Accessory sales represented 24.8% and 26.1% of our net sales for the three and nine months ended November 30, 2010, respectively, compared to 29.5% and 33.1% in the prior year periods.  This group was impacted by slower retail sales for products utilizing our accessory products at the retail level. The group has added a more diverse group of customers, however, the general economy has had an impact on sales.  A portion of the decline was offset by our recent acquisition in our International group.

 

Overall our international sales increased as a result of our recent acquisition and an increase in its OEM sales program.  These increases were partially offset by declined sales in Venezuela which continues to experience general economic difficulties.

During the quarter ended November 30, 2010, sales incentive expenses decreased by $1,309 primarily as a result of the decline in Accessory sales partially offset by our Schwaiger acquisition, which has several marketing programs. Sales incentive expenses for the nine months ended November 30, 2010 increased $231 primarily as a result of the Schwaiger acquisition, partially offset by a decline in Accessories sales which has higher sales incentives. The release of unearned or unclaimed sales incentives was $267 and $910 for the three and nine months ended November 30, 2010, respectively. We believe the reversal of unearned but unclaimed or unearned sales incentives upon expiration of the claim period is a disciplined, rational, consistent, and systematic method of reversing these claims.  These sales incentive programs are expe cted to continue and will either increase or decrease based upon competition and customer demands.

Gross Profit

		November 30,
		2010				2009				$ Change				% Change
Three Months Ended:
Gross profit		$	34,597			$	30,226			$	4,371				14.5	%
Gross margin percentage			21.2	%			19.4	%
Nine Months Ended:
Gross profit		$	89,128			$	76,750			$	12,378				16.1	%
Gross margin percentage			21.1	%			19.2	%

 

Gross margins, which increased by 180 and 190 basis points for the three and nine months ended November 30, 2010, respectively, were favorably impacted by improved margins in most of the Company’s product lines in both Electronics and Accessories.  Contributing to this improvement was a shift in the mix of sales from fulfillment type sales to our other groups, which traditionally have higher margins.  Also, our freight and warehousing costs have continued to improve.

 

 

 

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Operating Expenses and Operating Loss

		November 30,
		2010				2009				$ Change				% Change
Three Months Ended:
Operating income		$	5,403			$	3,136			$	2,267				72.3	%
Nine Months Ended:
Operating income		$	4,091			$	4,188			$	(97	)			(2.3	) %

Operating expenses increased $2,105 and $12,475 for the three and nine months ended November 30, 2010,  respectively, from $27,090 and $72,562 in the comparable prior year periods. As a percentage of net sales, operating expenses were 17.9% and 20.1% for the three and nine months ended November 30, 2010, as compared to 17.4% and 18.1% for the three and nine months ended November 30, 2009, respectively. The increase in total operating expenses was primarily due to our Schwaiger and Invision acquisitions which accounted for approximately $2.6 million and $10.1 million during the three and nine months ended November 30, 2010, respectively.  Prior to overhead expenses related to recent acquisitions, the Company showed a decline of $.5 million f or the quarter primarily as a result of decreases in general and administrative expenses.  Year to date, after adjusting for our recent acquisition, expenses increased as a result of charges for employee stock option costs, professional fees, bad debt expenses associated with a bankruptcy settlement, and severance charges associated with the consolidation of a German operating location.  The balance of the increase was due to a reinstatement of a portion of the reductions originally instituted in the salary reduction program to all employees below the level of vice president.

Other Income (Expense)

Interest and bank charges represent expenses for bank obligations of Audiovox Corporation and Audiovox Germany and interest for a capital lease.

Equity income in equity investees increased for the three and nine months ended November 30, 2010 as a result of the improvement in the specialized vehicle and marine markets.

Other income decreased $84 for the quarter as a result of foreign exchange charges and account fees related to investments and additional credit card service charges.  Year to date, other income increased as a result of foreign exchange gains from our European operations (see Note 4), and investment income.

 

Income Tax Benefit/Provision

The effective tax rate for the three and nine months ended November 30, 2010 was a provision for income taxes of 34.5% and 24.1% compared to a benefit for income taxes of 247.2% and 184.1% in the comparable prior periods.  The effective tax rate for the nine months ended November 30, 2010 is different than the statutory rate primarily due to a discrete item related to the recognition of a tax receivable as a result of the favorable resolution of an income tax audit. 

 

Net Income

The following table sets forth, for the periods indicated, selected statement of operations data beginning with net income and basic and diluted net income per common share.

		Three Months Ended								Nine Months Ended
		November 30,								November 30,
		2010				2009				2010				2009
Net income		$	3,859			$	12,645			$	5,624			$	15,893
Net income per common share:
Basic		$	0.17			$	0.55			$	0.25			$	0.69
Diluted		$	0.17			$	0.55			$	0.24			$	0.69

Net income declined for the three months ended November 30, 2010 versus the prior year period primarily as a result of a discrete tax benefit recorded in 2009 associated with a FIN 48 tax position and the favorable benefit in the prior year’s quarter as a result of the Worker Homeownership and Business Assistance Act of 2009 in which the Company was able to record a discrete tax benefit of $10,149.

 

 

 

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Liquidity and Capital Resources

Cash Flows, Commitments and Obligations

 

As of November 30, 2010, we had working capital of $252,368 which includes cash and short-term investments of $62,381, compared with working capital of $239,787 at February 28, 2010, which included cash and short-term investments of $69,511. The decrease in cash and short-term investments is primarily due to an increase in inventory and the repayment of the Suntrust loan, partially offset by an increase in accounts payable and accrued expenses, a decrease in prepaid expenses, and other and the sale of a long-term investment.  We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations, and income on our investments to fund the current operations of the business.  However, we may utilize all or a portion of current cash resources to pursue other business opportunities, including acquisitions. 

Operating activities used cash of $5,003 for the nine months ended November 30, 2010 principally due to increased accounts receivables and inventory.

§	The Company experienced increased accounts receivable turnover of 4.4 during the nine months ended November 30, 2010 compared to 3.8 during the nine months ended November 30, 2009.

§	Inventory turnover declined to 3.2 during the nine months ended November 30, 2010 compared to 3.5 during the nine months ended November 30, 2009.

 

Investing activities used cash of $22,362 during the nine months ended November 30, 2010, primarily due to the purchase of short-term investments, partially offset by proceeds from the sale of long-term investments.

 

Financing activities used cash of $4,095 during the nine months ended November 30, 2010, primarily from repayment of bank obligations.

 

Up until March 31, 2010, the Company had a secured credit line to fund the temporary short-term working capital needs of the domestic operations.  This line allowed aggregate borrowings of up to $10,000 at an interest rate of Prime (or similar designations) plus 1% or LIBOR plus 5%. The line was subsequently replaced by a $15,000 three-year facility at an interest rate of LIBOR plus 2.8%.  As of November 30, 2010 and February 28, 2010, no direct amounts were outstanding under either of these agreements.   At November 30, 2010, the Company had $2,817 and $1,022 outstanding in standby and commercial letters of credit, respectively, which reduces the amount available under the secured credit line.

 

Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity.  At November 30, 2010, such obligations and commitments are as follows:

		Payments Due by Period
						Less than					1-3				4-5			After
Contractual Cash Obligations		Total				1 Year				Years				Years				5 Years
Capital lease obligation (1)		$	10,015			$	522			$	1,147			$	1,147			$	7,199
Operating leases (2)			19,312				4,034				5,311				2,804				7,163
Total contractual cash obligations		$	29,327			$	4,556			$	6,458			$	3,951			$	14,362
		Amount of Commitment Expiration per period
		Total
		Amounts				Less than					1-3				4-5			After
Other Commercial Commitments		Committed				1 Year				Years				Years				5 years
Bank obligations (3)		$	2,183			$	2,183			$	-			$	-			$	-
Stand-by and commercial letters of credit (4)			3,839				3,839				-				-				-
Debt (5)			8,210				2,712				5,498				-				-
Contingent earn-out payments (6)			6,898				1,990				3,223				1,685				-
Unconditional purchase obligations (7)			52,323				52,323				-				-				-
Total commercial commitments		$	73,453			$	63,047			$	8,721			$	1,685			$	-

1. Represents total payments (interest and principal) due under a capital lease obligation which has a current (included in other current liabilities) and long term principal balance of $87 and $5,384, respectively at November 30, 2010.

 

 

 

 

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2. We enter into operating leases in the normal course of business.

 

3. Includes amounts outstanding under the Audiovox Germany Euro asset-based lending facility at November 30, 2010 and the Venezuelan credit line.

 

4. We issue standby and commercial letters of credit to secure certain bank obligations and insurance requirements.

 

5. Represents amounts outstanding under a loan agreement for Audiovox Germany.  This amount also includes amounts due under a call-put option with certain employees of Audiovox Germany.

 

6. Represents contingent payments in connection with the Thomson Accessory and Thomson Audio/Video acquisitions (see Note 3 of the Company’s annual report).

 

7. Open purchase obligations represent inventory commitments.  These obligations are not recorded in the consolidated financial statements until commitments are fulfilled and such obligations are subject to change based on negotiations with manufacturers.

We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings.  At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash.  We believe that our cash, other liquid assets, operating cash flows, credit arrangements, and access to equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional fu nds through the sale of public or private equity and/or debt financings as well as from other sources.  No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable when required.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Acquisitions

During the third quarter of Fiscal 2010, the Company completed the acquisition of Schwaiger GmbH, a German market leader in the consumer electronics, SAT and receiver technologies for $4,348. The purpose of this acquisition was to expand our European operations and increase our presence in the European accessory market.

On February 1, 2010, the Company’s newly formed subsidiary, Invision Automotive Systems, Inc., purchased the assets of Invision Industries, Inc., a manufacturer of rear seat entertainment systems for OEM’s, ports and car dealers. As consideration for Invision, the Company paid $15,320 (including payments to principal and certain vendors).

In conjunction with the acquisition, the Company refinanced and executed a new loan with Suntrust Bank to pay down the former obligation of Invision Industries, Inc. and assumed certain debt. The total debt at closing was $5,000, which is included in the purchase price.

The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition. The purpose of this acquisition was to further strengthen our OEM presence and add manufacturing capabilities to our business model (see Note 7 for the purchase price allocation).

Subsequent Events

On January 6, 2011, the Company announced that it had recently signed a non-binding term sheet to purchase all of the shares of Klipsch Group Inc., including its worldwide subsidiaries (collectively, ”Klipsch”).  Klipsch is a leading, global provider of premium, high performance speakers sold through retail and installation channels.  The transaction is subject to a number of contingencies, including satisfactory completion of due diligence, negotiation and signing of definitive agreements and requisite approvals.  If it proceeds with the acquisition of Klipsch, the Company expects to finance the purchase price through a combination of cash and a new credit facility.  On January 7, 2011, the Company obtained the commitment of Wells Fargo Capital Finance, LLC to syndicate a credit facility for the Company in an amount up to $175 million. The Company expects to use a portion of the proceeds from the credit facility to finance part of the Klipsch purchase price and expects the balance remaining under the credit facility to be available for working capital purposes. The commitment is subject to a number of customary and other conditions, including the Company’s successful completion of the Klipsch acquisition.  It is anticipated that the credit facility would be secured by substantially all of the assets of the Company and Klipsch and that availability under the credit facility would be based on negotiated levels of eligible accounts receivable and inventory of the Company and Klipsch from time to time.  There can be no assurance that the Company will be successful in its efforts to obtain the credit facility on these, or on any other, terms, or to complete the acquisition of Klipsch.   The Company does not expect to enter into the credit facility if it does not consummate the Klipsch acquisition.

 

 

 

 

 

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Related Party Transactions

During 1998, we entered into a 30-year capital lease for a building with our principal stockholder and chairman, which was the headquarters of the discontinued Cellular operation.  Payments on the capital lease were based upon the construction costs of the building and the then-current interest rates.  This capital lease was refinanced in December 2006 and the lease expires on November 30, 2026.  The effective interest rate on the capital lease obligation is 8%.  On November 1, 2004, we entered into an agreement to sublease the building to Personal Communication Devices, LLC (Formerly UTStarcom) for monthly payments of $46 until November 1, 2009.  The sublease lease agreement has been renewed and requires, for a term of three years, monthly payments of $50 until November 1, 2012. We als o lease another facility from our principal stockholder which expires on November 30, 2016.  Total lease payments required under all related party leases for the five-year period ending November 30, 2015 are $6,284.

New Accounting Pronouncements

We are required to adopt certain new accounting pronouncements (see Note 19) to our consolidated financial statements included herein.

 

 

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our changes in foreign currency exchange rates are managed through normal operating and financing activities.  We have foreign operations  primarily in Germany, Canada,  Mexico and Venezuela and thus are exposed to market risk for changes in foreign currency exchange rates. For the three months ended November 30, 2010, a uniform 10% strengthening of the U.S. dollar relative to the local currency of our foreign operations would have resulted in a decrease in sales of approximately $4.2 million. The impact on net income would be negligible. For the nine months ended November 30, 2010, a uniform 10% strengthening of the U.S. dollar relative to the local currency of our foreign operations would have resulted in a decrease in sales and net income of approximately $7.9 and $.1 million, respectively. The effects of foreign currency exchange rates on future results would also be impacted by changes in sales levels or local currency prices.

 
 

There has been no significant change in our market risk sensitive instruments since February 28, 2010 with the exception of our operations in Venezuela. Venezuela represented 1% of quarterly and year to date sales. The majority of assets invested in Venezuela are cash related and are subject to government foreign exchange controls including its investment in Venezuelan government bonds (see Note 4). The Company will continue to monitor the situation.

The Company also continues to monitor the circumstances related to its equity investment in Bliss-tel (Thailand) as discussed in Note 4.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures are effective at a “reasonable assurance” level.

 

There were no material changes in our internal control over financial  reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three and nine month period ended November 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

 

 

 

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PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

 

See Note 17 of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and Note 14 of the Form 10-K for the fiscal year ended February 28, 2010 for information regarding legal proceedings.

ITEM 1A.   RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended February 28, 2010.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no shares of common stock repurchased during the three and nine months ended November 30, 2010.

 

 

 

 

 

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ITEM 6.   EXHIBITS

 

 

Exhibit Number		Description
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AUDIOVOX CORPORATION

January 10, 2011

By: /s/ Patrick M. Lavelle

Patrick M. Lavelle,

President and Chief Executive Officer

By: /s/ Charles M. Stoehr

Charles M. Stoehr,

Senior Vice President and Chief Financial Officer

 

 

 

 

 

 

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CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Patrick M. Lavelle, President and Chief Executive Officer of Audiovox Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation (the “Company”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the three and nine months ended November 30, 2010) that has materiality affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

January 10, 2011

/s/ Patrick M. Lavelle                                                      

Patrick M. Lavelle

Exhibit 31.1

 

 

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CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, C. Michael Stoehr, Senior Vice President and Chief Financial Officer of Audiovox Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation (the “Company”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the three and nine months ended November 30, 2010) that has materiality affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

January 10, 2011

/s/ C. Michael Stoehr

C. Michael Stoehr

Exhibit 31.2

 

 

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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Audiovox Corporation (the “Company”) on Form 10-Q for the three and nine months ended November 30, 2010 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Patrick M. Lavelle, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

January 10, 2011

/s/Patrick M. Lavelle____________

Patrick M. Lavelle

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Audiovox Corporation (the “Company”) on Form 10-Q for the three and nine months ended November 30, 2010 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, C. Michael Stoehr, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

January 10, 2011

/s/ C. Michael Stoehr_______________

C. Michael Stoehr

EXHIBIT 32.2