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| COBR > SEC Filings for COBR > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Executive Summary - Second Quarter
Pre-tax loss for the second quarter of 2009 totaled $1.1 million compared to the pre-tax income of $2.3 million for year ago period. Key factors contributing to the pre-tax loss were:
• Net sales declined $8.3 million, or 24.3%, principally due to the adverse economic climate in the United States and Europe.
• Gross margins decreased by 9.3 points to 24.0% due to lower volume, unfavorable sales mix and the impact of fixed overhead charges against a lower sales base.
• Selling, general and administrative expenses decreased $1.0 million, or 11.4%, due to management's effort to reduce spending and lower variable selling costs.
• Other income increased by $845,000 mainly due to CSV income and foreign exchange gains.
The combined impact of the foregoing factors was a $3.4 million decrease in income before taxes.
At June 30, 2009, Cobra's U.S. operation had a net deferred tax asset of $9.6 million. During the second quarter of 2009, management concluded that the "more likely than not" criteria required under SFAS 109 for forming a conclusion that a valuation allowance is not needed could not be met for its U.S. operation. This conclusion was based on the fact that the U.S. operation has sustained cumulative losses over the past three years, is forecasted to have a loss in 2009 because of the on-going recession and has no tax planning strategies available that if implemented would generate taxable income sufficient for the U.S. operation to realize in full its net deferred tax assets within a reasonable time horizon absent a turnaround in the business. As a result, the Company recorded a charge of $9.6 million for a valuation allowance in the second quarter of 2009 to fully offset the net deferred tax asset for its U.S. operation at June 30, 2009. With the valuation allowance charge, the Company reported a tax provision of $8.8 million for the second quarter of 2009 compared to the $584,000 provision with effective rate of 25.4% for the year ago quarter.
Until the "more likely than not" criteria of SFAS 109 can be met, the Company will not report for its U.S. operation a tax benefit for any future pretax losses or a tax provision for any future pretax income. This does not affect tax reporting for CEEL and PPL as each of these is in a separate, non-U.S. tax jurisdiction. Management currently believes that net deferred tax asset will be realized in the future when the Company's operations return to profitability.
Including the effect of a $9.6 million charge to establish a valuation allowance, the net loss for the second quarter of 2009 totaled $9.9 million or $1.53 per share compared to the net income of $1.7 million or $.26 per share reported for the same period last year.
Executive Summary - Six Months
Pre-tax loss for the first half of 2009 totaled $3.5 million compared to the pre-tax income of $2.4 million for year ago period. Key factors contributing to the pre-tax loss were:
• Net sales declined $18.1 million, or 28.7%, principally because of the adverse economic climate in the United States and Europe.
• Gross margins decreased by 7.1 points to 25.1% due to lower volume, unfavorable sales mix and the impact of fixed overhead charges against a lower sales base.
• Selling, general and administrative expenses decreased $2.3 million, or 13.2%, due to management's effort to reduce spending and lower variable selling costs.
• Other income increased by $933,000 mainly due to CSV income and foreign exchange gains.
The combined impact of the foregoing factors was a $5.9 million decrease in income before taxes.
At June 30, 2009, Cobra's U.S. operation had a net deferred tax asset of $9.6 million. During the second quarter of 2009, management concluded that the "more likely than not" criteria required under SFAS 109 for forming a conclusion that a valuation allowance is not needed could not be met for its U.S. operation. This conclusion was based on the facts that the U.S. operation has sustained cumulative losses over the past three years, is forecasted to have a loss in 2009 because of the recession and has no tax planning strategies available that if implemented would generate taxable income sufficient for the U.S. operation to realize in full its net deferred tax assets within a reasonable time horizon absent a turnaround in the business. As a result, the Company recorded a charge of $9.6 million for a valuation allowance in the second quarter of 2009 to fully offset the net deferred tax asset for its U.S. operation at June 30, 2009. With the valuation allowance charge recorded in the second quarter, the Company reported a tax provision of $8.1 million for the first half of 2009 compared to the $610,000 provision with effective rate of 25.3% for the year ago period.
Until the "more likely than not" criteria of SFAS 109 can be met, the Company will not report for its U.S. operation a tax benefit for any future pretax losses or a tax provision for any future pretax income. This does not affect tax reporting for CEEL and PPL as each of these is in a separate, non-U.S. tax jurisdiction. Management currently believes that net deferred tax asset will be realized in the future when the Company's operations return to profitability.
Including the effect of a $9.6 million charge to establish a valuation allowance, the net loss for the first half of 2009 totaled $11.5 million or $1.78 per share compared to the net income of $1.8 million or $.28 per share reported for the prior year.
Outlook
The prospects for the global economy, particularly in Europe, remain uncertain. During the second half of 2009, the Company will benefit from cost reduction steps taken earlier in the year as well as from further cost containment measures. In addition, the second half will see the Company aggressively pursue new product opportunities, such as the mobile navigation device for the professional driver, that require modest investment but that are expected to deliver profitable sales to offset expected continued weakness in existing product categories.
The Company expects its future operations and results will permit compliance with the covenants in the Loan Agreement. Failure to comply with the covenants contained in the amended Loan Agreement in future periods could have adverse consequences including all outstanding debt becoming immediately payable and the inability to borrow additional funds under the Loan Agreement.
EBITDA
The following table shows the reconciliation of net earnings (loss) to the
Adjusted EBITDA:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) (In Thousands)
2009 2008 2009 2008
Net (loss) earnings $ (9,902 ) $ 1,710 $ (11,518 ) $ 1,791
Depreciation/amortization 996 1,711 1,974 3,405
Interest expense 190 241 340 544
Income tax provision 8,840 584 8,054 610
Non-controlling interest 1 7 2 14
EBITDA 125 4,253 (1,148 ) 6,364
Stock option expense 58 64 117 129
CSV (income) loss (398 ) 112 (119 ) 461
Other non-cash items (165 ) 104 (112 ) (56 )
Adjusted EBITDA $ (380 ) $ 4,533 $ (1,262 ) $ 6,898
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EBITDA represents earnings before interest, taxes, depreciation and amortization and non-controlling interest. Adjusted EBITDA, 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 Adjusted EBITDA to assess operating performance and measure compliance with financial covenants.
EBITDA and Adjusted EBITDA 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 Adjusted EBITDA are not alternatives to net income or cash flow from operations determined in accordance with GAAP. Furthermore, EBITDA and Adjusted EBITDA may not be comparable to the calculation of similar titled measures reported by other companies.
Second Quarter 2009 Compared to Second Quarter 2008
The following table contains sales and pre-tax (loss) profit after eliminating
intercompany accounts by business segment for the quarter ending June 30, 2009
and 2008:
2009 vs. 2008
2009 2008 Increase (Decrease)
(In Thousands)
Pre-tax Pre-tax
Profit Pre-tax Profit
Business Segment Net Sales (Loss) Net Sales Profit Net Sales (Loss)
Cobra $ 23,366 $ (1,294 ) $ 28,932 $ 471 $ (5,566 ) $ (1,765 )
PPL 2,605 233 5,386 1,830 (2,781 ) (1,597 )
Total Company $ 25,971 $ (1,061 ) $ 34,318 $ 2,301 $ (8,347 ) $ (3,362 )
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Cobra Business Segment
Cobra net sales decreased $5.5 million, or 19.2%, in the second quarter of 2009 to $23.4 million compared to $28.9 million in the second quarter of 2008. Much of the decline was due to lower sales of detection and Citizens Band radios in the United States, which declined 37.4%, and 28.5%, respectively. Also contributing to the decline were lower two-way radio sales in Canada. These lower sales were driven primarily by the severe global economic downturn, which caused significant declines in retail store traffic (including traffic at travel centers and truck stops due to decreasing freight movements) and consumer spending for discretionary and higher price point products. In the case of detection, the lower sales were also driven by the bankruptcy and liquidation in the second half of 2008 of Circuit City, which accounted for almost 6% of Cobra's U.S. detection sales in the second quarter of 2008, as well as a change in merchandising strategy at one major customer that resulted in a reduction in store count. With respect to Citizens Band radios, some of the lower sales in the second quarter were offset by more than $800,000 in sales that shifted from the first quarter of 2009 into the current quarter due to a vendor delay. In addition, sales in the prior year's quarter were reduced by $1.5 million of mobile navigation returns in excess of sales. Mobile navigation sales were discontinued due to the Company's change at the end of 2007 in its North American mobile navigation strategy. These lower sales were partially offset by a 12.0% increase in U.S. two-way radio sales as Cobra established its position as the exclusive supplier of two-way radios to a major retailer.
Gross profit and gross margin for the second quarter of 2009 were $5.3 million and 22.7%, respectively, compared to the prior year's quarter gross profit and gross margin of $8.2 million and 28.4%, respectively. The decrease in gross margin was mainly due to a lower proportion of Citizens Band radio sales in the second quarter of 2009 compared to the prior year as well as an unfavorable sales mix for Citizens Band radios and detection compared to the prior year as consumers focused their spending on purchases of lower price point, lower margin products. Additionally, gross margin for European sales was negatively impacted by a weaker euro, which declined 12.9% compared to the second quarter of 2008, and decreased margins on CEEL's euro-paying customers.
Selling, general and administrative expenses declined $625,000, or 8.4%, to $6.8 million in the second quarter of 2009 from $7.4 million in the second quarter of 2008. Decreased variable selling costs caused by lower sales accounted for much of the decline. Lower fixed selling and administrative expenses made up the remainder of the decline in part due to cost savings measures implemented by management early in 2009, including an approximate 10% reduction in the Cobra segment's headcount.
Interest expense decreased by $51,000 to $190,000 in the second quarter due mainly to a more favorable interest rate. Cobra also had other income of $388,000 in the second quarter of 2009 compared to $70,000 of other expense in the prior year's quarter. This favorable swing was due primarily to CSV income of $398,000 compared to $112,000 of CSV expense in the second quarter of 2008. The CSV of life insurance policies is affected by the market value of the underlying investments and adverse market conditions may result in a non-cash expense.
As a result of the above, the Cobra segment had a pre-tax loss of $1.3 million in the second quarter of 2009 compared to pre-tax income of $471,000 in the second quarter of 2008.
Performance Products Limited ("PPL") Business Segment
PPL's net sales decreased $2.8 million, or 51.6%, to $2.6 million in the second quarter of 2009 compared to the year ago quarter. A major contributor to this decrease was the negative effects of the global recession, which has been particularly severe in the United Kingdom as well as elsewhere in Europe. Also contributing to the sales decrease was a weaker pound sterling, which was down 21.5% in the second quarter of 2009 compared to the prior year's quarter, as well as the fact that in the prior year's quarter, PPL had a large sale of SD cards containing their database of speed camera locations for a smartphone promotion, which was not repeated in the second quarter of 2009.
Gross profit was $925,000 in the second quarter of 2009 compared to $3.2 million in the prior year's quarter, a decrease of $2.3 million, or 71.4%, while gross margin decreased to 35.5% in 2009 from 60.0% in 2008. The gross margin decrease resulted primarily from the weaker pound sterling discussed above as well as a more favorable sales mix in the prior year's quarter that included higher margin sales of proprietary data, including the sales of the speed camera database for use in smartphones and download fees for mobile navigation and GPS speed camera locator products.
Selling, general and administrative expenses were $376,000 or 27.6% lower than the second quarter of 2008 and mainly reflected the impact of a weaker pound sterling compared to the prior year's quarter as well as a reduction in personnel. As a percentage of net sales, selling, general and administrative expenses increased to 37.8% in 2009 from 25.3% in 2008 due to the lower level of sales in 2009 as compared to 2008.
PPL had other income of $292,000 in the second quarter of 2009 compared to other expense of $44,000 in the prior year's quarter. The favorable swing was due to $295,000 of foreign exchange gains in the second quarter of 2009 compared to $57,000 of foreign exchange losses in the prior year's quarter.
As a result of the above, the PPL segment had pre-tax income of $233,000 for the second quarter of 2009 compared to $1.8 million of pre-tax income for the second quarter of 2008.
Six Months 2009 Compared to Six Months 2008
The following table contains sales and pre-tax (loss) profit after eliminating
intercompany accounts by business segment for the six months ending June 30,
2009 and 2008:
2009 vs. 2008
2009 2008 Increase (Decrease)
(In Thousands)
Pre-tax Pre-tax Pre-tax
Profit Profit Profit
Business Segment Net Sales (Loss) Net Sales (Loss) Net Sales (Loss)
Cobra $ 40,614 $ (3,494 ) $ 53,508 $ (195 ) $ (12,894 ) $ (3,299 )
PPL 4,442 32 9,668 2,610 (5,226 ) (2,578 )
Total Company $ 45,056 $ (3,462 ) $ 63,176 $ 2,415 $ (18,120 ) $ (5,877 )
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Cobra Business Segment
Cobra net sales decreased $12.9 million, or 24.1%, in the first half of 2009 to $40.6 million compared to $53.5 million in the first half of 2008. Much of the decline was due to lower sales of detection and Citizens Band radios in the United States, which fell 24.9%, and 34.0%, respectively. Also contributing to the decline were lower two-way radio sales in the U.S. and Canada and lower sales at CEEL. These lower sales were driven primarily by the severe global economic downturn, which caused significant declines in retail store traffic (including traffic at travel centers and truck stops due to decreasing freight movements) and consumer spending for discretionary and higher price point products. Additionally, the drop in detection sales reflected the bankruptcy and liquidation in the second half of 2008 of Circuit City, which accounted for almost $1.0 million of Cobra's U.S. detection sales in the first half of 2008. In addition, sales in the first half of 2008 were reduced by $365,000 of mobile navigation returns in excess of sales. Mobile navigation sales were discontinued in 2009 due to the Company's change at the end of 2007 in its North American mobile navigation strategy.
Gross profit decreased $5.6 million for the first half of 2009 from the year ago period to $9.6 million and the gross margin decreased to 23.6% in the first half of 2009 from 28.4% for the prior year. The decline in gross margin was mainly due to sales mix as consumers focused their discretionary spending on purchases of lower price point, lower margin products as well as the effect on overhead expenses of the reduced sales base. Additionally, gross margin for European sales was negatively impacted by a 12.7% weakening of the euro as compared to the first half of 2008, which compressed margins on CEEL's euro-paying customers.
Selling, general and administrative expenses declined $1.5 million, or 10.6%, to $12.9 million in the first half of 2009 from $14.4 million for the prior year period. $883,000 of the decline was due to decreased variable selling costs because of the sales decrease. The remainder of the decline was due to lower fixed selling, general and administrative expenses as a result of lower professional fees and cost savings measures implemented by management, including an approximate 10% headcount reduction early in the year, offset in part by $147,000 of severance expense.
Interest expense decreased $204,000 in the first half of 2009 compared to the prior year due to a more favorable interest rate. Other expense decreased $600,000 due to $119,000 of CSV income in the current period compared to CSV expense of $461,000 in the prior year period. The CSV of life insurance policies is affected by the market value of the underlying investments and adverse market conditions may result in a non-cash expense.
As a result of the above, the Cobra segment had a pre-tax loss of $3.5 million in the first half of 2009 compared to a pre-tax loss of $195,000 in the first half of 2008.
Performance Products Limited ("PPL") Business Segment
PPL's net sales decreased by $5.2 million, or 54.1%, to $4.4 million in the first half of 2009 from $9.6 million for the year ago period. This decrease was due to the severe recession, particularly in the United Kingdom as well as elsewhere in Europe, and the absence of the database sales for smartphone use in 2009. The weaker pound sterling reduced the current year's net sales when compared to 2008 by 14.1%.
Gross profit decreased $3.4 million to $1.7 million in the first half of 2009 from $5.1 million in the first half of 2008 due to reduced sales volume, sales mix and the impact of the weaker pound sterling. Gross margin decreased to 38.9% in 2009 from 53.4% in 2008 primarily due to the absence of the high margin database sales for smartphone use, sales of the older GPS models with lower margins, and the impact of fixed transaction-based amortization of intangible assets over lower sales volume.
Selling, general and administrative expenses were $733,000, or 27.2% lower than the first half of 2008 and mainly reflected the impact of a stronger dollar. As a percentage of net sales, selling, general and administrative expenses increased to 44.2% in 2009 from 27.9% in 2008 due to the lower level of sales in 2009 as compared to 2008.
As a result of the above, the PPL segment had a loss before income taxes of $32,000 for the first half of 2009 compared to $2.6 million pre-tax income for the first half of 2008.
On August 13, 2009, the Company entered into the Loan Agreement Amendment. Pursuant to the Loan Agreement Amendment, the lenders have waived the failure of the Company to comply as of June 30, 2009 with the financial covenants set forth in the Loan Agreement relating to Total Debt to EBITDA Ratio (as defined in the Loan Agreement) and Fixed Charge Coverage Ratio (as defined in the Loan Agreement). In addition, the Loan Agreement Amendment decreases the maximum principal amount available to be borrowed by the Company pursuant to the revolving credit facility under the Loan Agreement from $40 million to $28 million.
The Loan Agreement Amendment also amends the covenants set forth in the Loan Agreement to provide for the following financial covenants:
• minimum fixed charge coverage at revised levels from those contained in the Loan Agreement
• minimum cumulative EBITDA
• minimum tangible net worth
The Second Amendment to the Loan Agreement requires lockbox agreements, which provide for all Company receipts to be swept daily to reduce borrowings outstanding under the revolving credit facility. These agreements, combined with the existence of a material adverse change ("MAC") clause in the Loan Agreement, result in the Revolving Credit Facility being classified as a current liability, per guidance in the EITF No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement. The Company does not expect to repay, or be required to repay, within one year, the balance of it revolving credit facility, which has a final expiration date of October 19, 2011. The MAC clause, which is a common requirement in commercial credit agreements, allows the lender to require the loan to become due if there has been a material adverse change in the Company's financial condition, operations or other status. The classification of the revolving credit facility as a current liability results only because of the combination of the lockbox agreements and the MAC clause.
Pursuant to the Loan Agreement Amendment, interest on amounts borrowed under the Loan Agreement will be based on the prime rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined based on the Total Debt to EBITDA Ratio as of the end of the previous two quarters. The applicable margin based on the Total Debt to EBITDA Ratio of the Company as of June 30, 2009 was 2.0% for prime rate loans and 4.5% for LIBOR loans.
Pursuant to the Loan Agreement Amendment, availability under the revolving credit facility is calculated based on a borrowing base formula that includes 75% of eligible accounts receivable, the lesser of 60% of lower of cost or market value of eligible inventory or 85% of the appraised orderly liquidation value of eligible inventory, and 60% of commercial letters of credit issued for the purchase of inventory, subject to certain limitations and to reserves established at the lenders' discretion including but not limited to an availability reserve of $2.5 million through September 30, 2009 and $3.0 million thereafter.
Pursuant to the Loan Agreement Amendment, the revolving credit facility continues to be subject to an unused line fee of 0.5% and the term loan under the Loan Agreement is subject to quarterly principal payments by the Company of $310,000 for the quarter ending September 30, 2009 and $440,000 for each quarter thereafter through September 30, 2011. The term of the Loan Agreement continues to extend until October 19, 2011. The Company paid an amendment fee of $159,150, amortized over the life of the loan, as well as certain fees and expenses of the lenders in connection with the execution of the Loan Agreement Amendment. Borrowings under the Loan Agreement are secured by substantially all of the assets of the Company except for equity interests in the non-U.S. subsidiaries.
At June 30, 2009, the Company had interest bearing debt outstanding of $18.2 million, consisting of the $3.8 million term loan and $14.4 million in the revolver. As of June 30, 2009, availability was approximately $6.4 million under the revolving credit line based on the borrowing base formula in effect at that time; the application of the revised borrowing base formula would not have had a material effect on availability, absent any reserves established by the lender pursuant to the Loan Agreement. Such reserves will include, but will not be limited to, an availability reserve of $2.5 million through September 30, 2009 and $3.0 million thereafter. Additionally, the Loan Agreement Amendment requires an appraisal of inventory, the results of which could lead to a reduction in the availability based on inventory.
For the six months ended June 30, 2009, net cash flows from operating activities were $1.3 million. Significant net cash inflows from operations included the add-back of non-cash depreciation and amortization of $2.0 million and the $9.6 million valuation allowance, a reduction in accounts receivable of $2.1 million and an increase in accounts payable of $3.9 million. The decrease in accounts . . .
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