11.3%. Selling and administrative expenses as a percentage of revenues for the year ended December 31, 2021 were 16.9%, compared with 17.2% for the year ended December 31, 2020. The increase in expenses was primarily driven by stock-based compensation, incentive compensation, and our acquisition of IMC. Due to the impacts of the COVID-19 pandemic, stock-based compensation in 2021 increased due to certain modifications made to previously granted performance share units, while stock-based compensation in 2020 was lowered due to a change in estimated attainment of certain performance targets. For additional information on stock-based compensation, refer to Note 14. Equity Incentive Program to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." The increase in selling and administrative expenses was partially offset by lower legal expenses, which were lower due to reduced activity related to the protection of our intellectual property. Expenses as a percentage of revenues have remained consistent.

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Impairment Charges

Impairment charges for the year ended December 31, 2021 were $4.0 million, compared to $7.6 million for the year ended December 31, 2020 and relate to facilities in our Intelligent Audio product line. For additional information related to these impairment charges, refer to Note 4. Impairments to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Interest Expense, net

Interest expense, net for the year ended December 31, 2021 was $14.2 million, compared with $16.4 million for the year ended December 31, 2020, a decrease of $2.2 million or 13.4%. The decrease was primarily due to lower outstanding borrowings. For additional information on borrowings and interest expense, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

Other (Income) Expense, net

Other income for the year ended December 31, 2021 was $3.0 million, compared with expense of $1.5 million for the year ended December 31, 2020, a change of $4.5 million. The change was primarily due to the impacts from foreign currency exchange rate changes and the appreciation in our investment balances.

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

The effective tax rate ("ETR") for the year ended December 31, 2021 was a 43.6% benefit, compared with a 74.3% provision for the year ended December 31, 2020. The change in the ETR was primarily due to a $59.1 million benefit in 2021 related to the release of a significant portion of the valuation allowance in the U.S. The U.S. operations were in a cumulative income position as of December 31, 2021, as compared to a cumulative loss position as of December 31, 2020. Based on this change, and other relevant information, we released a significant portion of our valuation allowance related to deferred tax assets that will be benefited in the U.S. The change in ETR was also impacted by the mix of earnings and losses by taxing jurisdictions.

The non-GAAP ETR for the year ended December 31, 2021 was an 11.9% provision, compared with a 10.1% provision for the year ended December 31, 2020. The increase in the non-GAAP ETR was primarily due to the mix of earnings and losses by taxing jurisdictions.

The ETR and non-GAAP ETR deviate from the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions where we generate taxable income or loss and the favorable impact of our tax holidays in Malaysia. A significant portion of our pre-tax income is subject to a lower tax rate as a result of our Malaysian tax holidays, subject to our annual satisfaction of certain conditions we expect to continue to satisfy. During the fourth quarter of 2021, our existing significant tax holiday in Malaysia was extended through December 31, 2026. For additional information on these tax holidays, see Note 13. Income Taxes to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data."

Earnings from Continuing Operations

Earnings from continuing operations for the year ended December 31, 2021 was $150.2 million, compared with $2.9 million for the year ended December 31, 2020, an increase of $147.3 million. As described above, the increase was primarily due to increased revenues, a benefit from income taxes, higher gross profit margin, reduced legal spending, lower restructuring charges, and a reduction of impairment charges, partially offset by higher stock-based compensation and incentive compensation.

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

Earnings before interest and income taxes ("EBIT") from continuing operations for the year ended December 31, 2021 was $118.8 million, compared with $27.7 million for the year ended December 31, 2020, an increase of $91.1 million or 328.9%. EBIT margin (EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2021 was 13.7%, as compared with 3.6% for the year ended December 31, 2020. The increase in EBIT was primarily due to increased revenues, higher gross profit margin, reduced legal spending, lower restructuring charges, and a reduction of impairment charges, partially offset by higher stock-based compensation and incentive compensation.

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Adjusted earnings before interest and income taxes ("Adjusted EBIT") from continuing operations for the year ended December 31, 2021 was $174.3 million, compared with $79.3 million for the year ended December 31, 2020, an increase of $95.0 million or 119.8%. Adjusted EBIT margin (adjusted EBIT from continuing operations as a percentage of revenues) for the year ended December 31, 2021 was 20.1%, as compared with 10.4% for the year ended December 31, 2020. The increases in Adjusted EBIT and Adjusted EBIT margin were primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by higher incentive compensation.

Earnings from Discontinued Operations, net

Earnings from discontinued operations was $0.2 million for the year ended December 31, 2021, compared with earnings of $3.7 million for the year ended December 31, 2020. We recorded a tax benefit during the second quarter of 2021 related to the Speaker and Receiver Product Line. We recorded a tax benefit for a refund received during the first quarter of 2020 related to the Timing Device Business.

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

Diluted earnings per share from continuing operations was $1.59 for the year ended December 31, 2021, compared with $0.03 for the year ended December 31, 2020. As described above, the increase was primarily due to increased revenues, a benefit from income taxes, higher gross profit margin, reduced legal spending, lower restructuring charges, and a reduction of impairment charges, partially offset by higher stock-based compensation and incentive compensation.

Non-GAAP diluted earnings per share for the year ended December 31, 2021 was $1.53, compared with $0.67 for the year ended December 31, 2020. As described above, the increase was primarily due to increased revenues, higher non-GAAP gross profit margin, and reduced legal spending, partially offset by higher income taxes and incentive compensation.

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

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

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

(3)    In 2021, Other expenses represent the ongoing net lease cost (income) related to facilities not used in operations and expenses related to the acquisition of IMC by the PD segment. In 2020, Other expenses represent the ongoing net lease cost (income) related to facilities not used in operations and expenses related to shareholder activism. In 2019, Other expenses of $4.4 million represent expenses related to shareholder activism and the remaining Other expenses relate to the acquisition of the MEMS Microphone Application-specific integrated circuit Design Business (“ASIC Design Business”) by the Audio segment and the acquisition of DITF Interconnect Technology, Inc. ("DITF") by the PD segment.

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

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

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

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

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Segment Results of Operations for the Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

Audio

Revenues

Audio revenues were $667.0 million for the year ended December 31, 2021, compared with $591.2 million for the year ended December 31, 2020, an increase of $75.8 million or 12.8%. Revenues increased primarily due to higher shipping volumes as market conditions have improved from 2020, which was negatively impacted by the COVID-19 pandemic. The higher volumes were driven by increased shipments into the hearing health market, exceeding pre-pandemic levels. In addition, MEMS microphone demand in the IoT and computing markets was above pre-pandemic levels, with the computing market benefiting from the work-from-home and remote-learning trends. The increased demand was partially offset by lower average pricing on mature products and supply constraints.

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

Audio EBIT from continuing operations was $137.0 million for the year ended December 31, 2021, compared with $44.9 million for the year ended December 31, 2020, an increase of $92.1 million or 205.1%. EBIT margin for the year ended December 31, 2021 was 20.5%, compared to 7.6% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher gross profit margin, lower legal expenses in connection with the protection of our intellectual property, lower restructuring charges, reduced operating expenses, and a reduction of impairment charges, partially offset by increases in incentive compensation. The gross profit margin increase was driven by product cost reductions, favorable mix, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line.

Audio Adjusted EBIT was $163.6 million for the year ended December 31, 2021, compared with $85.0 million for the year ended December 31, 2020, an increase of $78.6 million or 92.5%. Adjusted EBIT margin for the year ended December 31, 2021 was 24.5%, compared with 14.4% for the year ended December 31, 2020. The increases were primarily due to increased revenues, higher gross profit margin, lower legal expenses in connection with the protection of our intellectual property, and reduced operating expenses, partially offset by increases in incentive compensation. The gross profit margin increase was driven by product cost reductions, favorable mix, and higher factory capacity utilization, partially offset by lower average pricing on mature products and unfavorable foreign currency exchange rate changes. Our 2021 plant productivity has improved due to our factories returning to pre-pandemic production levels. Our reduction in operating costs was primarily driven by headcount reductions in our Intelligent Audio product line.

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Precision Devices

Revenues

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

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

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

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

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Liquidity and Capital Resources

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

Due to the global nature of our operations, a significant portion of our cash is generated and typically held outside the United States. Our cash and cash equivalents totaled $68.9 million and $147.8 million at December 31, 2021 and 2020, respectively. Of these amounts, cash held by our non-U.S. operations totaled $64.9 million and $101.4 million as of December 31, 2021 and 2020, respectively. To the extent we repatriate these funds to the U.S., we may be required to pay U.S. state income taxes and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. Management will continue to reassess our need to repatriate the earnings of our foreign subsidiaries.

On May 3, 2021, we acquired all of the outstanding shares of common stock of IMC for $80.7 million. The acquired business provides RF filters to the defense, industrial, and communications markets. The acquisition's operations are included in the PD segment. For additional information, refer to Note 3. Acquisitions to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

On September 4, 2020, we entered into a new Credit Agreement (the "New Credit Agreement"), which provides for a senior secured revolving credit facility (the "New Credit Facility") with borrowings in an aggregate principal amount at any time outstanding not to exceed $400.0 million. At any time during the term of the New Credit Facility, we will be permitted to increase the commitments under the New Credit Facility or to establish one or more incremental term loan facilities under the New Credit Facility in an aggregate principal amount not to exceed $200.0 million for all such incremental facilities. Commitments under the New Credit Facility will terminate, and loans outstanding thereunder will mature, on January 2, 2024. For additional information, refer to Note 12. Borrowings to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data."

On February 24, 2020, we announced that our Board of Directors had authorized a share repurchase program of up to $100 million of our common stock. 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, 2021 and 2020, we repurchased 2,139,413 and 1,078,363 shares of common stock, respectively, for a total of $44.5 million and $16.2 million, respectively.

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:

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Operating Activities

Cash provided by operating activities reflects net earnings adjusted for certain non-cash items, including depreciation expense, amortization of intangible assets, stock-based compensation, changes in deferred income taxes, impairment charges, and the effects of changes in operating assets and liabilities. The increase in cash provided by operating activities for 2021 as compared to 2020 was primarily due to higher net earnings compared to the prior period, which was largely driven by higher revenues and improved gross profit margins. The higher 2021 net earnings was partially offset by an unfavorable change in working capital. The unfavorable change in working capital was primarily driven by an increase in accounts receivables and inventories, partially offset by an increase in accounts payable. These 2021 working capital changes are attributable to higher customer demand and increased production activity. The lower 2020 net earnings was partially offset by the favorable change in working capital. The favorable change in working capital in 2020 was primarily driven by a decrease in accounts receivables and inventories, partially offset by a decrease in accounts payable. These 2020 working capital changes were driven by the timing of cash collections, inventory control initiatives, timing of payments, and reduced spending.

Investing Activities

Cash used in investing activities are primarily used for capital expenditures and acquisitions. Capital expenditures and acquisitions support our manufacturing capacity expansion, development of new products, advances in our technology, future growth, and achievement of operating efficiencies. Capital expenditures were $48.6 million and $31.9 million for the years ended December 31, 2021 and 2020, respectively. The cash used in investing activities during 2021 was primarily driven by the acquisition of IMC and capital expenditures to support our development of new products and operating efficiencies. The cash used in investing activities during 2020 was driven by capital expenditures to support our manufacturing capacity expansion. Our investment activities in 2021 and 2020 were funded by our positive cash flow from operating activities.

Our 2021 and 2020 capital expenditures as a percentage of revenues were 5.6% and 4.2%, respectively. In 2022, we expect capital expenditures to be in the range of 5% to 6% of revenues. We expect to fund these capital expenditures through our existing cash balances and cash flows from operating activities.

Financing Activities

Cash used in financing activities during 2021 is primarily related to the $172.5 million principal payment on the convertible senior notes, the $44.5 million used to repurchase shares of our common stock in the open market, and the $7.7 million payment of taxes related to net share settlement of equity awards, partially offset by the $70.0 million of borrowings under our revolving credit facility and proceeds of $25.6 million from the exercise of options. Cash used in financing activities during 2020 is primarily related to the $16.2 million used to repurchase shares of our common stock in the open market and the $6.1 million payment of taxes related to net share settlement of equity awards. Our financing activities in 2021 and 2020 were funded by our positive cash flow from operating activities.

Free Cash Flow

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

Our Audio businesses tend to have stronger revenues in the third and fourth quarters of each fiscal year. This is particularly true of those businesses that serve the consumer electronics market. Our Audio businesses tend to have short product cycles due to the highly technical nature of the industries they serve, which can result in new OEM product launches that can impact quarterly revenues, earnings, and cash flow. Our PD business is not typically subject to seasonality.

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

In 2021, we generated free cash flow of $133.5 million, representing 15.4% of revenues, compared to free cash flow in 2020 of $96.2 million, representing 12.6% of revenues. The increase in free cash flow in 2021 compared to 2020 was primarily due to higher net earnings, partially offset by an increase in capital expenditures.

Contingent Obligations

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

Contractual Obligations and Off-Balance Sheet Arrangements

A summary of our significant contractual obligations and commitments as of December 31, 2021 and the years when these obligations are expected to be due is as follows:

[table omitted - see filing]