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| COBR > SEC Filings for COBR > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
Executive Summary-Third Quarter
Net earnings for the third quarter of 2008 totaled $142,000 or $.02 per share, compared to net earnings of $404,000 or $.06 per share for the third quarter of 2007. Key factors contributing to the lower net earnings were:
• Net sales declined $6.0 million, or 15.4%, due to lower sales of mobile navigation, as a result of the change in the Company's North American mobile navigation strategy in the fourth quarter of 2007, as well as lower sales of two-way radios, Citizens Band radios and radar detectors in North America. A sales decline of $1.1 million at PPL also contributed to the overall revenue decline.
• Gross margins increased by 4.4 points to 29.2 points, nearly offsetting the decline in net sales and resulting in a decrease
in gross profit of $29,000.
• Selling, general and administrative expenses decreased $805,000 or 8.3% due to the Company's cost containment efforts, headcount reductions and lower professional fees.
• Operating income increased to $793,000 from $17,000 in the third quarter of 2007 as the efforts to contain selling, general and administrative expenses resulted in improved operating margins.
• Other expenses, including interest, increased by $159,000 primarily due to an increase in cash surrender value ("CSV") expense for life insurance of $292,000, which was partially offset by $188,000 of lower interest expense because of reduced debt and a decline in interest rates.
The combined impact of the foregoing factors was a $617,000 improvement in income before taxes.
The effective tax rate for the third quarter of 2008 was 66.7% compared to 313.7% for the third quarter of 2007. The 66.7% effective tax rate for the third quarter of 2008 was due principally to the effect of non-deductible CSV expense of $319,000. The 313.7% effective rate for the tax benefit for the third quarter of 2007 was due to a reversal of the net operating loss ("NOL") valuation allowance for CEEL and a tax benefit for PPL due to a pending decline in the corporate tax rate in the United Kingdom from 30% to 28% and the impact of this action on deferred taxes on the Company's balance sheet.
Executive Summary-Nine Months
Net earnings for the first nine months of 2008 totaled $1.9 million or $.30 per share - an increase of $2.7 million or $.42 per share compared to the same period of 2007. Key factors contributing to the improved net earnings were:
• Net sales declined $14.1 million, or 12.8%, due to lower sales of mobile navigation, as a result of the change in the fourth quarter of 2007 of the Company's North American mobile navigation strategy, as well as lower sales of two-way radios,
Citizens Band radios and radar detectors in North America. Partially offsetting these lower sales was a $1.7 million net
sales increase at PPL.
• Gross profit increased by $3.9 million despite the sales decline as gross margin rose 7.5 points to 31.2% because of higher margins on new models, lower airfreight and the change in the Company's North American mobile navigation strategy.
• Selling, general and administrative expenses decreased $2.4 million, or 8.4%, due to lower selling expense as a result of the decline in sales as well headcount reductions, lower professional fees and the Company's overall cost containment efforts.
• Operating income increased $6.2 million to $4.1 million as the improvements in gross margins and efforts to contain selling, general and administrative expenses resulted in improved operating margins.
• Other expenses, including interest, increased by $894,000 mainly due to $780,000 of a CSV expense in 2008 compared to $193,000 of CSV income in 2007. This was partially offset by $374,000 of lower interest expense because of reduced debt
and a decline in the interest rate incurred.
The combined impact of the foregoing factors was $2.8 million of income before income taxes compared to a $2.5 million loss before income taxes for the first nine months of 2007.
The effective tax rate for the first nine months of 2008 was 31.5% compared to 70.6% for the same period a year ago. The 70.6% effective rate for the tax benefit for the nine-month period ending September 30, 2007 was due to a reversal of the NOL valuation allowance for CEEL and a tax benefit for PPL due to a pending decline in the corporate tax rate in the United Kingdom from 30% to 28% and the impact of this action on deferred taxes on the company's balance sheet.
EBITDA
The following table shows the reconciliation of net income to EBITDA and EBITDA
As Defined:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands)
2008 2007 2008 2007
Net income (loss) $ 142 $ 404 $ 1,933 $ (750 )
Depreciation/amortization 1,130 1,481 4,535 5,248
Interest expense 231 419 775 1,149
Income tax provision (benefit) 285 (596 ) 895 (1,768 )
Minority interest - 2 14 13
EBITDA 1,788 1,710 8,152 3,892
Stock option expense 65 67 194 158
CSV loss (gain) 319 27 780 (193 )
Other non-cash items (217 ) 986 (273 ) 959
EBITDA As Defined $ 1,955 $ 2,790 $ 8,853 $ 4,816
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EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA As Defined, represents EBITDA plus the applicable adjustments required to agree with the EBITDA measurement for compliance with the financial covenants of the Company's lenders. The Company believes EBITDA is a useful performance indicator and is frequently used by management, securities analysts and investors to judge operating performance between time periods and among other companies. The Company uses EBITDA As Defined to assess operating performance and ensure compliance with financial covenants.
EBITDA and EBITDA As Defined are Non-GAAP performance indicators that should be used in conjunction with GAAP performance measurements such as net sales, operating profit and net income to evaluate the Company's operating performance. EBITDA and EBITDA As Defined are not alternatives to net income or cash flow from operations determined in accordance with GAAP. Furthermore, EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.
Third Quarter 2008 Compared to Third Quarter 2007
The following table contains sales and pre-tax profit (loss) after eliminating
intercompany accounts by business segment for the third quarter ending
September 30, 2008 and 2007:
2008 vs. 2007
2008 2007 Increase (Decrease)
(in thousands)
Pre-tax
Pre-tax (Loss) Net Pre-tax
Business Segment Net Sales Profit Net Sales Profit Sales Profit
Cobra $ 30,778 $ 258 $ 35,695 $ (409 ) $ (4,917 ) $ 667
PPL 2,464 169 3,588 219 (1,124 ) (50 )
Total Company $ 33,242 $ 427 $ 39,283 $ (190 ) $ (6,041 ) $ 617
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Cobra Business Segment
Cobra net sales decreased $4.9 million, or 13.8%, in the third quarter of 2008 to $30.8 million. During the fourth quarter of 2007, the Company announced a change in its mass market mobile navigation strategy in North America. As part of this change in strategy, all future development of mass marketed mobile navigation products ceased with future efforts limited to unique mobile navigation products sold into niche markets with specialized and focused distribution. When such products are launched, lower cost sourcing arrangements utilizing the PPL platform or that of other qualified vendors will be employed. Accordingly, $1.2 million of this decline was due to lower mobile navigation/GPS product net sales as a result of this change in strategy. The remaining $3.7 million decline was due to lower sales of two-way radios, Citizens Band radios and detectors in the United States due to weak store traffic and competitive pressures. The following table summarizes the net sales for the three-month periods ending September 30, 2008 and 2007:
Mobile Navigation/ Other
GPS Products Products Total
Net Sales Net Sales Net Sales
(in thousands)
2008 $ 674 $ 30,104 $ 30,778
2007 1,897 33,798 35,695
Decrease $ (1,223 ) $ (3,694 ) $ (4,917 )
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Gross profit increased $126,000 in the third quarter of 2008 from the third quarter of 2007 to $8.4 million and the gross margin improved to 27.3% in the third quarter of 2008 from 23.2% in the third quarter of 2007. The gross margin improvement was due to increased gross margins on domestic two-way radios, detectors and Citizens Band radios, which benefited from sales of new, higher-margin models. Additionally, substantially lower air freight also contributed to the improvement in the two-way radio gross margin. Lastly, the gross margin in mobile navigation improved as prices for the most recent product, the NAV ONE™ 5000, remained stable through the third quarter of 2008. The following table summarizes the gross profit for the three-month periods ending September 30, 2008 and 2007:
Mobile Navigation/ Other
GPS Products Gross Products Total
(Loss) Profit Gross Profit Gross Profit
(in thousands)
2008 gross (loss) profit $ (54 ) $ 8,457 $ 8,403
2007 gross (loss) profit (941 ) 9,218 8,277
Increase $ 887 $ (761 ) $ 126
2008 gross margin -8.0 % 28.1 % 27.3 %
2007 gross margin -49.6 % 27.3 % 23.2 %
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Selling, general and administrative expenses decreased $731,000, or 8.8%, to $7.6 million in the third quarter of 2008 from $8.3 million in the third quarter of 2007. The decrease was due to less variable selling expenses because of the lower sales as well as reduced professional fees and management's efforts to reduce spending.
Other expense, including interest, increased $190,000 in the third quarter of 2008 as compared to the third quarter of 2007. This increase was mainly due to a $319,000 loss in 2008 on the cash surrender value of life insurance, owned by the Company for the purpose of funding deferred compensation programs for several current and former officers. The loss was generated as the investment vehicles in which the cash was invested declined in value in line with the overall financial markets. Partially offsetting the cash surrender value loss was a $186,000 decline in interest expense, primarily because of a reduced level of borrowings and lower interest rates.
As a result of the above, there was a pre-tax profit of $258,000 in the third quarter of 2008 compared to a pre-tax loss of $409,000 in third quarter of 2007.
Performance Products Limited ("PPL") Business Segment
PPL's net sales decreased $1.1 million, or 31.3%, to $2.5 million in the third quarter of 2008 from $3.6 million in the third quarter of 2007. This decrease was due to lower sales of personal navigation and GPS locator products in the United Kingdom and in part was due to the weakness in the United Kingdom economy.
Gross profit decreased $155,000 to $1.3 million in the third quarter of 2008 from $1.5 million in the third quarter of 2007. However, the gross margin improved to 52.8% in 2008 from 40.6% in 2007 as the higher-margin download fees of PPL's proprietary Enigma data base-which provides accurate and comprehensive listings of fixed speed cameras, high accident zones and other hazards-accounted for a higher percentage of revenues in 2008.
Selling, general and administrative expenses totaled $1.3 million for the third quarter of 2008 and were $74,000 or 5.3% lower than the third quarter of 2007. As a percentage of net sales, selling, general and administrative expenses increased to 53.8% in 2008 from 39.0% in 2007 due to the lower level of sales in 2008 as compared to 2007.
As a result of the above, income before income taxes decreased to $169,000 in the third quarter of 2008 from $219,000 in the third quarter of 2007.
Nine Months 2008 Compared to Nine Months 2007
The following table contains sales and pre-tax profit (loss) after eliminating
intercompany accounts by business segment for the nine-month periods ending
September 30, 2008 and 2007.
2008 vs. 2007
2008 2007 Increase (Decrease)
(in thousands)
Pre-tax Pre-tax
(Loss) (Loss) Pre-tax
Business Segment Net Sales Profit Net Sales Profit Net Sales Profit
Cobra $ 84,286 $ 63 $ 100,080 $ (2,934 ) $ (15,794 ) $ 2,997
PPL 12,132 2,779 10,454 429 1,678 2,350
Total Company $ 96,418 $ 2,842 $ 110,534 $ (2,505 ) $ (14,116 ) $ 5,347
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Cobra Business Segment
Cobra net sales decreased $15.8 million, or 15.8%, in 2008 to $84.3 million as compared to the first nine months of 2007. $5.9 million of the decline was due to lower mobile navigation sales as a result of the change in Cobra's North American mass market mobile navigation strategy as previously discussed. The remaining $9.9 million decline was due primarily to lower sales of Citizens Band radios, detectors and two-way radios in the United States. Sales of Citizens Band radios declined as the weak economy and higher fuel prices reduced discretionary income of professional drivers, with strong sales of the new 29 LTD BT with Bluetooth® wireless technology, introduced earlier in 2008, offsetting some of the decline. Lower detector sales resulted principally from weak store traffic and competitive pressures, which were offset, in part, by sales to a major account with which Cobra had not done business for several years. Two-way radio sales in the U.S. decreased because of a reduction in the number of skus at a major retailer, mostly driven by the continuing decline of this product category. However, some of this domestic decrease was offset by a large increase in sales to Cobra's Canadian distributor because of increased placement. The following table summarizes the net sales for the nine-month periods ending September 30, 2008 and 2007:
Mobile Navigation/ Other
GPS Products Products Total
Net Sales Net Sales Net Sales
(in thousands)
2008 $ 309 $ 83,977 $ 84,286
2007 6,165 93,915 100,080
Decrease $ (5,856 ) $ (9,938 ) $ (15,794 )
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Gross margin increased to 28.0% in the first nine months of 2008 from 21.9% in the first nine months of 2007, which resulted in an increase in gross profit of $1.7 million to $23.6 million in the first nine months of 2008 from $21.9 million in the same period a year ago. Approximately 2.4 points of the gross margin improvement was as the result of the change in Cobra's North American mass market mobile navigation strategy as previously discussed including the positive effect of pricing stability during the period for the NAV ONE 5000, which was introduced late in 2007. Also contributing to the gross margin improvement was significantly lower air freight and the favorable impact of new, higher-margin models such as the 29 LTD BT Citizens Band radio and the XRS 9950 radar detector that includes an optional speed/red light camera GPS locator with Cobra's proprietary verified data for the entire United States and Canada.
Mobile Navigation/ Other
GPS Products Gross Products Total
Profit (Loss) Gross Profit Gross Profit
(in thousands)
2008 gross profit $ (11 ) $ 23,604 $ 23,593
2007 gross (loss) profit (2,074 ) 24,007 21,933
Increase $ 2,063 $ (403 ) $ 1,660
2008 gross margin -3.6 % 28.1 % 28.0 %
2007 gross margin -33.6 % 25.6 % 21.9 %
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Selling, general and administrative expenses decreased $2.3 million, or 9.5%, to $22.0 million in the first nine months of 2008 from $24.3 million in the first nine months of 2007. The decrease was due to less variable selling expenses because of the lower sales as well as headcount reductions, lower professional fees and management's efforts to reduce spending.
Other expense, including interest, was $969,000 higher in the first nine months of 2008 as compared to the same period of 2007 mainly because of a $780,000 loss in 2008 on the cash surrender value of life insurance compared to a $193,000 gain in the prior year. Interest expense decreased $338,000 because of lower borrowing levels and a decline in the interest rate.
As a result of the above, there was pre-tax profit of $63,000 in the first nine months of 2008 compared to a pre-tax loss of $2.9 million in the first nine months of 2007.
Performance Products Limited ("PPL") Business Segment
PPL's net sales increased $1.7 million, or 16.1%, to $12.1 million in the nine-month period ending September 30, 2008 from $10.4 million for the comparable 2007 period. Higher sales of smartphones and personal navigation products were partially offset by sales declines of GPS products. Sales of personal navigation products were aided by having a full array of products available for sale in 2008 compared to the limited availability in 2007 resulting from development and production problems.
Gross profit increased $2.2 million to $6.5 million, or 53.3%, in the nine-months ending September 30, 2008 from the $4.3 million, or 40.8%, for the prior year period. The increase in gross margin was due to higher sales volume and the mix impact as higher-margin download fees and smartphone sales accounted for a larger portion of the 2008 revenue.
Selling, general and administrative expenses totaled $4.0 million for the first nine months of 2008 and for the same period of 2007. Expressed as a percentage of net sales, selling, general and administrative expenses were 33.1% in 2008 compared to 39.2% for 2007.
As a result of the above, pre-tax profit for the nine-month period ending September 30, 2008 increased to $2.8 million from $429,000 for the prior year's period.
On January 31, 2002, the Company executed a three-year Revolving Credit Agreement (the "Credit Agreement") with three financial institutions, including LaSalle Bank National Association, as agent. In November 2005, the term of the agreement was amended to January 31, 2007. In October 2006, in connection with the PPL acquisition, the Credit Agreement was amended and restated for a five-year term and maximum loan limit of $53.6 million, including the $40 million revolver, a $7.0 million term loan and a $6.6 million delayed draw term loan. The delayed draw term loan was never activated. Borrowings under the Credit Agreement were secured by substantially all of the assets of the Company.
On February 15, 2008, the Company entered into a Loan and Security Agreement (the "LSA") with The PrivateBank and Trust Company, as lender and agent, and RBS Citizens, N.A., as lender, for a $5.7 million term loan facility and a $40 million revolving credit facility. Both facilities mature on October 19, 2011 and replaced the previous Credit Agreement. During the transition period to The PrivateBank and RBS Citizens lenders, the Company was required to maintain cash on deposit with the prior lender to fund letters of credit; as of September 30, 2008 the cash collateral was no longer required. At September 30, 2008, the Company had interest bearing debt outstanding of $14.2 million, consisting of the $4.8 million term loan and $9.4 million in the revolver. As of September 30, 2008, availability was approximately $18.5 million under the revolving credit line based on the asset advance formulas.
Cobra Electronics U.K. Limited, a wholly-owned subsidiary of the Company, completed the acquisition of 100% of the issued and outstanding share capital of PPL in 2006. Under the acquisition agreement, the purchase price for the issued share capital of PPL consisted of $21.2 million paid in cash at the closing of the transaction. The former shareholders of PPL were eligible to receive additional cash consideration of up to approximately $6.5 million based on the achievement of certain performance targets by PPL for the twelve-month period ended March 31, 2007 (the first earn-out period) and up to approximately $10.0 million for the fourteen-month period ended May 31, 2008 (the second earn-out period). No additional consideration was paid to the former shareholders for the first earn-out period; the former shareholders were eligible to recapture all or a portion of this first earn-out payment should the performance in the second earn-out period exceed the performance targets established for the payment of the entire second earn-out. Additionally, the former shareholders were eligible to earn additional consideration if the performance of PPL exceeded certain cumulative targets for the combined earn-out periods.
The second and final earn-out period in connection with the purchase agreement concluded on May 31, 2008. The aggregate amount of the final earn-out payment, which totaled $8.4 million, was paid to the former shareholders on October 20, 2008.
For the nine months ended September 30, 2008 net cash flows from operating activities were $10.2 million. Significant net cash inflows from operations included net income of $1.9 million, non-cash depreciation and amortization of $4.5 million, a reduction in accounts receivable of $4.0 million, a decrease in inventory of $3.5 million and an increase in accrued income taxes of $716,000. The decrease in accounts receivable resulted from collections on sales from the fourth quarter of 2007. The decrease in inventory was due to mainly lower Cobra mobile navigation inventory as a result of the change in Cobra's North American mass market mobile navigation strategy as previously discussed and lower inventory at PPL because of higher sales. The increase in accrued income taxes was due to the strong profits at PPL in 2008.
Partially offsetting these inflows was a decrease in accrued liabilities of $4.0 million. The decrease in accrued liabilities was due to two factors. First, accrued advertising and sales promotion costs declined as payments to customers for fourth quarter 2007 advertising and sales promotion programs more than offset similar accruals made in the first quarter of 2008 on lower sales. Second, there was a large reduction in the warranty reserve established at December 31, 2007 for the Company's change in its North American mobile navigation strategy, which reflected customer returns in the first nine months of 2008. In the fourth quarter of 2007, $7.5 million was charged to cost of sales for costs related to the change in the Company's mobile navigation strategy in North America, including the impairment of certain intellectual property, the write down of certain mobile navigation inventory, related parts and other assets to estimated net realizable value and the disposition of future product returns by means other than returning them to vendors for credit against new products. At September 30, 2008, the total remaining amount of reserves established for this change in strategy was approximately $326,000. Of this amount, $132,000 was for a warranty reserve for the disposition of future product returns by means other than returning them to vendors for credit against new products, $178,000 was to reduce certain mobile navigation parts to their estimated net realizable value and $16,000 was for a NRV reserve, which reduced mobile navigation products returned from customers to their estimated net realizable value.
Working capital requirements are seasonal, with demand for working capital being . . .
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