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Knowles Electronics Announces First Quarter Results.

Business Editors

ITASCA, Ill.--(BUSINESS WIRE)--May 7, 2001

Knowles Electronics Holdings Inc. announced its first quarter 2001 results.

The manufacturer of hearing aid components and other products reported net sales of $54.7 million, nine percent less than the $59.9 million the company reported for the first quarter of 2000. The company's net income for the quarter was $156,000, compared to a net loss of $16.8 million for the first quarter of 2000, when the company recorded a $20.1 million restructuring charge to consolidate its worldwide manufacturing operations and close five manufacturing facilities.

Two of the company's three operating groups reported lower sales. Sales of the hearing aid transducers and Deltek controls produced by the Knowles Electronics Group declined by $3.8 million, or 11 percent, as major customers reduced inventories of the group's products. A slowdown in vehicle sales and production resulted in a decline of $2.1 million, or 13 percent, in the sales reported by the company's Automotive Components Group. At the company's Emkay Group, sales increased by more than $700,000, or 10 percent, primarily as a result of growing demand for its infrared technology products.

Along with weaker sales, the company reported that EBITDA (earnings before income taxes, depreciation and amortization) excluding restructuring charges was $14.2 million the first quarter of 2001 compared to $16.8 million the first quarter of 2000. Cash flow from operations for the quarter was positive, but significantly less than the first quarter last year, due to payments for restructuring charges and other liabilities of $6.5 million and inventories growing by almost $2 million. However, the company remained in compliance with all lenders' covenants through the first quarter of the year.

"Although we're disappointed in our short-term results, we're continuing to make real progress," said President and CEO John Zei. "The results of our restructuring plan have exceeded our expectations, and the rollout of a new Enterprise Resource Planning system will make our operations even more productive. Planned new product introductions are proceeding on schedule."

The company attributes a nearly four percentage point increase in its gross profit margin--from 43.9% in the first quarter of 2000 to 47.8% in 2001--to the restructuring it announced last year. "The cost savings from restructuring exceeded the one million dollars per month that we had forecasted," said James F. Brace, Executive Vice President and Chief Financial Officer.

Despite the savings the company has achieved, it reported a significant increase in its general and administrative expenses, due to the roll out of an Enterprise Resource Planning system, which will allow for improved planning and communications, shorter production times and lower inventory and supply chain costs. More than three-quarters of the $1.8 million increase in G&A expenses can be attributed to the launch of the ERP system, which will continue throughout the year.

The company also reported increased R&D expenses in the first quarter as it began to introduce new products. The Knowles Electronics Group recently introduced eight new products. The Emkay Group plans to launch a number of new products in the second half of the year, including a line of silicon microphones. Emkay also has expanded its sales force, to help increase sales of its condenser microphones and other new products.

"Without the expenses associated with implementing ERP, introducing new products and strengthening Emkay's sales force, we would have reported operating earnings before restructuring expense similar to last year," said Brace. "But all of these actions are vital to improving our performance in the future."

Looking ahead, the company anticipates a modest improvement in its key markets. "We think that the inventory reductions made by our KE Group's customers are coming to an end," Zei commented. He also said that the company expected to see a recovery in the sales of its Emkay Group's computer and telephony-related products. However, it does not expect any major improvement in the automotive components market. Weak conditions in that market led the company to suspend efforts to sell its RUF automotive subsidiary. "This is not the opportune time to sell RUF," Zei said, "so we will concentrate on completing the restructuring of that business and improving it's operating margins."

Although sales trends are expected to improve for the remainder of the year, the company is taking steps to reduce its operating expenses and conserve its capital. It will eliminate the first quarter's inventory increase and reduce inventories below last year's levels. Expenses associated with the ERP system will decline over the course of the year. A recently implemented hiring freeze, combined with selective reductions in indirect personnel, have trimmed the company's workforce by more than 100 people since the beginning of the year. Managers have been asked to reduce planned expenditures by five percent for the remaining three quarters of the year.

"We're adapting to current conditions while we continue to prepare for the future," said Zei. "We're improving our profit margins and investing in new products and better performance. And we're confident that our progress will be reflected in our future results."

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

 Three months ended March 31
 2001 2000
 ---------- ----------
 (in thousands)

Net sales $ 54,729 $ 59,860
Cost of sales 28,561 33,603
Gross margin 26,168 26,257

Research and development expenses 3,562 2,960
Selling and marketing expenses 3,410 2,972
General and administrative expenses 8,377 6,535
Restructuring expenses 285 20,094
Operating income 10,534 (6,304)

Other income (expense):
Interest income 78 239
Interest expense (10,361) (10,206)
Income (loss) before income taxes 251 (16,271)

Income taxes (95) (523)
Net income (loss) $ 156 $ (16,794)

 Knowles Electronics Holdings, Inc.

 Consolidated Balance Sheets

 March 31 December 31
 2001 2000
 ---------- ----------
 (in thousands)
Current Assets:
 Cash and cash equivalents $ 11,065 $ 17,076
 Accounts receivable, net 42,434 42,392
 Inventories, net 49,216 47,465
 Prepaid expenses and other 2,732 3,134
Total current assets 105,447 110,067
Property, plant and equipment, at cost:
Land 6,948 6,957
Building and improvements 31,135 31,469
Machinery and equipment 64,853 65,482
Furniture and fixtures 24,649 23,705
Construction in progress 5,759 4,501
 Subtotal 133,344 132,114
Accumulated depreciation (72,820) (71,580)
 Net 60,524 60,534
Other assets, net 3,771 3,855
Deferred income taxes 5,736 5,744
Deferred finance costs, net 8,971 9,577
Total assets $ 184,449 $ 189,777

Liabilities and stockholders' equity (deficit)
Current liabilities:
 Accounts payable $ 12,529 $ 14,471
 Accrued compensation and employee benefits 7,534 9,334
 Accrued interest payable 10,459 4,898
 Accrued warranty and rebates 8,205 8,971
 Accrued restructuring costs 9,674 12,886
 Other liabilities 8,204 8,652
 Income taxes 3,890 4,134
 Short-term debt 1,691 1,253
 Current portion of notes payable 10,000 9,375
Total current liabilities 72,186 73,974

Accrued pension liability 8,038 7,902
Other noncurrent liabilities 312 764
Notes payable 337,263 339,432
Preferred stock mandatorily redeemable
 in 2019 including accumulating dividends
 of: $33,762 March 2001; $28,675
 December, 2000 218,762 213,675
Stockholders' equity (deficit):
 Common stock, Class A, $0.001 par value,
 1,052,632 shares authorized, outstanding:
 983,333 March, 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 17,263 17,263
 Retained earnings (accumulated loss) (461,155) (456,430)
 Accumulated other comprehensive income -
 translation adjustment (8,220) (6,803)
Total stockholders' equity (deficit) (452,112) (445,970)
Total liabilities and stockholders'
 equity (deficit) $ 184,449 $ 189,777
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Publication:Business Wire
Date:May 7, 2001
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