Knowles Electronics Announces Sales for Fourth Quarter and Results for Year; Renegotiates Bank Covenants
ITASCA, Ill.--Feb. 7, 2002--Knowles Electronics Holdings, Inc. announced its sales for the fourth quarter and results for the year ended December 31, 2001.The manufacturer of hearing aid components and other products reported fourth quarter sales of $57.1 million, 7% less than the $61.2 million reported for the fourth quarter of 2000. The company's sales for the year totaled $223.7 million, 6% less than the $238.1 million reported for 2000.
"Although we were pleased to see continued improvement in the sales of our core products during the fourth quarter, our sales did not meet our expectations," said President and CEO John Zei. The company's KE hearing components Division reported a 8% increase in sales compared to the fourth quarter of 2000, the result of significantly increased orders from the company's largest customer. Yet the gains the company made in the last half of the year did not offset weak sales in first half, and the division's sales were down 1% for the year. Sales of the company's Automotive Components Group Division declined 28% compared to the fourth quarter of 2000 and declined 18% for the year, due to reduced worldwide demand for the SSPI solenoid products used in off-road diesel equipment and the sensors manufactured by the company's Ruf Electronics subsidiary. Two factors account for the 24% decline in the Emkay Division's fourth quarter sales. The consolidation and reorganization of European cable operators in the second half of the year reduced demand for the division's infrared products, which had enjoyed strong sales during the first half of the year. Fourth quarter sales of the division's finished goods declined in comparison to the especially strong sales reported in the fourth quarter of 2000. Emkay's sales were down 5% for the year.
The company's results for the full year were affected by unfavorable book to physical inventory adjustments, manufacturing inefficiencies and short-term quality costs related to outsourced material. For the year, EBITDA before restructuring charges reached $56.7 million or 25.3% of sales. In 2000, EBITDA before restructuring expenses totaled $66.8 million, or 28.1% of sales. The company reported a loss of $1.5 million for 2001, compared to a loss of $3.9 million for 2000, when the company recorded an $18 million restructuring charge to consolidate its operations, close five manufacturing facilities and outsource some of its production.
"We are disappointed that our success in restructuring and streamlining our operations is not reflected in our current results," said James F. Brace, Executive Vice President and CFO. "Gross margins had the potential to improve by several percentage points as a result of restructuring, but actually improved less than one percent due to the challenges we encountered with inventory, outsourced quality and manufacturing." SG&A expenses increased $6 1/2 million as the company introduced new products and new product management teams at its Emkay Division and incurred additional non-capitalized expenses associated with the launch of its new enterprise resource planning system. Operating income increased from $37.4 million in 2000 to $43.0 million in 2001, due to the lower restructuring expense in 2001.
The company will report full results for the fourth quarter later. The implementation of a new enterprise resource planning system and a related physical inventory identified significant material usage variances and increased levels of slow moving and obsolete inventory at year-end.
At the same time, in accordance with generally accepted accounting principles, the company capitalized previously expensed software development costs, and it modified the way it accounts for absorbing overhead into inventory due to the shifting of manufacturing resources. Both of these changes had a positive impact on fourth quarter earnings. The company capitalized $3.3 million of the consulting expenses associated with designing, testing and implementing its new enterprise resource planning system. In addition, the company also changed its method of accounting for inventory from LIFO to FIFO, noting that this change had no impact on the company's income statement for 2001, although 2000 cost of sales, inventory and equity have been restated.
The company is reviewing the impact of spreading these fourth quarter adjustments on the full year, to determine what the appropriate changes, if any, are to the previously reported quarterly results. The company expects to report quarterly results in the next four weeks.
Lower than anticipated 2001 sales and earnings led the company to renegotiate its agreements with lenders. The new covenants, which took effect on December 31, 2001, permit higher leverage and interest coverage ratios for five quarters. In exchange, the company agreed to pay higher interest rate spreads over LIBOR for the remainder of the agreement. The covenants revert to the original terms of the bank agreement on March 31, 2003. Until then, the company also has agreed to seek the approval of lenders before making acquisitions over a nominal amount, to limit 2002 capital expenditures to no more than $20 million, and to use all cash proceeds from the sale of assets in excess of $10 million to pay down bank debt. The banks agreed to the proposed amendment on December 21, 2001 and the company passed the revised covenants at the end of the fourth quarter. "We expect to be able to meet the revised covenants through 2002," commented Brace.
"We are happy to put 2001 behind us," said Zei, "and even though sales remain unpredictable, we are looking forward to 2002. We have solved the problems related to outsourced quality, and we have gained a much better understanding of the factors creating the manufacturing inefficiencies. Meanwhile, our restructuring plan has proven its worth, and our new ERP system is giving us better information to use in running the business."
Although the company does not expect the infrared and finished goods products made by its Emkay Division and the diesel solenoids made by SSPI to contribute significantly to its growth, it anticipates continued increases in sales of its core KE Division products. It also plans to increase sales of its Deltek volume controls and new silicon microphone products. Microphones for applications other than hearing aids and far field array products will open new opportunities for growth. To concentrate on these areas, the company expects to complete the planned sale of its Ruf subsidiary by the end of the first half of 2002.
"Our strategies are clear, and the operating improvements we have made will enable us to work more profitably and productively," said Zei. "We lead our core markets, and the demand for our products will continue to rise. We are committed to significant improvement in 2002."
Knowles Electronics is the world's leading manufacturer of transducers and related components used in hearing aids. The company also manufactures acoustic components used in voice recognition, telephony, and Internet applications as well as automotive solenoids and sensors. In 1999, the European fund management company Doughty Hanson & Co Ltd acquired Knowles.
(Please see attached financial statements)
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Any Forward Looking Statements contained herein involve risks and uncertainties, including, but not limited to, product demand and market acceptance risks, the effect of economic conditions, the impact of competitive products and pricing, product development and patent protection, commercialization and technological difficulties, capacity and supply constraints or difficulties, actual purchases under agreements, the effect of the company's accounting policies, and other risks.
Knowles Electronics Holdings, Inc.
Consolidated Statements of Operations
Year ended December 31,
2001 2000
----------------- ----------------
(in thousands)
(Unaudited)
Net sales $ 223,721 $ 238,123
Cost of sales 124,587 134,069
----------------- ----------------
Gross margin 99,134 104,054
44.3% 43.7%
Research and development expenses 14,684 13,380
Selling and marketing expenses 14,732 12,511
General and administrative expenses 26,738 23,831
Restructuring expenses 317 18,440
----------------- ----------------
Operating income 42,663 35,892
Other income (expense):
Interest income 146 959
Interest expense (37,756) (43,341)
----------------- ----------------
Income (loss) before income taxes 5,053 (6,490)
Income taxes (6,532) 1,082
----------------- ----------------
Net income (loss) $ (1,479) $ (5,408)
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Knowles Electronics Holdings, Inc.
Consolidated Balance Sheets
December 31,
2001 2000
----------------- ----------------
Assets (in thousands)
Current Assets: (Unaudited)
Cash and cash equivalents $ 2,446 $ 17,076
Accounts receivable, net 39,113 41,192
Inventories, net 46,662 48,273
Prepaid expenses and other 6,082 4,334
----------------- ----------------
----------------- ----------------
Total current assets 94,303 110,875
Property, plant and equipment,
at cost:
Land 6,829 6,957
Building and improvements 32,464 31,469
Machinery and equipment 62,026 65,482
Furniture and fixtures 27,453 23,705
Construction in progress 5,559 4,501
----------------- ----------------
----------------- ----------------
Subtotal 134,331 132,114
Accumulated depreciation (68,704) (71,580)
----------------- ----------------
----------------- ----------------
Net 65,627 60,534
Other assets, net 3,105 3,855
Deferred income taxes 4,956 5,744
Deferred finance costs, net 8,421 9,577
----------------- ----------------
----------------- ----------------
Total assets $ 176,412 $ 190,585
================= ================
================= ================
Liabilities and stockholders'
equity (deficit) Current
liabilities:
Accounts payable $ 17,727 $ 14,471
Accrued compensation and
employee benefits 7,403 9,334
Accrued interest payable 5,096 4,898
Accrued warranty and rebates 7,545 8,971
Accrued restructuring costs 4,197 12,886
Other liabilities 7,885 8,652
Income taxes 6,015 4,134
Short-term debt 5,287 1,253
Current portion of notes payable 9,000 9,375
----------------- ----------------
----------------- ----------------
Total current liabilities 70,155 73,974
Accrued pension liability 8,872 7,902
Other noncurrent liabilities 5 764
Notes payable 330,773 339,432
Preferred stock mandatorily
redeemable in 2019 including
accumulating dividends of: $50,042
December 2001; $28,675
December, 2000 235,042 213,675
Stockholders' equity (deficit):
Common stock, Class A, $0.001 par
value, 1,052,632 shares
authorized, outstanding: 981,667
December, 2001; 983,333
December, 2000 - -
Common stock, Class B, $0.001 par
value, 52,632 shares authorized,
none ever issued - -
Capital in excess of par value 17,213 17,263
Retained earnings (accumulated
loss) (478,482) (455,622)
Accumulated other comprehensive
income - translation adjustment (7,166) (6,803)
---------------- ---------------
Total stockholders' equity (deficit) (468,435) (445,162)
---------------- ---------------
Total liabilities and stockholders'
equity (deficit) $ 176,412 $ 190,585
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