UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 9, 2008
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-28839 13-1964841
(Commission File Number) (IRS Employer Identification No.)
180 Marcus Boulevard, Hauppauge, New York 11788
(Address of Principal Executive Offices) (Zip Code)
(631) 231-7750
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of file
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(e))
1
Item 2.02 Results of Operations and Financial Condition
On January 9, 2008, Audiovox Corporation (the "Company") issued a press release
announcing its earnings for the nine months ended November 30, 2007. A copy of
the release is furnished herewith as Exhibit 99.1.
Item 8.01 Other Events
On January 10, 2008, the Company held a conference call to discuss its financial
results for the nine months ended November 30, 2007. The Company has prepared a
transcript of that conference call, a copy of which is annexed hereto as Exhibit
99.2.
The information furnished under Items 2.02 and 8.01, including Exhibits 99.1 and
99.2, shall not be deemed to be filed for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and will not be incorporated by
reference into any registration statement filed under the Securities Act of
1933, as amended, unless specifically identified therein as being incorporated
therein by reference.
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
(Registrant)
Date: January 14, 2008 By: /s/ Charles M. Stoehr
----------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
2
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
99.1 Press Release, dated January 9, 2008, relating to
Audiovox Corporation's earnings release for the
nine months ended November 30, 2007 (filed herewith).
99.2 Transcript of conference call held on January 10,
2008 at 10:00 am (filed herewith).
3
FOR IMMEDIATE RELEASE
Audiovox Corporation Reports Fiscal 2008
Third Quarter and Nine-Month Results
HAUPPAUGE, NY, January 9, 2008 -- Audiovox Corporation (NASDAQ:VOXX) today
announced results for its fiscal 2008 third quarter and nine months ended
November 30, 2007.
Three-Month Results ------------------- The Company reported net sales for the
fiscal 2008 third quarter of $183.6 million, an increase of 20.9% compared to
$151.8 million reported in the comparable prior year quarter. Operating income
for the three months ended November 30, 2007 was $5.6 million, an increase of
229.4% compared to $1.7 million reported in the comparable prior year period.
Pre-tax income from continuing operations for the fiscal 2008 third quarter was
$6.7 million, an increase of $3.6 million or 116.1%, compared to $3.1 million in
the fiscal 2007 third quarter.
As a result of recording increased income from operations and a decrease in the
tax-exempt interest income on our investment balances during the period, total
income taxes increased from a tax benefit of $0.8 million in the fiscal 2007
third quarter to a tax expense of $2.0 million, an increase of $2.8 million
compared to the comparable period last year. Accordingly, net income for the
fiscal 2008 third quarter was approximately $4.7 million or $0.20 per diluted
share compared to net income of $3.9 million or $0.17 per diluted share in the
fiscal 2007 third quarter.
Electronics sales, which include both mobile and consumer electronics were
$139.0 million, a decrease of 6.3% compared to the three-month period ended
November 30, 2006. This decrease was due to a decline in consumer electronics
sales as a result of lower holiday sales than anticipated and LCD panel
shortages. This industry-wide shortage adversely impacted fiscal 2008 third
quarter sales of LCD TV's, portable DVD's and digital picture frames. Offsetting
these declines was an increase in sales of mobile electronics products;
particularly Jensen, Phase Linear and satellite radio product lines, as well as
increases in the electronics sales of the Company's international operations in
Germany and Venezuela.
Accessories sales were $44.6 million, an increase of over 1,139% compared to
sales of $3.6 million in the fiscal 2007 third quarter. This increase was
primarily due to sales generated by the recently acquired Thomson, Oehlbach and
Technuity operations, which were not part of fiscal 2007 results.
As a percentage of net sales, Electronics represented 75.7% compared to almost
98% in the comparable fiscal 2007 quarter and Accessories represented 24.3%
compared to 2.3% in the comparable year ago period.
Patrick Lavelle, President and CEO of Audiovox stated, "While there were many
positives this past quarter, our results were impacted by the industry wide
shortage of LCD panels as well as weaker Christmas sales and lower car sales.
During the quarter, we experienced positive momentum in some of our mobile
groups and both our domestic and international accessory businesses. Despite
retail pressure, our margins tracked in line with last quarter's performance and
internal projections."
1
Gross margins for the period ended November 30, 2007 increased two hundred and
forty basis points to 19.1% compared to 16.7% in the fiscal 2007 third quarter.
Gross margins were favorably impacted by higher margins generated from the
recently acquired accessory companies as well as improved overall margins in the
core Electronics business. Gross margins were adversely impacted by increased
warehouse and assembly costs as a result of incremental costs necessary for the
acquisitions, as well as increased warranty and repair costs, freight, and
inventory provisions related to higher accessories sales.
Operating expenses for the three months ended November 30, 2007 were $29.4
million, an increase of $5.7 million, compared to $23.7 million reported in the
comparable prior year period. Excluding the impact of the acquisitions of $6.3
million, overhead for the Company's core operations was down approximately $0.6
million in the fiscal 2008 third quarter.
Lavelle continued, "During 2007, we made five acquisitions for approximately
$100 million, which collectively, should add $300-$350 million in sales, much of
it at higher margins than our existing core business. However, I must caution
everyone that during the next several months, we expect to incur incremental
costs associated with the integration of the RCA audio video business and the
Technuity accessory business. Most of these charges will occur during our fourth
fiscal quarter which historically, has been our weakest quarter."
Lavelle concluded, "I remain optimistic about our future and believe our Company
is on the right path. Our portfolio of brands is the strongest in our history
and we continue to expand our customer base and geographic footprint. We remain
committed to enhancing shareholder value, both near- and long-term."
Nine-Month Results
- ------------------
The Company reported net sales for the nine months ended November 30, 2007 of
$460.1 million, an increase of 27.6% compared to $360.6 million reported in the
comparable prior year period. Operating income for the nine months ended
November 30, 2007 was $8.0 million, an increase of 420.0% compared to an
operating loss of $2.5 million reported in the comparable prior year period.
Pre-tax income from continuing operations for the nine months ended November 30,
2007 was $12.2 million, an increase of $8.9 million or 270.0%, compared to $3.3
million in the prior year period. As a result of recording increased income from
operations and a decrease in the tax-exempt interest income on our investment
balances during the year to date period, total income taxes increased from a tax
benefit of $0.7 million in the fiscal 2007 year to date period to a tax expense
of $3.7 million in the comparable period last year, an increase of $4.4 million.
Accordingly, net income from continuing operations for the first nine months of
fiscal 2008 was approximately $8.5 million compared to $4.0 million in the first
nine months of fiscal 2007. Including discontinued operations, net income for
the fiscal nine month 2008 period was $10.6 million or $0.47 per diluted share
compared to $3.4 million or $0.15 per diluted share in the comparable fiscal
2007 period.
2
Electronics sales, which include both mobile and consumer electronics were
$341.2 million, down 2.5% compared to the first nine months of fiscal 2007. This
was due to a decline in consumer electronics sales as a result of LCD panel
shortages and a decline in mobile electronics sales related to increased OE
programs that include the video system as `standard' on more and more vehicles.
These declines were partially offset by increases in mobile audio sales,
particularly Jensen mobile, Phase Linear and satellite radio and increases in
the electronics sales of the Company's international operations in Germany and
Venezuela.
Accessories sales for the first nine months of fiscal 2008 were $118.9 million
compared to sales of $10.8 million in the first nine months of fiscal 2007. This
increase was due to increased sales
generated from the recently acquired Thomson, Oehlbach and Technuity operations.
As a percentage of net sales, Electronics represented 74.2% compared to 97.0% in
the comparable fiscal 2007 period and accessories represented 25.8% compared to
3.0% in the comparable year ago period.
Gross margins for the nine months ended November 30, 2007 were 18.8% compared to
17.0% in the comparable period last year, up 180 basis points. Gross margins
were favorably impacted by higher margins generated from the recently acquired
accessory companies, improved overall margins in the Company's core business and
improved buying programs and inventory management. Gross margins were adversely
impacted by increased warehouse and assembly costs as a result of incremental
costs necessary to integrate the acquisitions, as well as increased warranty and
repair costs, freight, and inventory provisions related to higher accessories
sales.
Operating expenses were $78.7 million, an increase of 23.5% compared to $63.7
million reported in the comparable prior year period. The increase in total
operating expenses is due to the incremental costs related to the acquired
operations, which had total operating expenses of $16.8 million for the nine
months ended November 30, 2007.
Conference Call Information
- ----------------------------
The Company will be hosting its conference call tomorrow morning on Thursday,
January 10, 2008 at 10:00 a.m. EST. Interested parties can participate by
visiting www.audiovox.com, and clicking on the webcast in the Investor Relations
section. For those who will be unable to participate, a replay has been arranged
and will be available approximately one hour after the call has been completed
and will last for one week thereafter.
Replay Information
- ------------------
o Toll-Free Call-In Number: 888-286-8010
o International Call-In Number: 617-801-6888
o Access Code: 29448708
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About Audiovox
- --------------
Audiovox Corporation is a leading international supplier and value added service
provider in the consumer electronics industry. The Company conducts its business
through subsidiaries and markets mobile and consumer electronics and accessories
products both domestically and internationally under several of its own brands.
It also functions as an OEM (Original Equipment Manufacturer) supplier to a wide
variety of customers, through several distinct distribution channels. For
additional information, please visit Audiovox on the Web at
http://www.audiovox.com.
Safe Harbor Language
- --------------------
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks and uncertainties. All forward-looking statements made in this release are
based on currently available information and the Company assumes no
responsibility to update any such forward-looking statements. The following
factors, among others, may cause actual results to differ materially from the
results suggested in the forward-looking statements. The factors include, but
are not limited to, risks that may result from changes in the Company's business
operations; our ability to keep pace with technological advances; significant
competition in the mobile and consumer electronics and accessories businesses;
our relationships with key suppliers and customers; quality and consumer
acceptance of newly introduced products; market volatility; non-availability of
product; excess inventory; price and product competition; new product
introductions; the possibility that the review of our prior filings by the SEC
may result in changes to our financial statements; and the possibility that
stockholders or regulatory authorities may initiate proceedings against Audiovox
and/or our officers and directors as a result of any restatements. Risk factors
associated with our business, including some of the facts set forth herein, are
detailed in the Company's Form 10-K for the fiscal year ended February 28, 2007.
Company Contacts
- ----------------
Glenn Wiener
GW Communications for Audiovox
Tel: 212-786-6011 or Email: gwiener@GWCco.com
- Tables To Follow -
4
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
November 30, February 28,
2007 2007
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ......................... $ 20,669 $ 15,473
Short-term investments ............................ 8,277 140,872
Accounts receivable, net .......................... 157,664 86,003
Inventory ......................................... 147,830 104,972
Receivables from vendors .......................... 26,701 13,935
Prepaid expenses and other current assets ......... 12,652 11,427
Income tax receivable ............................. 581 3,518
Deferred income taxes ............................. 2,705 2,492
-------- --------
Total current assets ............................ 377,079 378,692
Investment securities ................................ 14,353 13,179
Equity investments ................................... 13,064 11,353
Property, plant and equipment, net ................... 21,181 18,019
Goodwill ............................................. 40,009 17,514
Intangible assets .................................... 58,101 57,874
Deferred income taxes ................................ 2,503 1,858
Other assets ......................................... 649 631
-------- --------
Total assets .................................... $526,939 $499,120
======== ========
5
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets, continued
(In thousands, except share data)
November 30, February 28,
2007 2007
------------------ ------------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................ $ 39,664 $ 34,344
Accrued expenses and other current liabilities .............................. 25,319 26,564
Accrued sales incentives .................................................... 14,937 7,410
Bank obligations ............................................................ 3,929 2,890
Current portion of long-term debt ........................................... 79 1,524
------------ ------------
Total current liabilities ................................................. 83,928 72,732
Long-term debt ................................................................. 2,236 5,430
Other tax liabilities .......................................................... 4,450 3,347
Capital lease obligation ....................................................... 5,625 5,676
Deferred compensation .......................................................... 8,618 7,573
------------ ------------
Total liabilities ......................................................... 104,857 94,758
Commitments and contingencies
Stockholders' equity:
Series preferred stock, $.01 par value; 1,500,000 shares authorized, no
shares issued or outstanding .............................................. -- --
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized, 22,414,212
and 22,005,346 shares issued, 20,593,660 and 20,312,299 shares
outstanding at November 30, 2007 and February 28, 2007, respectively ..... 224 220
Class B convertible, $.01 par value; 10,000,000 shares authorized,
2,260,954 shares issued and outstanding ................................. 22 22
Paid-in capital ............................................................. 275,830 271,056
Retained earnings ........................................................... 161,873 151,363
Accumulated other comprehensive income (loss) ............................... 2,537 (1,320)
Treasury stock, at cost, 1,820,552 and 1,693,047 shares of Class A
common stock at November 30, 2007 and February 28, 2007,
respectively .............................................................. (18,404) (16,979)
------------ ------------
Total stockholders' equity ..................................................... 422,082 404,362
------------ ------------
Total liabilities and stockholders' equity ..................................... $ 526,939 $ 499,120
============ ============
6
Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended November 30, 2007 and 2006
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------------------- ------------------------------
2007 2006 2007 2006
--------------- --------------- ------------ -------------
Net sales ...................................................... $ 183,563 $ 151,833 $ 460,085 $ 360,556
Cost of sales .................................................. 148,572 126,462 373,431 299,332
------------ ------------ ------------ ------------
Gross profit ................................................... 34,991 25,371 86,654 61,224
------------ ------------ ------------ ------------
Operating expenses:
Selling ..................................................... 9,828 8,114 26,534 21,626
General and administrative .................................. 16,948 13,649 45,153 36,682
Engineering and technical support ........................... 2,600 1,888 7,010 5,418
------------ ------------ ------------ ------------
Total operating expenses .................................. 29,376 23,651 78,697 63,726
------------ ------------ ------------ ------------
Operating income (loss) ........................................ 5,615 1,720 7,957 (2,502)
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges ................................... (723) (429) (2,087) (1,491)
Equity in income of equity investees ........................ 1,011 659 2,927 2,423
Other, net .................................................. 816 1,118 3,444 4,827
------------ ------------ ------------ ------------
Total other income, net ................................... 1,104 1,348 4,284 5,759
------------ ------------ ------------ ------------
Income from continuing operations before income taxes .......... 6,719 3,068 12,241 3,257
Income tax (expense) benefit ................................... (2,039) 780 (3,709) 740
------------ ------------ ------------ ------------
Net income from continuing operations ......................... 4,680 3,848 8,532 3,997
Net income (loss) from discontinued operations, net of tax ..... -- 6 2,111 (576)
------------ ------------ ------------ ------------
Net income .................................................... $ 4,680 $ 3,854 $ 10,643 $ 3,421
============ ============ ============ ============
Net income (loss) per common share (basic):
From continuing operations .................................. $ 0.20 $ 0.17 $ 0.38 $ 0.18
From discontinued operations ................................ -- -- 0.09 (0.03)
------------ ------------ ------------ ------------
Net income per common share (basic) .......................... $ 0.20 $ 0.17 $ 0.47 $ 0.15
============ ============ ============ ============
Net income (loss) per common share (diluted):
From continuing operations .................................. $ 0.20 $ 0.17 $ 0.38 $ 0.18
From discontinued operations ................................ -- -- 0.09 (0.03)
------------ ------------ ------------ ------------
Net income per common share (diluted) .......................... $ 0.20 $ 0.17 $ 0.47 $ 0.15
============ ============ ============ ============
Weighted-average common shares outstanding (basic) ............. 22,852,781 22,234,399 22,853,108 22,345,183
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) ........... 22,857,355 22,445,164 22,880,263 22,540,476
============ ============ ============ ============
7
FINAL TRANSCRIPT
- --------------------------------------------------------------------------------
Conference Call Transcript
VOXX - Q3 2008 Audiovox Corporation Earnings Conference Call
Event Date/Time: Jan. 10. 2008 / 10:00AM ET
- --------------------------------------------------------------------------------
CORPORATE PARTICIPANTS
Glenn Wiener
Audiovox Corporation - Investor Relations
Patrick Lavelle
Audiovox Corporation - President, CEO
Michael Stoehr
Audiovox Corporation - SVP, CFO
CONFERENCE CALL PARTICIPANTS
C.J.
Securitize Capital - Analyst
Jim Barrett
CL King & Associates - Analyst
Mike Neary
Neary Asset Management - Analyst
Richard Greenberg
Donald Smith & Company - Analyst
PRESENTATION
- --------------------------------------------------------------------------------
Operator
Good morning, and welcome to the third quarter 2008 Audiovox Corporation's
earnings conference call. My name is Katina and I will be your coordinator for
today. At this time all participants are in a listen-only mode. We will conduct
a question-and-answer session towards the end of this conference. (OPERATOR
INSTRUCTIONS) As a reminder, this conference is being recorded for replay
purposes. I would now like to turn the presentation over to your host for
today's call, Mr. Glenn Wiener of Investor Relations. Please proceed.
- --------------------------------------------------------------------------------
Glenn Wiener - Audiovox Corporation - Investor Relations
Thank you, and good morning. Welcome to Audiovox's fiscal 2008 third quarter
results conference call for the period ended November 30th. Today's call is
being webcast on our website, www.audiovox.com, under our Investor Relations
section. Fiscal third quarter were released yesterday after market close and our
form 10Q was filed as well. That can be found on our website under our SEC
filings. Speaking from management this morning will be: Patrick Lavelle,
President and CEO, and Michael Stoehr, Senior Vice President and Chief Financial
Officer. John Shalam is also here with us. Both Michael and Pat will be making
opening remarks before opening the call for your questions and before we get
started I'd like to read Safe Harbor language.
Except for historical information contained herein statements made on today's
call and on today's 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. The following
factors among others may cause results to differ materially from the results
suggested in these forward-looking statements. These factors include but are not
limited to: risks that result in changes in the company's core business
operations, our ability to keep pace with technology advances, significant
competition in the mobile and consumer electronics businesses and accessory
business, relationships with key suppliers and customers, quality and consumer
acceptance of our newly introduced products, market volatility, nonavailability
of products, excess inventory, price and product competition, new product
introductions and the possibility that a review of our prior filings by the SEC
may result in changes to our financial statements, and the possibility that
stockholders or regulatory authorities may initiate proceedings against the
company and/or our officers and directors as a result of any numerous statements
or other actions. Risk factors with our business including some of the factors
set forth herein are detailed in the company's form 10K for the period ended
February 28th, 2007. Thank you again, and at this time I'd like to turn the call
over to Patrick.
1
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Thank you, Glenn, and good morning, everyone. I'm here with our Chairman, John
Shalam, at CES 2008 in Las Vegas, and online is Mike Stoehr, our CFO, who is
dialing in from New York. As most of you know, just days ago we closed on the
acquisition of Thompson's RCA audio video group, and I'll cover that detail in a
few moments. And I'm very happy to note that here at CES we have won 12 consumer
electronics innovation awards, the most at any one CES, and I'll cover those
shortly as well. But first, I'd like to recap our third quarter performance
highlighting some of the key drivers to our results. After my remarks, Michael
will cover our financials in more detail and then we'll open the call to
questions.
We reported sales of approximately $184 million, an increase of 21% compared to
fiscal third quarter last year, and net income of $4.7 million or $0.20 per
diluted share. On an operating basis, operating income came in at $5.6 million a
229% increase over Q3 last year. Excluding the $244,000 noncash charge related
to RCA accessory -- the RCA accessory acquisition, our operating income was $5.9
million. Our accessory group recorded sales of $44.6 million compared to $3.6
million last year. Of course, this increase is a result of our acquisition
strategy to enter the accessory business and the ensuing sales of Thompson,
Oehlbach and Technuity, all acquired during the year. As intended, the addition
of the accessory business is helping to improve overall margins and spread fixed
overhead across a larger sales base. Electronic sales were off a little over 6%,
coming in at $139 million.
On the consumer side, the industry-wide shortage of LCD panels intensified and
continue to impact our sales of LCD TVs, portable DVDs and digital picture
frames. We simply were unable -- [efficient supply] to meet our customer demand.
We estimate the impact of these product shortages to be approximately $20
million of lost sales for the quarter. And although we had previously cautioned
regarding the supply issues, the situation worsened as we ultimately did not
receive planned shipments. Sales of certain mobile products were also down this
quarter as the OEs continued to offer programs that cut into the after market
for mobile video, such as the recent holiday promotion that included a free rear
seat entertainment system with a vehicle purchase. Competition at the OE level
will continue and to help counter it we remain committed to introducing new
technologies at a faster pace and providing product solutions for a broader
variety of vehicles than the OEs provide, such as in-dash entertainment and
navigation systems for mid-and-lower price vehicles, a wider range of remote
start systems and more head rest options for rear seat entertainment, just to
name a few.
On the positive side, sales of mobile audio products were up 23% over Q3 last
year. Jensen continues to be the number-one selling mobile multimedia system in
the U.S. and Audiovox maintained it's number one market share in this category.
Sales of XM Satellite Radio also contributed significantly to our mobile audio
sales. And finally, we experienced growth in the mobile business of our
international operations in Germany and Venezuela, allowing us to post a modest
increase of 4.6% in our overall mobile business. Despite the improvements, I
must say that the quarter's performance was really somewhat mixed. On the one
hand we are executing our strategy and getting positive results from the
acquisitions, however there are market factors that have affected overall
consumer sales which are creating downward pressure. These short-term industry
drivers and the overall health of the economy have curtailed our growth to a
degree. However, with the new product introduced at the show in Vegas here and
the new sales from our acquisition, I expect the company to grow this year and
next.
Our gross margins came in at 19.1%, roughly in line with last quarter, and up
240 basis points over the third quarter last year. The contributions from our
acquired business, combined with the impact of our efforts to improve margins in
our core electronics has led to these improvements. Raising our margins remains
a top priority for me. Overhead was up due to the acquisitions, however when we
strip out acquisition overhead, our core overhead was actually down $600,000 for
the quarter. We evaluate our cost structure on a constant basis and expect
additional overhead reductions as we incorporate the new acquisitions and lower
core overhead to match lower core sales.
As I said at the beginning of the call we are here at the Consumer Electronics
Show in Las Vegas, and please excuse what I would call Vegas voice. After a week
in Vegas, you start to lose it after a while. We're here in Vegas where the
emphasis is on new products and innovation. Our design teams are on the right
track and have won, as I said, 12 CES innovation product awards across our
various product lines. Some of our products on display that have gotten a lot of
attention, we are showing four new acoustic research wireless modules, or models
featuring wireless technology developed by Audiovox engineers. Early product
reviews of these systems have been very favorable and are set to deliver this
month. The new products include a complete 5.1 system, wireless sub, and modules
that convert any speaker to wireless. In addition, the 2008 acoustic research
line also includes a high performance table-top radio line with five new product
offerings.
2
Under Jensen we hold five of the top ten positions in mobile multimedia today,
and with our new product line-up hope to increase our market leading position.
Our new Jensen Mobile multimedia piece, one of several introduced here, won a
CES innovation award for a truly differentiated product. This is a new 6.5-inch
touch screen multimedia receiver that is satellite radio ready, has navigation,
HD radio and Bluetooth, offering all the latest digital technology and
connectivity in a one-source media hub. In satellite radio we have the XM Direct
2 that allows users to listen to their XM radio through their satellite-ready
car stereo and is the only flashable smart adapter on the market today. It works
with any satellite ready head unit and allows software downloads via the
internet to accommodate all the different protocols from all models, from
Alpine, Clarion, Eclipse, Jensen, JVC, Kenwood Panasonic, Sony or any of the
other aftermarket radio providers.
Under Audiovox, we're launching two new digital message centers that are truly
innovative. They are digital picture frames that not only display your photos,
they also function as complete message centers and feature audio and video
message capabilities through built-in cameras and recorders. The units are
designed to be used in the kitchen, which is the hub of most family activities,
and utilize a unique refrigerator mounting system. This is one of the items
we've had unbelievable press coverage here at the show. In accessories, we'll
have a number of new products under acoustic research, RCA and Terk brands. The
new acoustic research wireless remotes manage and move content from your TV or
PC and include popular home automation features.
And last but by no means least, RCA audio video. One of the newest additions to
the Audiovox product portfolio made its debut here at CES with an expanded line
of affordable small wonder camcorders, a new and improved line-up of RCA gem
line digital media players featuring highly competitive prices and easy rip
media software as well as MPEG four players and a brand new internet clock
radio. Based on the media and customer response, we believe we are well
positioned to enter the spring selling season with a full arsenal of new and
exciting products.
For the last 12 months we've been very active carrying out the plans that I've
outlined in previous calls. We closed on five acquisitions and we spent
approximately $100 million on the acquisitions with the potential of adding $300
million to $350 million in sales, much of that at higher margins than our core
business. Some of these acquired sales will replace some core business being
lost to maturity in some of the markets that we serve and some of the business
will represent completely new sales to us.
As you know, we started 2007 with the acquisition of the Thompson consumer
electronics accessory business, which included the RCA brand, and effectively
put us into the accessory business with a significant presence. The RCA brand
strengthened our product portfolio and our industry position. It also expanded
our distribution network, opened up new sales channels, and improved our R&D
capabilities, which is a very important factor to us long term. We formed
Audiovox Accessories Corporation so that we could maintain, and enhance our
product development and marketing focus in this new business. And during the
course of the year we also added Technuity and the Energizer brand to our
accessory group domestically to further strengthen their product offerings. And
now, after probably two years of negotiations, on December 31st, we acquired
Thompson's Consumer Electronics audio video business outside of Europe. We now
have the world-wide rights to the RCA brand for AV product except TVs. We
acquired approximately $400 million in sales though we intend to keep roughly
$150 million and license out the rest to Multimedia Device, a Chinese
manufacturer, for an upfront payment of $10 million and a future and end future
royalty payments. We believe that this transaction will essentially give us $150
million in sales and a royalty revenue stream at very little cost. And Mike will
walk you through those numbers in a bit.
Internationally, we added two companies to our European business unit Oehlbach
and [Ncar]. And these acquisitions added an accessory and an OE component to our
international business. And I'm happy to report both are doing very well. In
addition, part of the most recent acquisition from Thompson includes an
international component in that we have established Audiovox Mexico, utilizing
the former Thompson operation, and expect this to not only to give us local
presence in this growing market, but also expand the distribution of the entire
Audiovox line. We believe international sales would be an important aspect to
our growth over the coming years, not just in the short term. But while we have
generated good momentum so far in 2007, I must temper expectations as we enter
the fourth quarter. While we expect positive contributions from our acquired
companies in the fourth fiscal quarter, we also anticipate additional transition
costs for the RCA AV and Technuity, during what is historically our slowest
period.
As we enter fiscal 2009, beginning in March 1st, I believe you'll see the
positive impacts that our acquisitions will have on our operating and financial
performance, and borrowing any further downturns in the economy or any
unexpected occurrences we believe we are positioned well. With Audiovox, Jensen,
RCA, Acoustic Research, Energizer, and our other brands, positive cash position
with little debt, I believe Audiovox is on the right path for strong growth and
the ability to generate sustainable returns for our shareholders. I'd now like
to turn the call over to Michael to go through some of the financials. Mike?
3
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
Thank you, Pat. Good morning, everyone. Since Pat covered our quarterly
performance in his opening remarks, I'll cover our results for nine-month
period. I'll also review the balance sheet, cash flow and provide insight into
our anticipated financial position. Sales for the nine months of 2008 fiscal
year were $460 million, an increase of 27.6% compared to the first nine months
of fiscal 2007 which had sales of $360.6 million. This increase is attributable
to the growth of our accessory business as sales grew for the nine months by
$108 million, as a result of the acquisition of Thompson and Oehlbach accessory
business. Please note we only had one month of sales revenue for Technuity as
the transaction closed November 1st, 2007.
For the fiscal 2008 nine-month period, we reported accessory sales of $118.9
million compared to $10.8 million in the comparable period. And this represented
25.8% of our sales for the first nine months of fiscal 2008 versus 3% last year.
Sales for electronics was $341.2 million for the nine months ending November
30th, 2007, compared to $349.8 million for the nine months ending November 30th,
2006, a decline of 2.5%. This occurred primarily in our consumer goods group
which was off 33% for the nine months to date. The majority of this decline
occurred in the third quarter as a result of lower than expected holiday sales
and the continued impact of industry-wide shortage of LCD panels. While setting
a decline in consumer good sales, the sales of our mobile audio products which
include Jensen, Phase Linear and Satellite Radio. The mobile group sales were up
approximately 6% and sales of our German and Venezuelan operations were up 32%
during the nine-month period compared to last year. As a percentage of sales,
electronics were 74.2% for the nine months period of 2007 compared to 97% last
year.
Our gross margins increased 180 basis points to 18.8% compared to 17% for the
nine months ended November 30th, 2006. Gross margins were favorably impacted by
the increased sales of our accessory group as a result of our acquisitions.
Accessory sales have a higher margin than some of our other products. We also
experienced improved margins in our electronics business. We have also seen a
positive impact in our margins due to better buying programs and management of
our inventory. These improvements were partially offset by higher warehouse and
assembly costs associated with the transition and integration of acquisitions
during the year, and higher warehousing, freight and shipping costs within our
existing operations. We also experienced high warranty costs as a result of
increased accessory sales. Accessory products have a higher warranty cost in our
existing lines. For the last two quarters, we reported gross profit margins in
excess of 19%. And as accessory products continue to increase as a percentage of
our sales, it will have a favorable impact on our gross margins. We anticipate
an upside in our margins year-over-year, though as Pat mentioned, we are
watching the fourth quarter closely.
Finally, there is still room for improvement in our margins, as some of our
recent initiatives and investments in systems continue to address costs related
to shipping, freight warehousing assembly and warranty. Our overhead increased
approximately $15 million for the nine months to $78.7 million versus $63.7
million last year, but as a percentage of sales decreased to 17.1% compared to
17.7% in similar nine-month period last year. Overhead before acquisitions
declined approximately $1.8 million or 2.9% as there was $16.8 million of
incremental costs related to our acquisition of Thompson, Oehlbach, [Ncar] and
Technuity. As Pat had indicated, we expect to incur additional costs in the
fourth quarter and some into our first quarter next year to integrate and
transfer the assets of the recent Thompson AV and Technuity acquisitions into
Audiovox. Once these businesses are totally integrated and with continued review
and improvement to our existing overhead, we anticipate operating expenses as a
percentage of sales to decline. Operating income for the nine months of fiscal
2008 was $8 million compared to operating loss of $2.5 million in the prior year
period, an improvement of approximately $10.5 million. This is a result of
increased sales, improved gross margins and overhead control.
The effective tax rate for fiscal 2008 nine-month period was a provision of
30.3% compared to a benefit of 22.7% in a similar prior year period, a
difference of $4.4 million. This increase in the effective tax rate is due to
lower tax exempt interest income earned on our short-term investments and
increased income from our operations. Net income from continued operations for
the nine-month period in fiscal 2008 was $8.5 million compared to $4 million in
the similar period last year. Including discontinued ops, we reported income of
$10.6 million or $0.47 a share nine months compared to net income of $3.4
million or $0.15 per share in the similar period last fiscal year. Continuing
operations reported $0.38 per share for nine months versus 18% nine months last
year.
Before I discuss the balance sheet and cash usage, I would like to outline the
process of our latest acquisition, the Thompson audio video business, which
closed December 31st, 2007. There were two parts in this transaction, Audiovox
purchase of the audio video business and the subsequent licensing arrangement
with Multimedia Device Limited. The present and future cash outlets for this
purchase are $19.7 million, up-front cash payment, fixed marketing fees and
trademark payments. This amount also includes one payment which will be due in
2009. We paid $6.4 million which is an (inaudible) payment for inventory net of
warranty expense, for a total of $26.1 million. The $26.1 million payment will
be reduced as follows as a result of the Multimedia Device Limited licensing
agreement with Audiovox. These payments are: a $10 million up-front payment, a
4
$4.6 million payment for inventory, used by Multimedia for its use. This frees
our cash outlays to $11.5 million to obtain $150 million in sales. The Thompson
agreement calls for payment by Audiovox on RCA branded audio video product sales
for years 2010 through 2014, of which there is a guarantee of $1 million per
year for five years. Our agreement with Multimedia requires a royalty payment
beginning January 1, 2008. We feel in this short period of time there'll be a
positive inflow of cash in excess of our purchase price.
For the nine months ended November 30, 2007, the following is a summary of our
cash flows. Usage, we financed increased receivables of $62 million, increased
inventory of $34 million, increased our receivables to $12 million. We paid for
acquisitions approximately $28.4 million. This does not include the Thompson
audio video acquisition which closed on December 31st. We had CapEx $5.8
million. We repurchased common stock of $1.4 million. We repaid debt, primarily
in Germany and Venezuela, for [$5.1 million], with a total cash usage of $150.2
million. To fund this, we had $8.5 million in earnings, $14.3 million in
miscellaneous cash, such as cash from our joint ventures, exercise of options,
increased AP & AE. And finally we utilized $127.4 million from our cash
investments accounts. As of November 30, 2007, we had working capital of
approximately $293 million, which included cash and short-term investments of
$28.9 million compared with working capital of $306 million as of February 28,
2007, and cash and short-term investments of $156.3 million. The reduction in
working capital is principally related to the acquisition of Technuity in
November.
AR turns improved, they were five times versus 4.2, nine months last year.
Inventory turns were approximately 3.9 for the nine months versus 4.1. There's a
little distortion there and we took $5 million worth of inventory from Technuity
in the last month of the year. After the close of the Thompson audio video
transaction, the company currently has low eight figures of cash in our
investment accounts, and we anticipate by the end of the fourth quarter to have
mid-eight figures in cash. We have no domestic debt, a small amount of overseas
debt, about $5 million, and anticipate a strong balance sheet going into fiscal
2009. We intend to continue to integrate the acquisitions and review our
internal process for more efficiencies. Thanks, I'll return this back to Pat.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Okay, Michael, thank you. And now I'd like to open the call to questions.
QUESTION AND ANSWER
- --------------------------------------------------------------------------------
Operator
Thank you. (OPERATOR INSTRUCTIONS) Questions will be taken in the order
received. (OPERATOR INSTRUCTIONS) Your first question comes from the line of
[Larome Ventildem from Securitize] Capital. Please proceed.
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Hey, guys, this is C.J. Wanted to get a little more color about the -- in the
press release you had mentioned a $6.3 million increase in operating expenses
from the acquisitions. How much of that was one-time versus what we can expect
going forward?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
I'll let Mike talk to the specific numbers, but in the quarter there was -- the
only one-time expenses we really would have had would have been with the
Technuity as we just brought that in. We didn't have much one-time expenses in
the expense of the RCA AV group. Those expenses -- those transition expenses
will really start to happen in the first quarter -- first calendar quarter.
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
C.J., this is Mike. Pat is correct, it was a small pick-up in evaluation.
$10,000. We do intend to see some improvements. As Pat had mentioned as we
continue the integration and as we continue to move them further into the
systems. There'll be some increase -- that increase will hold for next year.
5
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Okay, which line item is that in?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
That would be in G&A, amortization.
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Okay. Okay. So the number we had for Q3, we can expect going forward, maybe with
a slight uptick?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
Yes. Just for those purposes.
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Okay. And then looking at the bigger picture, and looking out over the next 12,
18 months, you guys have acquired a significant amount of revenue over the last
- -- since the beginning of the last year, and you've already put up $460 million
in revs through nine months. And tack onto that another $150 million from the
Thompson -- the most recent Thompson deal, the CE deal outside of Europe, and
assuming the base business can maybe get, say, $120 million, $140 million of
revs, you're looking at $730 million to $750 million in revenue on a go forward
basis for fiscal 2009. And at a 19% margin, I mean, it seems like you guys have
a very compelling story to tell and with a significant amount of SG&A leverage.
My big question is, are you guys going to be attending any conferences? What
does your marketing schedule look like in terms of getting out and talking to
investors?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Well, let me just say this, the first thing that we're going to do, you're 100%
right that we spent a lot of time on the acquisitions were the focus that we had
last year. The focus that we're going to have as we go into 2009's fiscal year
is going to be transitioning and squeezing down the overhead on all the acquired
assets. Although we have done that through the year, there are still areas where
there is duplication, there are synergies that we had identified going in that
we haven't gotten to yet as far as bringing down that overhead. So from a
management standpoint we're going to be spending a lot of time in 2009 bringing
down and tightening down on the overhead and squeezing out any duplication that
exists in the acquired operations. With that said, we do have plans to be out to
speak to the financial community, to tell the story. We believe that we're in a
good position, we've got a good story to tell, our sales will be growing based
on the acquisitions. Some of the new products that we've seen and the response
to the new products that we've seen here at the show are giving me some -- some
very, very good confidence that we, we might even see some significant growth in
some of our mature products if we can get around some of the issues that we were
faced with last year. So yes, we will be out and we're -- and we'll be planning
conferences. Most likely we'll be doing, what, three conferences in 2008?
Something like that.
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Okay, great. And you didn't do any last year, correct?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
No.
6
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Okay. So I think that is -- as an investors I think that is a step in the right
direction, because I look at the numbers, and if you look at the market cap
today, $250 million, and I think Mike had said mid-eight digits in cash, if you
subtract that out and you look at the multiple, it's very compelling. At least
according to my models, I definitely -- I applaud the fact you guys are getting
out there and going to hit up some conferences. That's all I had.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
We tend to agree.
- --------------------------------------------------------------------------------
C.J. - Securitize Capital - Analyst
Thank you.
- --------------------------------------------------------------------------------
Operator
Your next question will come from the line of Jim Barrett representing CL King
Associates. Please proceed.
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Good morning, everyone. Actually, I had a follow-up on the question from the
last caller. Pat, you indicated the company will be squeezing out overhead going
forward. Mike I thought you indicated we should use the Q3 run rate for G&A as a
very rough proxy in terms of what your overhead is going forward. So I'm trying
to reconcile those two comments --
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Jim, I'm right there with you. Obviously we're going to see an increase in
overhead with the personnel and some of the assets that we had to bring in to
employ the Technuity people and the new AV group from RCA. So I wouldn't model
the overhead on this year's numbers. We're going to see an increase. What I'm --
what I'm talking about, when we get through some of the meetings that I've got
prepared for February and March, both at Technuity and in RCA, as we transition
in, we will be able to take out some overhead that exists today, and I'll give
you a perfect example. We have a lot of product that set to reset in April with
RCA AV, so I had to bring over absolutely every bit of engineering, that is
going on right now to ensure that we meet timelines for the new product
introductions. I believe there is some savings in those areas, especially
overseas and that's where we're looking that we'll be able to start squeezing
down and complimenting the work that we're doing overseas with what we've
acquired.
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Okay, good. And Pat, if I look at the accessories business with the addition of
Technuity, how should investors view the current annualized top line in that
business? I know you've given previous thoughts on that.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
With what Technuity is going to add?
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Well, right, in other words, exactly, yes.
7
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Yes. Well we think we have some opportunities to grow the business with
Technuity, it's one of the reasons why we thought was a good property. They had
some cash constraints on them that prevented them from maximizing their sales
and we think we will also be able to pick up certain territories that they were
not able to take advantage of. So we're probably looking in the $30 million
range this year for what we can do, but when we had to look at, when we
evaluated the deal, we were looking at sales much higher than that. It's going
to take us a while to get there, but we think with expanded territory and
getting the depth of Audiovox description network behind them, that we can grow
them significantly.
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Okay, terrific. And then last, but not least, Mike, could you comment on the
status of trade inventories? Are they high? Low? Are they where they should be?
And comment on your own inventory levels?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
You mean customer inventory levels?
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Yes. Yes.
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
I'll leave that to Pat. On ours, ours are following our normal seasonal
patterns. So that's the reason why you're starting to see us -- we're beginning
to catch up. We had -- sales were a little slow in December, but we had to start
cutting the buying back a little bit. Pat, you want to comment on the trade?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
As far as the trade, I don't think it's any guess by anybody that it was a
softer Christmas. Consumers seemed to be pulling back. Car sales are coming in
at I guess 1998 levels, and I had had a number of meetings previous to the
Christmas season where going in we felt very, very confident that the new
products that we were introducing for Christmas and the fact that we were
loading in the load-ins that were being projected that we would have a good
Christmas selling season. We were disappointed as I indicated and we didn't
receive some shipments that were planned due to the shortage. That had an
impact. No question. I've given you that number. But there was a general short
- -- softness that we could feel in the rest of the Christmas buying patterns and
it seems as if the consumer pulled back. And I think the numbers at retail are
starting to reflect that.
- --------------------------------------------------------------------------------
Jim Barrett - CL King & Associates - Analyst
Exactly. Okay, well, thank you both.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
You're welcome.
- --------------------------------------------------------------------------------
Operator
(OPERATOR INSTRUCTIONS) Your next question will come from the line of Mike Neary
representing Neary Asset Management. Please proceed.
8
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Hi, I had a couple questions. You mentioned that you'd spent about $100 million
on the acquisitions, how much profit did we buy?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Let's see, I'd have to add that up, but Mike, do you have those numbers?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
Basically, what we looked at when we purchased this, not to beg off on that
question, but some of the businesses that we bought were stressed, so that the
income that came in came through our integration into our systems. As Pat had
mentioned, I think, Pat, we had said that we picked up sales of approximately
$350 million?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
$300 million to $350 million numbers. Those are all of our acquisitions. I could
give you a number, a ballpark in what we've done with Technuity and the RCA AV,
because we just looked at those numbers. Somewhere around $40 million in gross
profit generation, based on what we're taking in in sales.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. And what would that be on an operating basis? How much --
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Let's put it this way, our -- the cost for us to bring it in, there are going to
be incremental costs as I said because when we do these operations, and when we
do these acquisitions, we normally keep the marketing teams, the sales teams and
product development teams. The back end of the business, the financial, the
computer, the logistics side, normally blends right into the existing Audiovox
infrastructure. And that's where we've been able to take out overhead in all the
acquired assets is really on the back end. We maintain the salespeople to
maintain contact, we maintain the marketing people to maintain product
expertise, as well as the product development and engineering teams to be able
to focus and build product in those specific areas that we acquired.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. Well, let me look at it, maybe look at it this way, it looks like
incrementally our operating profit was up about $10.5 million year-over-year for
the nine months.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Yes.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
And the big acquisition we made in January of Thompson, I guess would have
accounted for all of that since our core sales were down slightly. Is that
accurate?
9
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Our core, not really. We -- in our core business, our mobile business is up,
and, yes, it does help the overall picture. One of the things you've got to look
at is, we have a certain amount of fixed overhead, so adding the accessory
business spreads out a lot of costs over those new sales. Okay? But I think
we're getting contribution from pretty much across the board, our European
operation, our Venezuelan operation are all profitable. So, it's essentially
putting more sales on top of an overhead structure that is fixed, and the reason
why it's fixed is because we knew we were bringing in acquiring companies, so we
knew we had to have a certain core overhead which gave us the capability to
handle the sales that we bring in so that we can take out the back ends of
acquired companies.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Yes. No, I understand.
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
That's correct. As Pat mentioned, we had margin improvement in -- both in our
groups. We had improvement in our international companies and we had
contributions from the acquisitions that we made after the transition costs.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. But for the nine months, would our company have been profitable without
the acquisitions on an operating basis?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
We report as a single unit. And we really don't report that.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
But when you buy these things --
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
It helped.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
- -- yes, you don't buy revenue, you're buying them because you think they'll
generate some profit?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Absolutely, and they have contributed. There's no question about it.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. And going forward, when you buy revenues, what type of obsolescence rate
do you look at? You buy $150 million in revenue, do you assume that declines a
few percentage points a year or how do you look at that?
10
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
It depends on what we buy. And as I said, in the case of Technuity, we think
Audiovox taking over can give them capabilities and a breadth of distribution
that they didn't have. So we're looking to actually grow that business. And we
think we can grow that business significantly over the next two our three years.
When you get -- when you get into the businesses that we took over from Thompson
for the AV group, we maintain, if you look at the fields of use and the
categories that we had mentioned, we maintained camcorders, camcorders is a
growing category, we maintained digital audio, another growing category, and
digital voice recorders. So the categories that we brought in are ones that we
think we can grow. We also maintained the clock radios, which to everybody
sounds very, very mature, but when you look at clock radios, number one RCA has
the number-one market share in clock radios. And when you take into account
internet radio, HD radio, satellite radio, iPod MP3 docking, the replacement
market for clock radios can be very, very big, so we may lose a point or two on
a transition or something like that, but in every one of the acquisitions, we're
looking to grow what we purchased.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay, great. And, last question, you gave a general sense on cash for year-end,
we're at $56 million now, we're going to spend $20 million, get $10 million
back, so I don't know what the season working capital needs are. Can you give me
just a better guesstimate of where we should end up cash for the year?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
Well, we should end up, as of February 28th, as I said, in the mid-eight
figures.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
We're at mid-eight figures now aren't we?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
No, we're at low.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay, I think we had $56 million in cash.
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
Yes, well, just going to be -- mid-figures is [$55.5 million].
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. And what is total season working capital swing? Is it $50 million of
inventory and receivables we build and then reduce per year roughly?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
If we don't do -- if we're not doing acquisitions next year which inventory will
come in, you're in a range, in that range depending on the sales that we move.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay.
11
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
But the big usage of seasonal needs is in the third quarter.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Okay. And has the -- has there been anything done on the share buy back other
than shares bought last quarter?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
No, we didn't buy anything.
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
And refresh me, there's two million shares authorized to buy?
- --------------------------------------------------------------------------------
Michael Stoehr - Audiovox Corporation - SVP, CFO
We have approximately 1.7 million left in the --
- --------------------------------------------------------------------------------
Mike Neary - Neary Asset Management - Analyst
Great, thank you very much.
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Thank you.
- --------------------------------------------------------------------------------
Operator
Your final question comes from the line of Richard Greenberg representing Donald
Smith & Company. Please proceed.
- --------------------------------------------------------------------------------
Richard Greenberg - Donald Smith & Company - Analyst
Good morning, guys. Hey, Pat, your comments on gross margin and hoping to
continue to increase that from the 19% current level, just -- could you give
some sense of what your ultimate target would be there, and where you're going
to get the further increases from here since you've -- unless you make further
high margin accessory acquisitions? But with the current mix of business, how
much can you increase it, and how's that going to come about?
- --------------------------------------------------------------------------------
Patrick Lavelle - Audiovox Corporation - President, CEO
Well, we've been increasing and our core overhead has been moving up throughout
the year. We've been -- we've worked hard on lowering costs and trying to raise
prices in some areas to raise our core business. The natural increase that we
will feel, the normal increase that we will feel, as the mix changed as we move
into more accessory business will certainly help pull the overall margin up.
There is one thing that, that can put some downward pressure on our margin this
year and that is the new acquisition that we've done with Thompson is that
traditional core CG or consumer levels, okay? And, obviously, that -- if sales
materialize as we expect, that could put some downward pressure on the overall
margin, but based on what we paid and based on the overhead we're bringing in,
we -- that will still be -- give us a better bottom line. But as the mix
changes, the margin will change. We're -- we've indicated that we thought we
could get north of 20%, but that's hard to gauge at this particular point
depending upon how much business we do with the new acquisition.
12
- --------------------------------------------------------------------------------
Richard Greenberg - Donald Smith & Company - Analyst
Okay. I guess what I'm driving at here is, once again, if you do, let's just
pick out the number, $730 million of kind of ongoing sales without further
acquisitions, and if your expense level is $120 million it's going to move up a
little from the third quarter levels due to RCA, but then you guys are going to
be cutting at the time, as you get the synergies. $120 million over $730
million, well that's a 16.5% operating expense level, and if your margins are,
even if you can get them up to 20% and you're not sure you can, that's again,
that's only a 3.15% operating margin level. So without -- it sounds like you
really need dramatic further growth in revenues, just internal revenues to get
anywhere close to your 5% ultimate goal.
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Patrick Lavelle - Audiovox Corporation - President, CEO
Right, and I think what you're going to look, I think you're going to see a
combination of all three. You're going to see top-line growth, you're going to
see overhead come down as a percentage of sales, and you're going to see
hopefully the margins improve somewhat based on the mix that we will have a full
year of sales of accessories where we did not have that last year. Don't forget,
Technuity is on the accessory side. Their margin structure is a little bit
better. So we're going to be working all three sides to get to that 5% target.
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Richard Greenberg - Donald Smith & Company - Analyst
Okay, all right, thanks a lot.
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Patrick Lavelle - Audiovox Corporation - President, CEO
You're welcome.
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Operator
Gentlemen, there are no further questions.
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Patrick Lavelle - Audiovox Corporation - President, CEO
Okay, ladies and gentlemen, thank you for calling in this morning, and thank you
for your support of Audiovox. Have a nice day. Bye-bye.
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Operator
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes your presentation. You may now disconnect. Good day.
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