VOXX International Corporation
Q4 2010 Earnings Call Transcript

Published: 17 May 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the Audiovox Fiscal Year 2010 Conference Call. My name is Noelia, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Glenn Wiener. Please proceed, sir.

[Glenn Wiener:]

Welcome to Audiovox's Fiscal 2010 Fourth Quarter and Year-End Results Conference Call. As you know, today's call is being webcast on our site, www.audiovox.com, and can be accessed in the Investor Relations section. With us today are Patrick Lavelle, President and CEO; Michael Stoehr, Senior Vice President and CFO; and John Shalam, Chairman of the Board. Before we begin, I'd quickly like to remind everyone that except for historical information contained herein, statements made on today's call and webcast that would constitute forward-looking statements may involve certain risks and uncertainties. All forward-looking statements made are based on currently available information, and the company assumes no responsibility to update any such forward-looking statements. Risk factors associated with our business are detailed in the company's Form 10-K for the fiscal year ended February 28, 2010. This time, I'd like turn the call over to Pat Lavelle. Pat?

[Patrick Lavelle:]

Thanks, Glenn, and good morning, everyone. We released, for our fourth quarter and fiscal year, on Friday after the market closed, reporting net income of $22.5 million or earnings per share of $0.98, compared to a net loss of $71 million or $3.11 per share last fiscal year. This rather dramatic swing to the positive side is the result of several factors

[Charles Stoehr:]

Thanks, Pat. Good morning, everyone. Let's start with our annual performance. We reported $550.7 million in sales, a decrease of 8.7% compared to $603 million last fiscal year; accessory sales were $175.7 million, an increase of 14.3%; and electronic sales were $375 million, or 16.6%. Within Accessories, we had several new products come to market under the RCA, Terk and Acoustic Research and new customers, which helped the overall business. Additionally, during the first half of the year and first quarter, in particular, we benefited from higher sales of antenna products related to the transition from analog to digital TV. Additional sales from our recent acquisition of SCHWAIGER were $13.4 million for the fiscal year. The decline in our Electronics group, as we have previously discussed, was anticipated due to the difficulties of the automakers and lower car sales, as well as the inventory overhang at retail, which impacted our first and second quarter performance. Retail buying was very slow during these periods, and we adjusted our buying programs and inventory accordingly. We also chose not to participate in a number of seasonal promotions due to lower margins in portable DVD and select digital product lines, programs we did participate in during the prior fiscal year. Lastly, we closed out several product lines in fiscal 2009, which were not included in this past year's results, such as flat-panel TVs, portable navigation and GMRS radios. Lower-cost sales in the first half also hurt our Electronics group, though we were able to offset some of these declines with higher sales of satellite radio products and the introduction of FLO TV and one month of sales from our recent acquisition of Invision of approximately $4 million. Consolidated gross margins for the year increased 280 basis points to 19.4% versus 16.6% in fiscal 2009. This increase for fiscal 2010 resulted to newer, higher products being introduced, improvements in our inventory positions. Additionally, margins were aided by our acquisition of SCHWAIGER. Finally, we were able to obtain better freight costs this year. Margins came in slightly above our projections at the beginning of the year, primarily due to product mix as Accessories represented a larger percentage of our overall sales. Overhead for fiscal 2010 declined by $50.8 million. Fiscal 2009 operating expenses included $38.8 million of goodwill intangible asset charges, as well as a $1 million one-time charge related to overhead reduction programs and cost containment efforts and a charge of $2.6 million for systems breach. Excluding the impact of these charges, our overhead for fiscal 2010 was down for the comparable fiscal years. We also note that fiscal 2010 overhead included approximately $6.8 million incremental costs associated with the issuance of stock options and warrants, and operating expenses for our acquisition of SCHWAIGER and Invision. Our employee headcount was reduced by 18% prior to acquisitions, and we realized additional savings in advertising occupancy costs, employee benefits, professional fee and T&E [travel and entertainment]. As Pat mentioned in the prior call, some of the temporary expense reductions would come back. And in the fourth quarter of fiscal 2010, we'll return the 10% salary reduction to employees below 80 in executive management. This took place in the fourth quarter and the amount was $2.5 million. We continue to evaluate our cost structure and adjust where needed to drive profits to the bottom line. Other income increased approximately $9.9 million as a result of a $5.4 million marketing purchase gain due to our SCHWAIGER acquisition and the absence of charges associated with a vendor bankruptcy in prior fiscal year, and a gain recorded on foreign change contracts used for our U.S. dollar purchases in Germany. This was partially offset by the other-than-temporary impairment on the equity investment of the company. Interest and bank charges decreased due to reduction of debt in our international subsidiaries and equity income of our equity investees increased due to higher inequity income of ASA. Pre-tax income was $11.2 million compared to a pre-tax loss of $56 million from the prior fiscal year. During fiscal 2010, we recorded income tax benefits of approximately $11.3 million. These benefits were the results of the Worker Home Ownership and Business Assistance Act of 2009, which allowed us to record an income tax benefit of $10.1 million in connection with carryback of certain operating losses and recognition of $3.2 million of uncertain tax positions, as a result of expiration of various tax implementation, offset by a $2 million payment in foreign and state taxes. We posted net income of $22.5 million, or earnings per share of $0.98, versus a net loss of $71 million, or a loss of $3.11 a share for fiscal 2009. For the fourth quarter, our sales were $150.3 million versus $115.7 million, an increase of 29.9%. Included in the quarter sales were sales of $11.5 million related to our recent SCHWAIGER and Invision acquisitions. The increase in revenue was principally in the Electronics group. Gross margins were 20% versus 12% last year. This is a result of increased international sales as a result of the SCHWAIGER acquisition, the lower inventory write-offs and write-downs, better freight costs and better margins in our Mobile Electronics Group. Offsetting this increase was pre-production charges for a contract that we have with Bosch Motors. On a go-forward basis, we anticipate margins will come back to the 80% to 90% range for the reason that Pat has outlined earlier. Overhead was $30.4 million, which includes $2.5 million temporary payroll reduction return versus $66.9 million last year's quarter, which included a $38.8 million impairment charge of $1 million reduction expense and $2.6 million provision for systems breach. Operating expenses for fourth quarter fiscal 2010 relate to SCHWAIGER and Invision acquisitions for $2.9 million. Net income was $6.6 million, which includes $5.4 million from bargain purchase and family charges of $1 million on one of our investments. For fiscal 2010 fourth quarter, EPS was $0.29 a share versus $3.06 of loss last year. Operating activities provided cash of $28.2 million; financing activities use of $1.2 million, primarily to repay bank obligations, offset by $25 million in investing activities to the cash payments related to the purchase of SCHWAIGER and Invision; CapEx expenditures; and an investment in bonds for our Venezuelan operation previously explained, partially offset by distributions from an equity of that state. We had working capital of $239.8 million, which includes cash, short-term investments of $69.5 million compared to working capital of $21.1 million, and cash and short-term investments of $69.5 million last fiscal year. Our cash position is $55.5, despite cash payments of $14.6 million related to our recent acquisitions. Essentially, use of cash has been to increase accounts receivable, as we increased sales in the fourth quarter, offset by declines in inventory and vendor receivables. Our turns of both AR and inventory are good. We continue to be prudent in our buying programs and are watching our expenses and markets closely. Cash today, as Pat mentioned, is $89 million, after we have paid down a bank loan that we had gotten from the Invision acquisition for $5 million. In March, the company entered into a three-year, $15 million line of credit. This line is principally used for purchases of product under letters of credits or standby LCs. Our inventory positions are much better this time last year. We are still cautious, and the global economy will be a key factor in the extent of our growth in products. Let me turn the call back to Pat. Pat?

[Patrick Lavelle:]

Thank you, Mike. And we're ready for any questions that you may have.

[Operator:]

[Operator Instructions] Your first question comes from the line of Thomas Kahn with Kahn Brothers.

[Thomas Kahn:]

Pat, I had a question on the systems breach. Could you explain that to me? And also, could you explain is FLO TV going to be used in the back of cars and the screens in the back of cars?

[Patrick Lavelle:]

Okay. First one is, the systems breach, that had to do with our Batteries.com subsidiary. When we were changing over the system, moving to a new system, we had a breach there. We have subsequently changed the system out completely. And we have become compliant for all the credit card companies, so we have put that past us. In the case of FLO TV, yes, it is designed for rear-seat entertainment. We do have modules that will hook up with any factory or any aftermarket system, so that you can get that live TV in your rear seat.

[Thomas Kahn:]

On FLO TV, what is your license cover? I know it covers certain things, but maybe excludes, if there's a telephone in the device, could you tell us what it covers and what it's exclusive or non-exclusive to, please?

[Patrick Lavelle:]

Well our exclusivity covers as for the 12-volt product that we supply to the aftermarket and what we're supplying to the OEMs at this point. This is a module that will receive the FLO information and off-convert it to a larger screen, up to about 10-inch screen, which is about as big as you're going to see in the rear seat of the car. So that device is what we have our exclusivity on. We also have an arrangement with QUALCOMM under a fulfillment contract, where we will supply to retail the handheld, portable FLO TV device. And that's a distribution agreement that we have with them.

[Thomas Kahn:]

And that has the QUALCOMM name on it, or the Audiovox?

[Patrick Lavelle:]

It has the FLO TV name on it.

[Operator:]

[Operator Instructions] Your next question comes from the line of Gary North with GS North Company.

[Gary North:]

I was just wondering how you're progressing on the Wi-Fi charger you're planning to introduce later this year?

[Patrick Lavelle:]

We show [indiscernible] our device -- we showed it at the Consumer Electronic Show and the CTIA show, primarily to get feedback from the customers as to whether or not we were on the right track. We are in product development at this particular point. We expect that later in the year, that we will be introducing the device. And we will have a special press release at that time to review all the features and our business planning around that.

[Gary North:]

Do you have any plans to combine like an e-Reader with the FLO TV device?

[Patrick Lavelle:]

No, not with an e-Reader. But we will be introducing later in the year a portable DVD player with a FLO built in.

[Operator:]

[Operator Instructions] And there are no questions in the queue at this moment.

[Patrick Lavelle:]

Okay, if there are no more questions, I want to thank you for your interest in Audiovox, and want to thank you for being on the call today. And have a good week. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.