Knowles Electronics Announces Second Quarter and Six Months 2002 Financial Results
ITASCA, Ill.--Aug. 6, 2002--Knowles Electronics Holdings Inc. announced its results for the quarter ended June 30 and the first six months of 2002.The manufacturer of hearing aid components and other products reported second quarter sales of $58.2 million, 2% more than the $57.3 million reported for the second quarter of 2001. The company's sales for the first six months of 2002 totaled $109.2 million, 3% less than the $112.0 million reported for the first half of 2001.
All three of the company's divisions reported increased sales compared to the first quarter of the year. At the company's Knowles Electronics Division, sales grew by 9% over the first quarter to $34.6 million, 1% less than the $35.1 million reported for the second quarter of 2001. The company's Emkay Division reported sales of $10.7 million, an increase of 42% over first quarter sales and 14% more than the $9.4 million reported for the second quarter of 2001, due to strong demand for its components, infrared products and finished goods. The company's Automotive Components Group reported sales of $13.0 million for the second quarter of 2002, compared to sales of $11.7 million for the first quarter of the year and $12.8 million for the second quarter of 2001.
Despite the quarter-to-quarter increase in sales, the company reported a decline in sales for the six months. For the first half of 2002, the company's KE Division reported sales of $66.4 million, 1% less than the $67.3 million reported for the first six months of 2001. Sales at the Emkay Division totaled $18.2 million for the first half, 5% more than the $17.4 million reported in 2001. The Automotive Components Group's sales declined by 10% to $24.6 million compared to $27.3 million in the first six months of 2001.
While second-quarter sales increased, operating income declined as a result of charges for the impairment of the Ruf Electronics subsidiary's assets, which the company plans to sell, and significant pricing pressure and unfavorable changes in product mix at all three of the company's divisions. The company announced that it was taking a non-cash charge of $8.7 million for the impairment of Ruf assets held for sale, as well as an additional $600,000 restructuring charge.
While improved operating efficiencies increased the KE Division's operating income compared to the second quarter of 2001, the non-cash charge and declines in the operating income at the Emkay and Automotive divisions reduced the company's operating income and net income. Operating income for the second quarter totaled $1.3 million, compared to $12.4 million for the second quarter of 2001. Operating income for the first six months totaled $9.2 million, compared to $23.3 million for the first six months of 2001. The company's net loss for the quarter was $7.8 million, compared to net income of $378,000 for the second quarter of 2001. The company reported a net loss of $8.2 million for the six months compared to net income of $1.0 million for the first half of 2001.
The company's adjusted EBITDA (reported EBITDA plus restructuring and impairment charges) for the second quarter of 2002 totaled $13.5 million, or 23.2% of sales, almost equal with the $13.6 million, or 23.8% of sales reported for the second quarter of 2001. For the first six months of the year, the company's adjusted EBITDA reached $24.9 million, or 22.8% of sales, compared to $28.3 million, or 25.3% of sales, for the first six months of 2001. The decline in the first half EBITDA percentage was about half due to lower gross margins caused by customer pricing pressure and about half due to selling, general and administrative costs being a higher percentage of sales.
"At a time when world markets were flat or down, we increased our sales in the second quarter," commented President and CEO John Zei. "What's more, we continued to improve our cash flows. The full implementation of our Enterprise Resource Planning system, significant inventory reductions, and improved supply chain management has helped us control costs and respond to the challenging conditions we face today."
The company has moved aggressively to control its costs and increase its ability to generate cash. Capital expenditures for the first half were down more than $7 million compared to 2001. Vice President and CFO Jim Moyle noted that the slight increase in the company's selling, general and administrative expenses resulted from the expenses and charges associated with renegotiating its bank lending agreements in May. "Cash generated by operations continues to rise," he said. "We are imposing very tight control over working capital."
While the company does not expect any short-term improvements in its markets, it said that its launch of new products is proceeding on schedule and that it expects to deliver its first shipments of new silicon microphones by the end of the year. Meanwhile, shifting the remainder of its production operations to its Asian facilities will help the company continue to improve its productivity. "We've made good progress in streamlining and improving our operations," said Zei. "Our bottom line performance is our number one priority."
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, the ability to generate sufficient liquidity to service debt obligations, the ability to maintain compliance with its debt covenants, and other risks.
Knowles Electronics Holdings, Inc.
Consolidated Statements of Operations
(unaudited)
Three months ended Six months ended
June 30 June 30
2002 2001 2002 2001
-------- -------- -------- --------
(restated) (restated)
(in thousands) (in thousands)
Net sales $ 58,233 $ 57,280 $109,239 $112,009
Cost of sales 32,888 33,633 62,549 63,348
-------- -------- -------- --------
Gross margin 25,345 23,647 46,690 48,661
Research and development
expenses 3,885 3,421 7,364 6,984
Selling expenses 3,631 3,265 7,235 6,675
General and administrative
expenses 7,252 6,686 13,598 13,558
Impairment of assets held
for sale 8,683 - 8,683 -
Restructuring activity 607 (2,122) 618 (1,837)
-------- -------- -------- --------
Operating income 1,287 12,397 9,192 23,281
Other income (expense):
Interest income 9 26 11 104
Interest expense (8,828) (9,640) (17,724) (19,839)
-------- -------- -------- --------
Income (loss) before taxes (7,532) 2,783 (8,521) 3,546
Income tax (benefit) 289 2,405 (293) 2,500
-------- -------- -------- --------
Net income (loss) $ (7,821) $ 378 $ (8,228) $ 1,046
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Knowles Electronics Holdings, Inc.
Consolidated Balance Sheets
(unaudited) (unaudited)
June 30 December 31
2002 2001
----------- -----------
Assets (in thousands)
Current Assets:
Cash & cash equivalents $5,731 $2,446
Accounts receivable, net 42,783 39,113
Inventories, net 41,175 46,662
Prepaid expenses and other 5,744 6,082
Deferred taxes, current portion 6,145 6,096
----------- -----------
Total current assets 101,578 100,399
Property, plant and equipment, at cost:
Land 6,764 6,758
Building and improvements 26,992 26,826
Machinery and equipment 55,708 53,879
Furniture and fixtures 26,841 26,117
Construction in progress 7,276 5,085
----------- -----------
Subtotal 123,581 118,665
Accumulated depreciation (70,411) (63,838)
----------- -----------
Net 53,170 54,827
Assets held for sale, net of impairment 3,858 10,800
Other assets, net 3,664 3,105
Deferred finance costs, net 7,812 8,421
Deferred income taxes 330 330
----------- -----------
Total assets $170,412 $177,882
=========== ===========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $14,099 $17,727
Short term debt 11,957 5,287
Accrued compensation and employee benefits 7,260 7,403
Accrued interest payable 4,900 5,096
Accrued warranty & rebates 8,330 7,545
Accrued restructuring costs 3,129 4,197
Other liabilities 6,962 7,885
Income taxes 5,230 6,940
Current portion of notes payable 11,250 9,000
----------- -----------
Total current liabilities 73,117 71,080
Accrued pension liability 9,544 8,872
Other noncurrent liabilities 22 5
Notes payable 326,461 330,773
Preferred stock mandatorily redeemable in
2019 including accumulating dividends of:
$61,235 June, 2002; $50,042 December 2001 246,235 235,042
Stockholders' equity (deficit):
Common stock, Class A, $0.001 par value,
1,052,632 shares authorized, outstanding:
981,667 June 2002; 981,667 December 2001 - -
Common stock, Class B, $0.001 par value,
52,632 shares authorized, none ever issued - -
Capital in excess of par value 17,213 17,213
Retained earnings (accumulated loss) (497,360) (477,937)
Accumulated other comprehensive income -
translation adjustment (4,820) (7,166)
----------- -----------
Total stockholders' equity (deficit) (484,967) (467,890)
----------- -----------
Total liabilities and stockholders' equity
(deficit) $170,412 $177,882
=========== ===========
Knowles Electronics Holdings, Inc.
Consolidated Statement of Cash Flows
(unaudited)
Three months ended Six months ended
June 30 June 30
2002 2001 2002 2001
-------- -------- -------- --------
(restated) (restated)
(in thousands) (in thousands)
Operating Activities
Net income (loss) ($7,821) $378 ($8,228) $1,046
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and
amortization 2,943 3,336 6,432 6,838
Impairment of assets
held for sale 8,683 - 8,683 -
Restructuring costs 607 550 618 835
Amortization of deferred
financing fees and debt
discount 556 531 1,285 1,056
Inventory obsolescence
provision 1,012 343 1,779 564
Deferred income taxes (10) - (49) 8
Stock compensation expense - - 200 -
Gain on disposal of
fixed assets - (3,046) - (3,046)
Change in assets and liabilities:
Accounts receivable (1,489) (1,664) (3,438) (1,356)
Inventories 3,247 3,781 4,218 673
Other current assets (520) (731) (223) (1,626)
Accounts payable 597 1,557 (3,628) 395
Accrued restructuring
costs (682) (696) (1,686) (4,193)
Accrued interest payable (5,044) (4,600) (196) 961
Accrued compensation
and benefits (918) (965) (143) (2,765)
Other current liabilities 1,401 672 (138) (542)
Other noncurrent
liabilities 439 (196) 689 (512)
Income taxes payable 147 1,124 (1,710) 880
-------- -------- -------- --------
Net cash provided by
(used in) operating
activities 3,148 374 4,465 (784)
Investing Activities
Proceeds from sales of
property, plant & equipment - 3,480 - 3,480
Purchases of property,
plant, and equipment, net (2,275) (6,418) (5,165) (12,212)
-------- -------- -------- --------
Net cash used in investing
activities (2,275) (2,938) (5,165) (8,732)
Financing Activities
Debt proceeds (payments) (1,872) (710) 4,420 (1,897)
Issuance of preferred stock
and common stock - 125 - 125
Costs associated with debt (480) - (488) -
Repurchase of common stock - (300) (200) (300)
-------- -------- -------- --------
Net cash provided by
(used in) financing
activities (2,352) (885) 3,732 (2,072)
Effect of exchange rate
changes on cash 345 (170) 253 (481)
-------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents (1,134) (3,619) 3,285 (12,069)
Cash and cash equivalents
at beginning of period 6,865 8,626 2,446 17,076
-------- -------- -------- --------
Cash and cash equivalents
at end of period $5,731 $5,007 $5,731 $5,007
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