DEI Holdings Reports Second Quarter 2008 Financial Results

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DEI Holdings Reports Second Quarter 2008 Financial Results
VISTA, Calif., Aug. 5 /PRNewswire-FirstCall/ -- DEI Holdings, Inc. (Nasdaq: DEIX) announced today financialresults for the second quarter and six months ended June 30, 2008.
"Despite the challenging macroeconomic conditions and consumerenvironment, in the second quarter we returned to profitability,generating strong earnings as compared with a year ago," commented James E. Minarik , DEI Holdings' President and Chief Executive Officer. "Wepositively impacted our top line by shipping a broad assortment ofPolk Audio products to approximately 900 Best Buy stores andearning additional IP royalty revenue related to our security andconvenience business, further demonstrating our competitiveadvantage in this category. In addition, we secured Hyundai MotorsCanada as a remote start customer, with initial shipments expectedin the third quarter."
"We also continued to reduce our fixed expenses includingannouncing the closure of our UK office, which had recentlygenerated operating losses, while concurrently appointing a leadingdistribution partner to service the UK market. Our comprehensiverestructuring plan has reduced our cost structure and positionedthe company for continued strong results."
Second Quarter 2008 Results
As a reminder, prior to January 1, 2008, the company accounted forsales of SIRIUS-related hardware products on a gross basis. Themost recent amendment to the company's agreement with SIRIUSsignificantly reduced the company's risks in this business.Consequently, in accordance with EITF 99-19, satellite radiorevenues are now reported on a net basis calculated as grossamounts billed to customers less (i) amounts paid to suppliers,(ii) rebates and discounts, and (iii) other direct costs. Thechange in the application of the company's accounting policy didnot affect reported gross profit, operating income, or net income.In the first quarter of 2008, the company also began providinggross margins by product category.
Sales
Pro forma net sales in the second quarter of 2008 totaled $75.0million compared with $86.7 million in the second quarter of 2007.Second quarter 2007 results included a one-time increase of $3.2million in net sales related to a change in the company's transportinsurance, which allowed the company to recognize revenue at thetime of shipment as opposed to the time of delivery. Second quarter2008 sales include $2.7 million of incremental royalty revenuerelated to intellectual property licensing fees. With thepreviously mentioned change in the satellite radio sales reportingmethod, the company's GAAP net sales were $58.9 million in thesecond quarter of 2008 compared with $86.7 million in the secondquarter of 2007.
Gross Margins
For the second quarter of 2008, gross margins were 53.6% comparedwith 32.7% for the second quarter of 2007. The increase isattributable to the change in accounting for the company'ssatellite radio products to a net basis as described above, anincrease in royalty revenue during the second quarter of 2008, anda reduction in warranty and returns expense primarily associatedwith the company's improved satellite radio distribution agreement.
Operating Expenses
Operating expenses were $23.2 million in the second quarter of 2008compared with $21.1 million in the second quarter of 2007. Theincrease was due to $0.7 million in greater outbound shipping costsprincipally related to higher fuel prices, $0.5 million from theaddition of Trilogix, which was acquired in May 2007, and $0.4million in restructuring charges related to right-sizinginitiatives and the closure of the UK office. The increase was alsopartially attributable to the reduction of the company's bonusexpense during the second quarter of 2007 as it became clear thatcompany performance criteria would not be met.
Interest Expense
Net interest expense decreased 10.8% to $6.0 million in the secondquarter of 2008 compared with the second quarter of 2007. Thedecrease is primarily due to lower levels of outstanding debt onthe company's senior credit facility in the second quarter of 2008.This decrease was partially offset by a $0.1 million non-cashwrite-off of unamortized debt issuance costs related to thecompany's prepayment of $3 million in term debt. The company'stotal debt decreased by $69.1 million, or 21.1%, from $327.7million as of June 30, 2007 to $258.6 million as of June 30, 2008.
Income
Operating income increased 15.0% to $8.3 million in the secondquarter of 2008 compared with $7.2 million in the second quarter of2007.
Adjusted EBITDA, which includes adjustments as defined by thecompany's lending agreement, was $11.6 million in the secondquarter of 2008 compared with $10.6 million for the comparableperiod last year. Second quarter 2008 EBITDA (earnings beforeinterest, taxes, depreciation, and amortization) was $10.5 millioncompared with EBITDA of $9.6 million in the comparable prior yearperiod. A quantitative reconciliation from the company's GAAPresults to its pro forma and adjusted results is provided in theaccompanying tables.
The company's net income for the second quarter of 2008 was $1.0million, or $0.04 per diluted share, compared with net income of$0.0 million, or $0.00 per diluted share, for the comparablequarter in the prior year.
Second Quarter Product Category Results
The following table provides pro forma sales and margins on aproduct category basis for the second quarter of 2008 compared withthe comparable period in the prior year. The following pro formafinancial results are reconciled to GAAP results in theaccompanying tables.
Security & Entertainment
Security and entertainment product sales, net of rebates, decreasedto $51.0 million in the second quarter of 2008 compared with $57.9million for the comparable period in 2007. Of the $6.9 milliondecrease, $3.0 million is attributable to the change in timing ofrevenue recognition in 2007 as discussed above. Excluding thedecrease attributable to the change in timing of revenuerecognition, security and entertainment product sales decreased by$3.9 million, or 7.1%, which is consistent with the first quarter2008 results as compared with the prior year. Strong salesperformance of Polk Audio products, as well as security products toBest Buy and Circuit City, were more than offset by overallconsumer weakness in many regions of the United States.
Gross profit margin on security and entertainment products totaled49.7% in the second quarter of 2008 compared with 42.2% in thesecond quarter of 2007. The gross margin rate increase wasprimarily attributable to $2.7 million of royalty revenue earned inthe second quarter of 2008 related to the company's security andconvenience intellectual property. Excluding this incrementalroyalty revenue, security and entertainment gross profit marginsincreased from 42.2% in the second quarter of 2007 to 47.0% in thesecond
quarter of 2008 primarily due to strategic price increases, as wellas lower warranty and returns costs.
Satellite Radio
Satellite radio pro forma product sales, net of rebates, for thesecond quarter of 2008 totaled $20.7 million, a 25.3% decreasecompared with net product sales of $27.7 million for the secondquarter of 2007. The decrease is partially attributable to acompany-initiated plan and a new arrangement between the companyand SIRIUS that reduced sales to Sirius.com, as these sales carriedlower than average margins and required high working capital.Additionally, consumer demand for satellite radio was lower in thesecond quarter of 2008 compared to the second quarter of 2007,particularly related to Father's Day gift giving which hashistorically been a demand driver for the purchase of satelliteradio receivers.
With the implementation of the previously mentioned net reportingaccounting policy, GAAP satellite radio sales, net of $16.2 millionin direct costs, totaled $4.5 million for the second quarter of2008.
On a pro forma basis, gross profit margin on satellite radio salesincreased from 12.7% in the second quarter of 2007 to 22.0% in thesecond quarter of 2008. The increase was primarily attributable toa reduction of $1.4 million in the company's warranty and salesreturns reserves related to the company's amended distributionagreement with SIRIUS. Excluding the reduction in these reserves,the company's satellite radio pro forma gross profit marginincreased from 12.7% in the second quarter of 2007 to 15.8% in thesecond quarter of 2008 primarily due to an improved customer mix.
Balance Sheet and Cash Flows
The company generated $20.5 million of operating cash flow for thefirst six months of 2008 and ended the quarter with $12.8 millionin cash and an undrawn revolver of $50.0 million. At the end of thesecond quarter of 2008, total debt was $258.6 million, a decreaseof $69.1 million, or 21.1%, compared with total debt of $327.7million as of June 30, 2007, which included $24.0 million drawn onthe revolver.
Conference Call and Webcast
DEI Holdings will host a conference call and webcast to discuss itsfinancial results today at 5:00 p.m. Eastern Time. The conferencecall may include forward-looking statements. This call will bewebcast live on the Investor Relations section of the company'swebsite at http://www.deiholdings.com and will be archived and available for replay approximately threehours after the live event. The audio replay will be availablethrough 11:59 p.m., August 19, 2008. The company's financialresults are also available online at http://www.deiholdings.com .
To participate in the conference call, investors should dial800-762-9439 ten minutes prior to the call. International callersshould dial 480-629-9572. A telephone replay of the call will beavailable through 11:59 p.m. Eastern Time on August 19, 2008 bycalling 800-406-7325 (passcode: 3904436). International callersshould dial 303-590-3030 and use the same passcode.
About DEI Holdings
Headquartered in Southern California, DEI Holdings, Inc. is theparent company of some of the most respected brands in the consumerelectronics industry. DEI Holdings is the largest designer andmarketer in North America of premium home theater loudspeakers(sold under the Polk Audio(R) and Definitive Technology(R) brandnames), and consumer-branded vehicle security and remote startsystems (sold under the Viper(R), Clifford(R), Python(R),Autostart(R) and other brand names). DEI Holdings is also thelargest aftermarket supplier of SIRIUS satellite radios andaccessories, and a supplier of mobile audio sold principally underboth the Polk Audio and Orion brand names. DEI Holdings markets itsbroad portfolio of products through many channels including leadingnational retailers and specialty chains throughout North Americaand around the world. Founded in 1982, the company hasapproximately 470 employees and operations in California, Maryland,Canada,
Europe, and Asia. For more information, please visit http://www.deiholdings.com .
Forward-Looking Statements
Certain statements in this news release that are not historicalfact constitute "forward-looking statements" within the meaning ofthe Private Securities Litigation Reform Act of 1995.Forward-looking statements typically are identified by the use ofterms such as "may," "should," "might," "believe," "expect,""anticipate," "estimate," and similar words, although some may beexpressed differently. Forward-looking statements in this releaseinclude, but are not limited to, statements as to expected savingsfrom the company's staff reductions and the company's position forcontinued profitable results. Shareholders and other readers arecautioned not to place undue reliance on these forward-lookingstatements. Such forward-looking statements involve known andunknown risks, uncertainties and other factors, which may cause theactual results of DEI Holdings to be materially different fromhistorical results or from any results expressed or implied by suchforward-looking statements. These factors include competition inthe consumer electronics industry, development of new products andchanging demand of customers, reliance on certain key customers,adverse developments affecting SIRIUS Satellite Radio, decline inconsumer spending, reliance on certain manufacturers and theirability to maintain satisfactory delivery schedules, disruption insupply chain, shortages of components and materials, economic risksassociated with changes in social, political, regulatory, andeconomic conditions in the countries where the company's productsare manufactured, quality installation of products by customers,significant product returns or product liability claims, compliancewith various state and local regulations, risks with internationaloperations, impairment of goodwill and intangible assets, claimsrelated to intellectual property, ability to service debtobligations, restrictive terms of the company's senior securedcredit facility, vulnerability to increases in interest rates,disruption in distribution centers, ability to raise additionalcapital if needed, dependence on senior management, ability torealize on investments made in the business, and integration ofacquired businesses. Certain of these factors, as well as variousadditional factors, are discussed from time to time in the reportsfiled by DEI Holdings with the Securities and Exchange Commission,including the Form 10-K for the year ended December 31, 2007. DEIHoldings disclaims any intent or obligation to update theseforward-looking statements.
This earnings release includes information presented on a pro formabasis. These pro forma financial measures are considered "non-GAAP"financial measures within the meaning of SEC Regulation G. Thecompany believes that this presentation of pro forma resultsprovides useful information to both management and investors byexcluding specific revenue, costs and expenses that the companybelieves are not indicative of core operating results.Additionally, in accordance with GAAP, beginning in the firstquarter of 2008, the company reported satellite radio sales on anet basis, but has not recast prior period satellite radio sales asthe change in presentation is not considered a change in accountingprinciple but is the application of the same principle to differentfacts and circumstances. For comparison and discussion purposes,the company provides sales and cost information on a gross basis.Although not in accordance with GAAP, the company believes thisinformation is informative as to the level of its satellite radiobusiness, provides increased transparency, and presents satelliteradio sales on a basis comparable to prior periods and to securityand entertainment sales. The presentation of this additionalinformation should not be considered in isolation or as asubstitute for results prepared in accordance with generallyaccepted accounting principles. The reconciliations set forth beloware provided in accordance with Regulation G and reconcile the proforma financial measures with the most directly comparableGAAP-based financial measures.
Note 1: EBITDA (earnings before interest, income taxes,depreciation, and amortization, including goodwill and intangibleasset impairment) is not a measure of financial performance undergenerally accepted accounting principles, or GAAP, but is used bysome investors to determine a company's ability to service or incurindebtedness. The company presents pro forma EBITDA as it believesthat pro forma results provide useful information to bothmanagement and investors by excluding specific revenue, costs andexpenses that the company believes are not indicative of coreoperating results. Adjusted EBITDA is presented as it includesother adjustments permitted under the company's lending agreementfor covenant calculations. The presentation of this additionalinformation should not be considered in isolation or as asubstitute for results prepared in accordance with generallyaccepted accounting principles. The reconciliation set forth aboveis provided in accordance with Regulation G and reconciles EBITDA,pro forma EBITDA, and adjusted EBITDA with the most directlycomparable GAAP-based financial measure. EBITDA is not calculatedin the same manner by all companies and accordingly is notnecessarily comparable to similarly entitled measures of othercompanies and may not be an appropriate measure for performancerelative to other companies. EBITDA is not intended to representand should not be considered more meaningful than, or as analternative to, measures of operating performance as determined inaccordance with GAAP.
This earnings release includes information presented on a pro formabasis. These pro forma financial measures are considered "non-GAAP"financial measures within the meaning of SEC Regulation G. Thecompany believes that this presentation of pro forma resultsprovides useful information to both management and investors byexcluding specific revenue, costs and expenses that the companybelieves are not indicative of core operating results.Additionally, in accordance with GAAP, beginning in the firstquarter of 2008, the company reported satellite radio sales on anet basis, but has not recast prior period satellite radio sales asthe change in presentation is not considered a change in accountingprinciple but is the application of the same principle to differentfacts and circumstances. For comparison and discussion purposes,the company provides sales and cost information on a gross basis.Although not in accordance with GAAP, the company believes thisinformation is informative as to the level of its satellite radiobusiness, provides increased transparency, and presents satelliteradio sales on a basis comparable to prior periods and to securityand entertainment sales. The presentation of this additionalinformation should not be considered in isolation or as asubstitute for results prepared in accordance with generallyaccepted accounting principles. The reconciliations set forth beloware provided in accordance with Regulation G and reconcile the proforma financial measures with the most directly comparableGAAP-based financial measures.
Note 1: EBITDA (earnings before interest, income taxes,depreciation, and amortization, including goodwill and intangibleasset impairment) is not a measure of financial performance undergenerally accepted accounting principles, or GAAP, but is used bysome investors to determine a company's ability to service or incurindebtedness. The company presents pro forma EBITDA as it believesthat pro forma results provide useful information to bothmanagement and investors by excluding specific revenue, costs andexpenses that the company believes are not indicative of coreoperating results. Adjusted EBITDA is presented as it includesother adjustments permitted under the company's lending agreementfor covenant calculations. The presentation of this additionalinformation should not be considered in isolation or as asubstitute for results prepared in accordance with generallyaccepted accounting principles. The reconciliation set forth aboveis provided in accordance with Regulation G and reconciles EBITDA,pro forma EBITDA, and adjusted EBITDA with the most directlycomparable GAAP-based financial measure. EBITDA is not calculatedin the same manner by all companies and accordingly is notnecessarily comparable to similarly entitled measures of othercompanies and may not be an appropriate measure for performancerelative to other companies. EBITDA is not intended to representand should not be considered more meaningful than, or as analternative to, measures of operating performance as determined inaccordance with GAAP.
SOURCE DEI Holdings, Inc.