VISTA, Calif., Nov 05, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- Directed Electronics, a wholly-owned subsidiary of DEI Holdings Inc. (Nasdaq: DEIX), announced today financial results for the third quarter and nine months ended September 30, 2008.
Third Quarter 2008 Financial Highlights Compared with Same Period Last Year:
-- Achieved pro forma net sales of $76.7 million, down 9% from
$84.5 million; GAAP net sales were $61.8 million for the third quarter
of 2008
-- Gross margin improved by 12 percentage points from 35% to 47%
-- Operating expenses decreased $3 million from $24.3 to $21.3 million, a
12% improvement
-- Operating income increased 48% from $5.2 to $7.7 million
-- Net income was $1.1 million compared with a loss of ($1.3) million
-- Adjusted EBITDA totaled $10.7 million compared with $8.3 million, a 29%
improvement
-- Reported EPS of $0.04 per share, compared with a loss of ($0.05) per
share
Balance Sheet Highlights:
-- Ended the quarter with cash balance of $9.1 million and undrawn
available revolver of $50.0 million
-- Debt balance decreased by $51 million year-over-year, a 17% improvement
-- Company is in full compliance with all of its debt covenants with
debt-to-EBITDA leverage ratio at 4.38x at the end of the quarter,
meaningfully lower than the 5.25x covenant requirement
-- Lower third quarter debt-to-EBITDA ratio triggers fourth quarter 50
basis point interest rate reduction, an improvement to LIBOR +350
Recent Operating and Restructuring Highlights:
-- Previously announced restructuring plan on track to achieve $5 million
in annualized cost savings
-- Launched company-wide supply chain cost reduction initiative and other
rightsizing initiatives that are expected to result in additional cost
savings in 2009
-- Entered into an agreement with SIRUS XM RADIO outlining key terms for
winding down this business by January 31, 2009, the expiration date of
the current distribution agreement
"We are pleased with our overall financial performance during the third quarter as we continued to make improvements in many controllable aspects of our business," commented James E. Minarik, DEI Holdings' President and Chief Executive Officer. "Even though our top line performance was negatively impacted by the challenging consumer environment, our improved operating efficiencies and financial discipline enabled us to achieve higher operating income and profitability compared to this period last year, resulting in trailing twelve month adjusted EBITDA of $59 million."
"While it is never an easy decision to exit any market, there are a number of factors that made exiting the satellite radio business the only logical choice for us. These factors include a dramatic drop in demand for aftermarket satellite radio, increasing warranty returns and decreasing margins that we and our customers have experienced throughout 2007 and 2008 on satellite radio products, and the large working capital commitment required for this relatively low margin business. Exiting this business will allow us to return 100% of our focus in 2009 to improving the experience we deliver to our customers and growing our highly profitable security and entertainment businesses."
Kevin Duffy, DEI Holdings' CFO, commented, "Exiting the satellite radio business will not only allow us to focus on our core business, but also increase our ability to pay down debt by recovering the $20 to $25 million of working capital we have committed to this business. Additionally, we are pleased with the terms of our wind-down agreement, as SIRIUS XM or their new partner will be purchasing substantially all of our remaining satellite radio inventory in the first quarter of 2009. They will also be taking full responsibility for all future product returns and warranty costs after January 31, 2009, regardless of when the product was sold."
Mr. Duffy continued, "Looking at the fourth quarter and into 2009, we anticipate that purchases of consumer electronics products will continue to decline significantly. As a result, we are taking every practical action to optimize our sales while preserving our margins. In addition, considering the realities of selling into this uncertain market, as well as our planned exit from the satellite radio receiver business next year, we plan to continue rightsizing our facilities and other overhead in all divisions of the company. Combined with the restructuring initiatives we have already implemented, we are confident that we are as well positioned as possible from an operational perspective to weather the current environment."
Third Quarter 2008 Results
As a reminder, prior to January 1, 2008, the company accounted for sales of SIRIUS XM-related hardware products on a gross basis. The November 2007 amendment to the company's agreement with SIRIUS XM significantly reduced the company's risks in this business. Consequently, in accordance with EITF 99-19, satellite radio revenues are now reported on a net basis calculated as gross amounts billed to customers less (i) amounts paid to suppliers, (ii) rebates and discounts, and (iii) other direct costs. The change in the application of the company's accounting policy did not affect reported gross profit, operating income, or net income. In the first quarter of 2008, the company also began providing gross margins by product category.
Sales
Pro forma net sales in the third quarter of 2008 totaled $76.7 million compared with $84.5 million in the third quarter of 2007, a 9% reduction. With the previously mentioned change in the satellite radio sales reporting method, the company's GAAP net sales were $61.8 million in the third quarter of 2008 compared with $84.5 million in the third quarter of 2007.
Gross Margins
For the third quarter of 2008, gross margins were 46.9% compared with 35.0% for the third quarter of 2007, a 12% margin increase. The increase is attributable to the change in accounting for the company's satellite radio products to a net basis as described above, as well as improvements in the company's security and entertainment and satellite radio margins.
Operating Expenses
Operating expenses decreased $3.0 million, or 12.3%, to $21.3 million in the third quarter of 2008 compared with $24.3 million in the third quarter of 2007 due to a decrease in headcount, marketing and travel expenses, audit and tax compliance fees, and fixed asset write-offs. These decreases were partially offset by $0.6 million in restructuring charges related to workforce rightsizing initiatives as well as higher fuel prices.
Interest Expense
Net interest expense decreased $1.0 million, or 14.9%, to $5.7 million in the third quarter of 2008 compared with $6.7 million in the third quarter of 2007. The decrease was primarily due to lower levels of outstanding debt on the company's senior credit facility in the third quarter of 2008. The company's total debt decreased 16.6%, from $309.9 million as of September 30, 2007 to $258.6 million as of September 30, 2008.
Income
Operating income increased $2.5 million, or 48.1%, to $7.7 million in the third quarter of 2008 compared with $5.2 million in the third quarter of 2007.
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), which includes adjustments as defined by the company's lending agreement, increased 29% to $10.7 million in the third quarter of 2008 compared with $8.3 million in the third quarter of 2007. A quantitative reconciliation from the company's GAAP results to its pro forma and adjusted results is provided in the accompanying tables.
The company's net income for the third quarter of 2008 was $1.1 million, or $0.04 per diluted share, compared with a net loss of ($1.3) million, or ($0.05) per diluted share, for the third quarter of 2007.
Third Quarter Product Category Results
The following table provides pro forma sales and margins on a product category basis for the third quarter of 2008 compared with the third quarter of 2007. The following pro forma financial results are reconciled to GAAP results in the accompanying tables.
Security &
Entertainment Satellite Radio Total
Qtr Ended Qtr Ended Qtr Ended Qtr Ended Qtr Ended Qtr Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007 9/30/2008 9/30/2007
Pro Forma
Results:
Net Product
Sales $58,753 $65,998 $17,132 $17,463 $75,885 $83,461
Royalty &
Other 821 873 17 156 838 1,029
Net Sales $59,574 $66,871 $17,149 $17,619 $76,723 $84,490
Cost of Sales 32,846 37,668 1 4,879 17,234 47,725 54,902
Gross Profit $26,728 $29,203 $2,270 $385 $28,998 $29,588
% Margin 44.9% 43.7% 13.2% 2.2% 37.8% 35.0%
Security & Entertainment
Security and entertainment product sales, net of rebates, decreased $7.2 million, or 11.0%, to $58.8 million in the third quarter of 2008 compared with $66.0 million in the third quarter of 2007. Strong sales of Polk Audio products to Best Buy were more than offset by overall consumer weakness in many regions of the United States.
Gross profit margin on security and entertainment products increased to 44.9% in the third quarter of 2008 compared with 43.7% in the third quarter of 2007. The gross margin rate increase was primarily attributable to lower warranty returns costs and strategic price increases during 2008.
Satellite Radio
Satellite radio pro forma product sales, net of rebates and sales returns, for the third quarter of 2008 totaled $17.1 million, a 2.3% decrease compared with $17.5 million for the third quarter of 2007. Satellite radio pro forma gross product sales decreased 34% during the third quarter of 2008 compared with the third quarter of 2007. This decrease is partially attributable to a company-initiated plan that reduced sales to Sirius.com, as these sales carried lower than average margins and required high working capital. Satellite radio sales also decreased to other major retailers as consumer demand for aftermarket satellite radio was lower in the third quarter of 2008 compared with the third quarter 2007.
With the implementation of the previously mentioned net reporting accounting policy, GAAP satellite radio sales, net of $14.9 million in direct costs, totaled $2.3 million for the third quarter of 2008.
On a pro forma basis, gross profit margin on satellite radio sales increased from 2.2% in the third quarter of 2007 to 13.2% in the third quarter of 2008. The increase in our margin was primarily attributable to an improvement in the company's warranty and sales returns experience.
Balance Sheet and Cash Flows
The company generated $17.6 million of operating cash flow for the first nine months of 2008 and ended the quarter with $9.1 million in cash and an undrawn revolver of $50.0 million. At the end of the third quarter of 2008, total debt was $258.6 million, a decrease of $51.3 million, or 16.6%, compared with total debt of $309.9 million as of September 30, 2007, which included $7.0 million drawn on the revolver.
Conference Call and Webcast
DEI Holdings will host a conference call and webcast to discuss its financial results today at 5:00 p.m. Eastern Time. The conference call may include forward-looking statements. This call will be webcast live on the Investor Relations section of the company's website at http://www.deiholdings.com and will be archived and available for replay approximately three hours after the live event. The audio replay will be available through 11:59 p.m., November 19, 2008. The company's financial results are also available online at http://www.deiholdings.com.
To participate in the conference call, investors should dial 800-762-8795 ten minutes prior to the call. International callers should dial 480-629- 9031. A telephone replay of the call will be available through 11:59 p.m. Eastern Time on November 19, 2008 by calling 800-406-7325 (passcode: 3933006). International callers should dial 303-590-3030 and use the same passcode.
About Directed Electronics
Headquartered in Vista, California, Directed Electronics (Nasdaq: DEIX) is the largest designer and marketer in North America of premium home theater loudspeakers (sold under the Polk Audio® and Definitive Technology® brand names), and consumer-branded vehicle security and remote start systems (sold under Viper®, Clifford®, Python®, Autostart® and other brand names). Directed Electronics is also a supplier of mobile audio sold principally under both the Polk Audio® and Orion® brand names. Directed Electronics markets its broad portfolio of products through many channels including leading national retailers and specialty chains throughout North America and around the world. Founded in 1982, the company has operations in California, Maryland, Canada, Europe and Asia. For more information, please visit www.directed.com.
Forward-Looking Statements
Certain statements in this news release that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as "may," "should," "might," "believe," "expect," "anticipate," "estimate," and similar words, although some may be expressed differently. Forward-looking statements in this release include, but are not limited to, statements as to expected savings from the company's restructuring initiatives and the company's ability to recover working capital and pay down debt. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results of DEI Holdings to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include competition in the consumer electronics industry, development of new products and changing demand of customers, reliance on certain key customers, adverse developments affecting SIRIUS XM Satellite Radio, decline in consumer spending, reliance on certain manufacturers and their ability to maintain satisfactory delivery schedules, disruption in supply chain, shortages of components and materials, economic risks associated with changes in social, political, regulatory, and economic conditions in the countries where the company's products are manufactured, quality installation of products by customers, significant product returns or product liability claims, compliance with various state and local regulations, risks with international operations, impairment of goodwill and intangible assets, claims related to intellectual property, ability to service debt obligations, restrictive terms of the company's senior secured credit facility, vulnerability to increases in interest rates, disruption in distribution centers, ability to raise additional capital if needed, dependence on senior management, ability to realize on investments made in the business, and integration of acquired businesses. Certain of these factors, as well as various additional factors, are discussed from time to time in the reports filed by DEI Holdings with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2007. DEI Holdings disclaims any intent or obligation to update these forward-looking statements.
Copyright © 2008 Directed Electronics, Inc. All rights reserved.
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