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COBR > SEC Filings for COBR > Form 10-K on 18-Mar-2013All Recent SEC Filings

Show all filings for COBRA ELECTRONICS CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for COBRA ELECTRONICS CORP


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis should be read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K, and any forward-looking statements contained herein or elsewhere in this Form 10-K involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under Risk Factors in Item 1A in this Form 10-K and elsewhere herein.

Executive Summary

The Company had net earnings of $3.2 million, or $.48 per share, for the year ending December 31, 2012 compared to net earnings of $3.1 million, or $.47 per share, for 2011.

The following summarizes the changes in the net earnings reported for 2012 as compared to 2011:

ź Net sales decreased $4.4 million, or 3.5 percent, largely due to lower net sales in both the Cobra and PPL segments.

ź Gross profit in 2012 decreased $1.6 million, while gross margin declined to 29.0 percent for 2012 from 29.3 percent for 2011 because of a lower gross margin in the Cobra segment, mainly due to a decline in Trucker Navigation gross margin.

ź Selling, general and administrative expenses decreased $115,000, or 0.4 percent, due to lower variable selling expense, partially offset by higher fixed expenses in the Cobra segment.

ź Interest expense decreased by $67,000 mainly due to lower average bank debt outstanding for the current year and a decline in the interest rate in the credit agreement that was amended at the beginning of December 2012.

ź Other income was $1.0 million in the current year compared to other expense of $387,000 in 2011, with $535,000 of CSV gains (compared to $152,000 of CSV losses in the prior year's period) and a $320,000 exchange gain on CEEL's repayment of its long-term loan to Cobra U.S.

ź Tax expense amounted to $108,000 in 2012 compared to tax expense in 2011 of $169,000, a decrease of $61,000 principally attributable to lower Cobra U.S. tax expense.


Table of Contents

EBITDA

Operating results in 2012 improved slightly from the prior year. The following
table shows the reconciliation of net income to EBITDA and EBITDA As Defined for
the years ended December 31, 2012 and 2011:



                                                         Years Ended December 31
                                                         2012               2011
                                                             (in thousands)
  Net earnings                                        $     3,170         $   3,087
  Depreciation and amortization                             3,532             3,805
  Interest expense, excluding loan fee amortization           796               867
  Income tax provision                                        108               169

  EBITDA                                                    7,606             7,928
  Stock option expense                                        327               203
  CSV (gain) loss                                            (535 )             152
  Other non-cash items                                       (245 )            (430 )

  EBITDA As Defined                                   $     7,153         $   7,853

EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA As Defined represents EBITDA adjusted to conform 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 U. S. Generally Accepted Accounting Principles ("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.

Results of Operations - 2012 Compared to 2011

The following table contains sales and pre-tax income after eliminating intercompany accounts by business segment for the years ended December 31, 2012 and 2011.

                                                                                                                              2012 vs. 2011
                                                     2012                                   2011                           Increase (Decrease)
                                                                                      (in thousands)
                                            Net              Pre-tax               Net              Pre-tax              Net               Pre-tax
Business Segment                          Sales               Income             Sales               Income             Sales              Income
Cobra                                  $     104,955       $      2,970       $     107,808       $      3,142       $    (2,853 )       $      (172 )
PPL                                           13,951                308              15,451                114            (1,500 )               194

Total Company                          $     118,906       $      3,278       $     123,259       $      3,256       $    (4,353 )       $        22


Table of Contents

Cobra Business Segment

Cobra net sales in 2012 decreased $2.9 million, or 2.6 percent, to $105.0 million compared to $107.8 million in 2011. The decrease was attributable to a 4.6 percent decline in domestic net sales, mainly driven by lower net sales of Citizens Band radios, Truck Navigation products and GMRS two-way radios, which fell a combined 10.6 percent, but were partially offset by sales growth in other categories, including Detection and Phone Products. Lower Citizens Band radio net sales were due to several factors, including sluggish sales at travel centers as discretionary spending by professional drivers fell due to higher fuel prices and a softening in truck tonnage shipments, the leveling of the demand for the popular 29 LX, introduced in early 2011, and a large sale of a new limited edition model in the prior year's period that was not repeated in the current year's period. The effect of these was partially offset by the introduction of two new models, the 25 LX and the 29 LX BT, which feature Bluetooth® wireless technology connectivity for hands-free operation to comply with hands-free legislation. Net sales of Truck Navigation products were lower principally because of declines in overall average selling prices resulting from increased competition, more spending for customer programs to help accelerate sales and a large return of unsold units of two older models in the third quarter of 2012, the sell through of which slowed considerably in the market-place due to sluggish sales at travel centers and the impact of the introduction of two new models, the 6000 PRO HD and the 8000 PRO HD, in the second quarter of 2012. GMRS two-way radio net sales were lower because placement at a major retailer declined by one model from 2011. Domestic Detection net sales increased as a result of the new iRadar and Vedetta models, while Phone Products net sales increased as a result of the new Cobra Tag Universal and new Bluetooth headsets for the professional driver. Partially offsetting some of the domestic net sales decline was an increase in European net sales, up 14.3 percent, resulting from higher sales into Western and Eastern Europe of radar detectors and marine radios.

Gross profit in 2012 decreased by $1.5 million, or 5.0 percent, to $29.4 million, while gross margin declined to 28.0 percent in 2012 from 28.7 percent in 2011. The decline was mainly due to a decrease in domestic Trucker Navigation gross margin because of the negative effect of increased competition on overall average selling prices and higher spending for customer pricing programs to help accelerate sales noted above, as well as unfavorable product mix due to the sale of more 5-inch screen models, which have an overall lower gross margin than 7-inch screen models. This decrease was offset in part by improved gross margins for domestic Citizens Band radios and GMRS two-way radios, driven by new products, as well as the favorable effect of an increase in world-wide net sales of Detection, which has a higher gross margin.

Selling, general and administrative expense in 2012 was $26.4 million, the same as last year, as a decline in variable selling expenses was offset by an increase in fixed expenses. As a percentage of net sales, selling, general and administrative expense was 25.1 percent for 2012 compared to 24.5 percent for 2011. Variable selling expenses declined $808,000 in 2012 due to a more favorable customer mix and a shift in funds provided by Cobra to customers for programs such as advertising (the costs of which are reflected in variable selling expense) to customer programs that management has determined to be more effective in helping to drive sell through (the costs of which are reflected as a reduction of revenue). Fixed expenses increased $759,000 compared to 2011 primarily because of higher engineering and marketing expenses, up a combined $997,000, mainly for the development and support of new products, as well as increased legal fees, principally relating to trademark work and patent litigation matters. Partially offsetting these higher expenses were declines in management incentive and profit sharing expense totaling $618,000, due to lower consolidated operating income, and lower bad debt expense totaling $533,000, due to the insolvency of a large customer in 2011.

Interest expense decreased to $1.0 million for 2012 compared to $1.1 million for 2011 and was mainly due to lower average bank debt outstanding for the current year and a decline in the interest rate in the credit agreement that was amended at the beginning of December 2012.

Other income for 2012 amounted to $1.0 million in 2012 compared to other expense $264,000 in 2011, a favorable swing of $1.3 million. Other income in the current year was due to $535,000 of CSV gains (compared to $152,000 of CSV losses in the prior year) and a $320,000 exchange gain on CEEL's repayment of its long-term loan to Cobra U.S.

As a result of the above, Cobra segment pre-tax earnings decreased $172,000 to $3.0 million for 2012 compared to pre-tax earnings of $3.1 million for 2011.


Table of Contents

Performance Products Limited Business Segment

PPL net sales decreased $1.5 million, or 9.7 percent, to $14.0 million in 2012 compared to 2011. The decrease resulted mainly from a decline in satellite navigation sales, which fell 12.9 percent, most of which occurred in the fourth quarter of 2012 because of significantly lower export sales to Western Europe, principally driven by the weak economy and increased competition from two large competitors. Also contributing to the sales decrease was a decline in Outdoor Leisure product sales, primarily due to lower sales of golf GPS range-finder units, because of the weak Western European economy and one of the wettest UK summers on record, which reduced demand for these products. Partially offsetting these declines were higher sales of AVN units and download fees.

Gross profit was $5.2 million for both 2012 and 2011, resulting in gross margins of 37.0 percent and 33.6 percent, respectively. The increase in gross margin in 2012 was primarily due to higher download fees, which have a 100 percent gross margin, and lower amortization expense attributable to certain fully amortized acquisition related intangible assets.

Selling, general and administrative expenses decreased $68,000, or 1.4 percent, to $4.9 million from $5.0 million in 2011 and, as a percentage of net sales, were 35.0 percent in 2012 and 32.1 percent in 2011. The decrease was due primarily to lower management incentive expense and a decrease in advertising and promotional expenses because of the lower net sales, offset in part by an additional headcount to support product development.

Other income for 2012 was $28,000 compared to other expense of $123,000 in 2011, principally because of foreign exchange gains in 2012 compared to foreign exchange losses in 2011.

As a result of the above, the PPL segment had pre-tax earnings of $308,000 in 2012 compared to a pre-tax income of $114,000 in 2011.

Income Taxes

For the year ended December 31, 2012, the Company reported $108,000 of tax expense compared to tax expense of $169,000 for the year ended December 31, 2011. The $108,000 of tax expense was comprised of a $86,000 expense in the U.S., a $338,000 expense in Ireland and a $316,000 tax benefit in the UK. The U.S. tax expense was mainly for state income taxes, as the utilization of net operating loss ("NOL") carry forwards are delayed in certain states. The Irish tax expense reflected the pre-tax earnings reported for the current year. The UK tax benefit was due to return to provision adjustments for the 2011 tax return, the prospective rate reduction to 23 percent for deferred taxes, and book to tax timing differences for fixed assets and intangible assets. The $169,000 tax benefit reported for 2011 was comprised of a $201,000 expense in the U.S., a $360,000 expense in Ireland and a $392,000 tax benefit in the UK.

In accordance with ASC 740-30 (formerly APB 23), the Company deems the unremitted earnings of its Irish subsidiary (CEEL) to be permanently invested and thus not subject to United States income taxes. Under ASC 740-30, unremitted earnings of CEEL that are no longer permanently invested would become subject to deferred income taxes under United States tax law.

The Company reviews the need for a valuation allowance in each tax jurisdiction on a quarterly basis, analyzing all negative and positive evidence. The U.S. operations were in a small cumulative income position for the thirty-six month period ending December 31, 2012, which, while objective positive evidence, is not conclusive and must be further evaluated by considering any other positive or negative objective evidence, such as the trend in earnings, as well as any positive or negative subjective evidence existing at December 31, 2012. After this evaluation, the Company concluded that the net weight of evidence was negative, and therefore the Company did not meet the more likely than not criteria for concluding that the valuation allowance for its U.S. operations, which totaled $8.7 million at December 31, 2012 (compared to $9.0 million at December 31, 2011), was no longer required in part or total. The Company will continue to monitor the need for a valuation allowance throughout 2013, pursuant to the guidance of ASC 740.


Table of Contents

Results of Operations - 2011 Compared to 2010

The following table contains sales and pre-tax income (loss) after eliminating
intercompany accounts by business segment for the years ended December 31, 2011
and 2010.



                                                                                               2011 vs. 2010
                                2011                             2010                       Increase (Decrease)
                                                            (in thousands)
                                       Pre-tax                         Pre-tax                            Pre-tax
                        Net             Income           Net            Income             Net             Income
Business Segment      Sales             (Loss)          Sales           (Loss)            Sales            (Loss)
Cobra              $     107,808     $      3,142     $   95,797     $        958      $    12,011      $      2,184
PPL                       15,451              114         14,723               (6 )            728               120

Total Company      $     123,259     $      3,256     $  110,520     $        952      $    12,739      $      2,304

Cobra Business Segment

Cobra net sales in 2011 increased $12.0 million, or 12.5 percent, to $107.8 million compared to $95.8 million in 2010. The increase was attributable to strong sales of domestic Citizens Band radio and Truck Navigation products sales as well as higher sales at CEEL, which offset a 20.1 percent decline in domestic Detection sales. Citizens Band radio sales benefitted from sales of new products, principally the 29 LX and the newly introduced limited edition 29 LX Chrome, while Truck Navigation products benefitted from strong sales of both the 7550 PLT, a 7-inch display model with enhanced graphics and menu options that was introduced in the third quarter of 2010 to replace an older model, and the 5550 PRO, Cobra's first 5-inch screen model introduced in the first quarter of 2011. The higher CEEL sales principally reflected strong sales of Detection and PMR two-way radios products, which increased 75.1 percent and 23.7 percent, respectively, mainly into the Netherlands, Russia, Turkey, the Ukraine and the United Kingdom. The decline in domestic Detection sales reflected lower sales to a major retailer as a result of its shift in advertising to larger categories and the continuing trend of consumers shifting more purchases to online retailers, which also negatively impacted radar sales at a number of other Cobra segment bricks and mortar retailers.

Gross profit in 2011 increased $5.5 million, or 21.6 percent, to $30.9 million for 2011, while gross margin increased over 2 points to 28.7 percent from 26.5 percent in 2010. The improved gross margin was due to a more favorable product mix, including the positive impact of higher-margin new Citizens Band radio and Trucker Navigation products domestically, as discussed above, as well as an almost fourfold increase in sales of high-margin iRadar models, introduced in the fall of 2010. In addition, a higher gross margin at CEEL contributed as well, driven by a favorable product mix, as the percentage of sales of radar detectors, a high margin category, increased while the percentage of sales of PMR two-way radios, a low margin category, decreased.

Selling, general and administrative expense increased $3.0 million, or 12.6 percent, to $26.4 million from $23.4 million for the same period last year, and, as a percentage of net sales, was 24.5 percent for 2011 and 24.5 percent for 2010 due to higher fixed expenses. Fixed selling and marketing expenses increased $1.6 million, mainly because of higher public relations, media and show expenses to support consumer awareness of new products. General and administrative expenses rose $1.4 million as a result of increases of $1.1 million in management incentive and profit sharing expenses because of the significant improvement in financial results, and $603,000 in bad debt expense, principally due to a Chapter 11 bankruptcy filing by a significant customer. The effects of the higher bad debt expense were partially offset by a reduction in professional fees and lower salary and deferred compensation expenses related to the replacement of two long-term executive officers, one of whom retired in 2010 and one of whom resigned in January 2011.


Table of Contents

Interest expense was $1.1 million for 2011 compared to $1.6 million for the same period in 2010. The $460,000 decrease was mainly due to the write off of prepaid loan fees related to a previous loan agreement that was replaced with a new agreement in the third quarter of 2010 and the lower interest rate that resulted from this new agreement. Other expense for 2011 increased $808,000 from the year ago period mainly due to CSV loss of $152,000 in 2011 compared to a CSV gain of $574,000 in 2010.

As a result of the above, Cobra segment pre-tax earnings increased $2.2 million to $3.1 million for 2011 compared to pre-tax earnings of $1.0 million for 2010.

Performance Products Limited Business Segment

PPL's net sales increased $728,000, or 4.9 percent, to $15.4 million in 2011 compared to 2010. The increase resulted mainly from higher satellite navigation sales, which rose 17.0 percent, driven mainly by strong demand for Truckmate units. Also contributing to the sales increase were higher sales of Snooper Shotsaver golf GPS units in 2011. The higher satellite navigation and golf GPS sales were partially offset by lower download fees.

Gross profit increased $1.0 million, or 23.8 percent, to $5.2 million for 2011, while gross margin increased over 5 points to 33.6 percent from 28.5 percent in 2010. The improvement in gross margin was due to a more favorable product mix as the proportion of higher margin satellite navigation sales increased as a percentage of total sales. A reduction in exchange losses incurred in 2011 compared to 2010 also contributed to the gross margin increase.

Selling, general and administrative expenses increased $347,000, or 7.5 percent, to $5.0 million from $4.6 million in 2010 and, as a percentage of net sales, were 32.1 percent in 2011 and 31.3 percent in 2010. The increase was due primarily to higher costs for commissions and promotions, overseas travel, legal fees and payroll due to two employee additions.

Other expense for 2011 increased $533,000 compared to the same period in 2010, principally because of foreign exchange losses in 2011 compared to foreign exchange gains in 2010.

As a result of the above, the PPL segment had pre-tax earnings of $114,000 for 2011 compared to a pre-tax loss of $6,000 in 2010, a favorable swing of $120,000.

Income Taxes

For the year ended December 31, 2011, the Company reported a $169,000 tax expense compared to the $380,000 benefit for the year ago period. The $169,000 tax expense was comprised of a $201,000 expense in the U.S., a $360,000 expense in Ireland and a $392,000 tax benefit in the UK. The U.S. tax expense was mainly for state income taxes, as the utilization of net operating loss ("NOL") carry forwards are delayed in certain states. The Irish tax expense reflects the pre-tax earnings reported for the current year. The UK tax benefit is due to return to provision adjustments for the 2010 tax return, the prospective rate reduction to 25 percent tax rate for deferred taxes and book to tax timing differences for fixed assets and intangible assets.

The $380,000 tax benefit reported for 2010 was due to $130,000 in U.S. tax refunds, a $91,000 expense in Ireland and a $341,000 tax benefit in the UK.

Prior to 2009, the Company asserted under ASC 740-30 (formerly APB 23) that the unremitted earnings of its Irish subsidiary (CEEL) were permanently invested. In 2009, the Company withdrew its permanent investment assertion for CEEL's future earnings and provided deferred taxes on the earnings subsequent to 2008. In light of the Company's debt refinancing concluded in 2011, the Company reassessed its unremitted earnings position in the fourth quarter of 2011 and concluded all of CEEL's earnings including the 2009 - 2011 period were permanently invested overseas. Accordingly the deferred tax liability recorded as of December 31, 2010 was reversed but there was no income statement impact because of the valuation allowance.


Table of Contents

The Company reviews the need for a valuation allowance in each tax jurisdiction on a quarterly basis, analyzing all negative and positive evidence. The U.S. operations were in a cumulative loss position for the thirty-six month period ending December 31, 2011 which is significant objective negative evidence that is difficult to overcome without the existence of objective positive evidence. Earnings projections can be positive evidence, although significantly more subjective in nature and not sufficient on their own to overcome the cumulative loss. Accordingly, based upon the weight of the negative evidence that existed at December 31, 2011, the Company maintained a $9.0 million valuation allowance. The Company will continue to monitor the need for a valuation allowance throughout 2012, pursuant to the guidance of ASC 740.

Liquidity and Capital Resources

The Company amended and extended its bank debt in December 2012 and increased the revolving credit facility from $30.0 million to $35.0 million. This amended Credit Agreement provided a lower cost credit facility and greater liquidity due to the borrowing base formula. Refer to Note 6 Financing Arrangements to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Working capital requirements are seasonal, with demand for working capital being higher later in the year as customers begin purchasing for the holiday selling season. The Company believes that cash generated from operations and from borrowings under its credit agreement will be sufficient in 2013 to fund its working capital needs. At December 31, 2012, the Company had interest-bearing debt outstanding of $20.3 million and availability was approximately $11.9 million under the revolving credit line based on the borrowing base formula. Additionally, the Company's Credit Agreement permits an "overadvance" of up to $1.0 million dollars for sixty consecutive days.

Absent a waiver from lenders, a failure to comply with the covenants in the Credit Agreement could result in any outstanding indebtedness under the Credit Agreement becoming immediately due and payable and the inability to borrow additional funds under the Credit Agreement. The Company was in compliance with the Credit Agreement covenants for the twelve-month period ending December 31, 2012.

Net cash flows provided by operating activities for the year ended December 31, 2012 totaled $759,000 compared to the $589,000 of net cash provided by operating activities in 2011. Significant net cash inflows from operations and non-cash add-backs included net earnings of $3.2 million, depreciation and amortization totaling $3.5 million and a decrease in accounts receivables totaling $2.5 million. These cash inflows were partially offset by increases in inventory and other assets of $3.6 million and $1.6 million, respectively, and by a decrease in accounts payable of $1.9 million.

$2.6 million of the depreciation and amortization related to the Cobra segment in 2012, including $1.1 million of intangible asset amortization, $958,000 of fixed asset depreciation, and $494,000 of prepaid asset amortization, mainly for packaging and outside design. For the PPL segment, depreciation and amortization amounted to $973,000 in 2012, including $662,000 of amortization for intangibles and other assets, which resulted from the allocation of the purchase price, and $311,000 of fixed asset depreciation. The decrease in accounts receivables was due to normal year-end collections and increases in credits issued for higher returns and pricing programs.

The increase in inventory was mainly attributable to higher Cobra segment inventories for Detection, Trucker Navigation, and Phone Products due to lower than anticipated sales in the back-half of 2012. Other assets increased primarily because of expenditures for trademarks and software development for . . .

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