Acquisition Acquisition

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Acquisition

On July 1, 2015, the Company completed the acquisition of Shares of Audience for a consideration per Share of $2.51 in cash and 0.13207 shares of Knowles common stock pursuant to the Agreement and Plan of Merger dated April 29, 2015. Audience is a leader in the area of digital signal processing as well as algorithm and software development.

As a result of the acquisition, the Company issued 3.2 million shares and paid $61.6 million in cash to former holders of Shares and for the conversion of vested in-the-money Audience stock options. The Company also converted unvested in-the-money Audience stock options and restricted stock units for an aggregate of 461,371 shares of its common stock. The fair value of unvested equity awards relating to future services, and not yet earned, will be recorded as operating expenses over the remaining service periods. Total consideration was approximately $92.8 million, net of cash and short-term investments acquired of $30.5 million. The revenues and net losses from Audience operations in the six months ending December 31, 2015 were $19.0 million and $31.6 million, respectively.

The total purchase consideration of approximately $123.3 million consists of the following (in millions except per share amounts):

Cash consideration paid to Audience shareholders and equity award holders	$	61.6
Fair value of shares of Knowles common stock issued to Audience shareholders and equity award holders	60.2
Fair value of restricted stock units assumed	1.5
Fair value of total consideration	$	123.3

The table below represents the preliminary allocation of the purchase price to the net assets acquired on their estimated fair values as of July 1, 2015 (in millions):

Goodwill	$	47.8
Cash	26.5
Identified intangible assets	25.8
Inventories	10.3
Property, plant, and equipment	10.7
Other assets	19.5
Total liabilities and accruals	(17.3		)
Fair value of total consideration	$	123.3

The preceding purchase price allocation has been determined provisionally and is subject to revision as additional information about the fair value of individual assets and liabilities becomes available. The Company is in the process of finalizing valuations of certain tangible and intangible assets, including developed technology. The provisional measurement of property, plant and equipment, intangible assets, goodwill, deferred income taxes, and other assets and liabilities is subject to change. Any change in the acquisition date fair value of the acquired net assets will change the amount of the purchase price allocable to goodwill.

Intangible Assets Recorded

The fair value of Audience’s developed technologies intangible asset was determined based on the Multi-Period Excess Earnings Method (MPEEM)of the income approach. The measure is based upon certain unobservable inputs and key assumptions surrounding revenues, growth rates, obsolescence factors and other market based metrics. The developed technologies intangible asset will be amortized on a straight line based over an estimated 5 year useful life. The intangible asset is included in Intangible assets, net within the Knowles Consolidated Balance Sheet.

Developed technologies acquired include Audience’s existing technologies related to improving the performance of speech-based services and enhancing audio quality for multimedia. An income approach was used to value Audience’s customer relationships and developed technologies. Using this approach, the estimated fair value was calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. A discount rate of 27.0% was used to discount the cash flows to the present value.

The excess of the fair value of the merger consideration over the fair values of these identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to the assembled workforce, a reduction in costs and other synergies and an increase in product development capabilities. The goodwill resulting from the merger is not deductible for tax purposes. Goodwill has been allocated to the MCE segment, which is the operating segment expected to benefit from the merger.     

Impact of Acquisition and Pro-forma Summary

The following unaudited pro-forma summary presents consolidated financial information as if Audience had been acquired on January 1, 2013. The unaudited pro-forma financial information is based on historical results of operations and financial position of the Company and Audience. The pro-forma results include:

• estimated amortization of a definite-lived developed technology intangible asset,

• the estimated cost of the inventory step-up to fair value,

• the estimated depreciation expense of the fixed asset step-up to fair value,

• interest expense associated with debt that would have been incurred in connection with the acquisition and

• the reclassification of Audience transaction costs from 2015 to the first quarter of 2013.

The unaudited pro-forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2013. In addition, the unaudited pro-forma information should not be deemed to be indicative of future results.

	Years Ended December 31,
	2015			2014			2013
Revenues	$	1,114.6		$	1,254.6		$	1,374.9
Net (loss) earnings	(287.7		)	(169.7		)	89.7
Basic (loss) earnings per share	(3.20		)	(1.93		)	1.02
Diluted (loss) earnings per share	$	(3.20	)	$	(1.93	)	$	1.02