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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 0-511

 

 

COBRA ELECTRONICS CORPORATION

(Exact name of Registrant as specified in its Charter)

 

 

 

DELAWARE   36-2479991

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

6500 WEST CORTLAND STREET

CHICAGO, ILLINOIS

  60707
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (773) 889-8870

 

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Number of shares of Common Stock of Registrant outstanding as of November 6, 2012: 6,610,580

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page No.  

PART I

  FINANCIAL INFORMATION   

Item 1

  Financial Statements      3   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   

Item 3

  Quantitative and Qualitative Disclosures About Market Risk      25   

Item 4

  Controls and Procedures      25   

PART II

  OTHER INFORMATION   

Item 1A

  Risk Factors      26   

Item 6

  Exhibits      26   

SIGNATURE

     27   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Operations - Unaudited

(In Thousands, Except Per Share Amounts)

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2012     2011     2012     2011  

Net sales

   $ 27,672      $ 34,454      $ 83,174      $ 85,753   

Cost of sales

     19,893        24,155        58,949        61,430   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,779        10,299        24,225        24,323   

Selling, general and administrative expense

     7,475        7,952        22,315        21,847   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from operations

     304        2,347        1,910        2,476   

Interest expense

     (277     (272     (765     (795

Other income (expense)

     336        (899     685        (738
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     363        1,176        1,830        943   

Tax (benefit) provision

     (201     (202     25        (133
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 564      $ 1,378      $ 1,805      $ 1,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share:

        

Basic

   $ 0.09      $ 0.21      $ 0.27      $ 0.16   

Diluted

   $ 0.09      $ 0.21      $ 0.27      $ 0.16   

Weighted average shares outstanding:

        

Basic

     6,611        6,540        6,595        6,522   

Diluted

     6,633        6,540        6,610        6,522   

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) - Unaudited

(In Thousands)

 

     Three Months Ended
September  30
    Nine Months Ended
September  30
 
     2012      2011     2012      2011  

Net earnings

   $ 564       $ 1,378      $ 1,805       $ 1,076   

Other comprehensive income (loss), net of tax:

          

Foreign currency translation

     422         (356     314         306   

Interest rate swap

     21         32        69         107   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     443         (324     383         413   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 1,007       $ 1,054      $ 2,188       $ 1,489   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets

(In Thousands)

 

     September 30
2012
    December 31
2011
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash

   $ 3,434      $ 1,033   

Receivables, net of allowance for doubtful accounts of $631 in 2012 and $665 in 2011

     17,894        23,400   

Inventories, primarily finished goods, net

     38,946        34,093   

Other current assets

     3,293        2,726   
  

 

 

   

 

 

 

Total current assets

     63,567        61,252   

Property, plant and equipment, at cost:

    

Buildings and improvements

     6,822        6,625   

Tooling and equipment

     19,895        19,191   
  

 

 

   

 

 

 
     26,717        25,816   

Accumulated depreciation

     (21,574     (20,679

Land

     230        230   
  

 

 

   

 

 

 

Property, plant and equipment, net

     5,373        5,367   

Other assets:

    

Cash surrender value of life insurance policies

     5,882        5,056   

Deferred income taxes, non-current

     402        297   

Intangible assets

     7,786        8,431   

Other assets

     239        192   
  

 

 

   

 

 

 

Total other assets

     14,309        13,976   
  

 

 

   

 

 

 

Total assets

   $ 83,249      $ 80,595   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

     September 30
2012
    December 31
2011
 
     (Unaudited)        

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Bank debt

   $ 22,578      $ 18,655   

Accounts payable

     5,870        7,368   

Accrued salaries and commissions

     1,442        2,359   

Accrued advertising and sales promotion costs

     651        1,668   

Accrued product warranty costs

     1,039        1,191   

Accrued income taxes

     186        826   

Deferred income taxes, current

     169        12   

Other accrued liabilities

     2,955        2,854   
  

 

 

   

 

 

 

Total current liabilities

     34,890        34,933   
  

 

 

   

 

 

 

Non-current liabilities:

    

Deferred compensation

     7,730        7,392   

Deferred income taxes, non-current

     914        1,159   

Other long-term liabilities

     742        588   
  

 

 

   

 

 

 

Total non-current liabilities

     9,386        9,139   
  

 

 

   

 

 

 

Total liabilities

     44,276        44,072   

Commitments and contingencies

     —          —     

Shareholders’ equity:

    

Preferred stock, $1 par value

    

Authorized: 1,000,000 shares

    

Issued: None

     —          —     

Common stock, $.33 1/3 par value

    

Authorized: 12,000,000 shares

    

Issued: 7,178,400 shares for 2012 and 7,107,400 shares for 2011

    

Outstanding: 6,610,580 shares for 2012 and 6,539,580 shares for 2011

     2,392        2,368   

Additional paid-in capital

     21,203        20,965   

Retained earnings

     21,094        19,289   

Accumulated other comprehensive loss

     (1,879     (2,262
  

 

 

   

 

 

 
     42,810        40,360   

Treasury stock, at cost (567,820 shares)

     (3,837     (3,837
  

 

 

   

 

 

 

Total shareholders’ equity

     38,973        36,523   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 83,249      $ 80,595   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In Thousands)

 

     Nine Months  Ended
September 30
 
     2012     2011  

Cash flows from operating activities:

    

Net earnings

   $ 1,805      $ 1,076   

Adjustments to reconcile net earnings to net cash flows from operating activities:

    

Depreciation and amortization

     2,743        2,866   

Deferred income taxes

     (233     (365

(Gain) loss on cash surrender value (CSV) of life insurance

     (509     512   

Stock-based compensation

     262        171   

Non-controlling interests

     —          (28

Changes in assets and liabilities:

    

Receivables

     5,574        48   

Inventories

     (4,634     (4,746

Other assets

     (976     45   

Income tax refund

     —          8   

Accounts payable

     (1,536     (535

Other liabilities

     (2,434     941   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     62        (7
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Property, plant and equipment

     (948     (941

Premiums on CSV life insurance

     (317     (317

Intangible assets

     (523     (891
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,788     (2,149
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Bank borrowings

     3,922        2,130   

Capital lease obligations

     86        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,008        2,130   

Effect of exchange rate changes on cash and cash equivalents

     119        182   
  

 

 

   

 

 

 

Net increase in cash

     2,401        156   

Cash at beginning of period

     1,033        1,133   
  

 

 

   

 

 

 

Cash at end of period

   $ 3,434      $ 1,289   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 489      $ 530   

Income taxes

   $ 902      $ 131   

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Equity and Comprehensive Income (Loss) - Unaudited

(In Thousands)

 

            Additional             Accumulated              
     Common      Paid-in      Retained      Comprehensive     Treasury        
     Stock      Capital      Earnings      Income (Loss)     Stock     Total  

Balance — December 31, 2011

   $ 2,368       $ 20,965       $ 19,289       $ (2,262   $ (3,837   $ 36,523   

Net earnings

     —           —           1,805         —          —          1,805   

Accumulated other comprehensive income:

               

Foreign currency translation adjustment

     —           —           —           314        —          314   

Interest rate swap, no tax benefit

     —           —           —           69        —          69   

Stock compensation expense

     24         238         —           —          —          262   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance — September 30, 2012

   $ 2,392       $ 21,203       $ 21,094       $ (1,879   $ (3,837   $ 38,973   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Cobra Electronics Corporation and Subsidiaries

Notes to Consolidated Financial Statements

For the nine months ended September 30, 2012 and 2011

(Unaudited)

The consolidated financial statements for the nine months ended September 30, 2012 included herein have been prepared by Cobra Electronics Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The Consolidated Balance Sheet as of December 31, 2011 has been derived from the audited consolidated balance sheet as of that date. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim period a fair statement of such operations. Due to the seasonality of the Company’s business, the results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year.

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business — Cobra designs and markets consumer electronics products, which it sells primarily under the Cobra brand name, principally in the United States, Canada and Europe. The Company’s Performance Products Limited (“PPL”) subsidiary sells its products under the Snooper trade name, principally in the United Kingdom, as well as elsewhere in Europe. A majority of the Company’s products are purchased from overseas suppliers, primarily in China, Hong Kong and South Korea. The consumer electronics market is characterized by rapidly changing technology and certain products may have limited life cycles. Management believes that it maintains strong relationships with its current suppliers and that, if necessary, other suppliers could be found. The extent to which a change in a supplier would have an adverse effect on the Company’s business depends on the timing of the change, the product or products that the supplier produces for the Company and the volume of that production. The Company also maintains insurance coverage that would, in certain limited circumstances, reimburse the Company for lost profits resulting from a supplier’s inability to fulfill its commitments to the Company.

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated entities are collectively referred to as the “Company”. All intercompany balances and transactions have been eliminated in consolidation.

Accounts Receivable — The majority of the Company’s accounts receivables are due from retailers and two-step distributors. Credit is extended based on an evaluation of a customer’s financial condition, including, at times, the availability of credit insurance, and generally, collateral is not required. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts.

The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, availability of credit insurance and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable against the allowance for claims and doubtful accounts when they are judged to be uncollectible, and payments subsequently received on such receivables are credited to customer claims or bad debt expense.

 

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Table of Contents

(2) SEGMENT INFORMATION

The Company operates in two business segments: (1) Cobra Consumer Electronics (“Cobra”) and (2) Performance Products Limited (“PPL”). The Cobra segment is comprised of Cobra Electronics Corporation, Cobra Hong Kong Limited and Cobra Electronics Europe Limited (“CEEL”). The Company has separate sales departments and distribution channels for each segment, which provide segment exclusive product lines to all customers for that segment. Currently, there are no intersegment sales. The financial information by business segment for the three months and nine months ended September 30, 2012 and 2011 follows:

Three months - 2012 vs. 2011

 

     2012     2011  
     COBRA     PPL     TOTAL     COBRA     PPL     TOTAL  
     (In Thousands)  

Net sales

   $ 23,962      $ 3,710      $ 27,672      $ 30,907      $ 3,547      $ 34,454   

Cost of sales

     17,494        2,399        19,893        21,886        2,269        24,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,468        1,311        7,779        9,021        1,278        10,299   

Selling, general and administrative expense

     6,202        1,273        7,475        6,749        1,203        7,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from operations

     266        38        304        2,272        75        2,347   

Interest expense

     (277     —          (277     (272     —          (272

Other income (expense)

     315        21        336        (662     (237     (899
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     304        59        363        1,338        (162     1,176   

Tax provision (benefit)

     41        (242     (201     32        (234     (202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 263      $ 301      $ 564      $ 1,306      $ 72      $ 1,378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months - 2012 vs. 2011

 

     2012     2011  
     COBRA     PPL     TOTAL     COBRA     PPL     TOTAL  
     (In Thousands)  

Net sales

   $ 72,071      $ 11,103      $ 83,174      $ 74,428      $ 11,325      $ 85,753   

Cost of sales

     51,901        7,048        58,949        53,949        7,481        61,430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     20,170        4,055        24,225        20,479        3,844        24,323   

Selling, general and administrative expense

     18,631        3,684        22,315        18,141        3,706        21,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from operations

     1,539        371        1,910        2,338        138        2,476   

Interest expense

     (765     —          (765     (795     —          (795

Other income (expense)

     632        53        685        (594     (144     (738
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     1,406        424        1,830        949        (6     943   

Tax provision (benefit)

     296        (271     25        230        (363     (133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 1,110      $ 695      $ 1,805      $ 719      $ 357      $ 1,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(3) MULTIPLE ELEMENT ARRANGEMENTS

The Company bundles the sale of its PPL trucker navigation and other selected PPL navigation products with ongoing access to its AURA speed camera database in order to allow those customers who so chose to update their databases for both navigation low bridge height data (perceived as critical to some professional drivers) and speed camera locations. However, in order to receive these updates to these fully functional products, customers must first register on PPL’s website. The Company deferred the revenue associated with the ongoing service period, which was considered a separate unit of accounting. Revenues deferred from this arrangement were calculated using the relative selling price method based on Vendor Specific Objective Evidence (“VSOE”). A summary of PPL’s deferred revenue at September 30, 2012 and December 31, 2011 follows:

 

     September 30,
2012
     December 31,
2011
 
     (In Thousands)  

Deferred revenue - PPL

   $ 1,072       $ 928   

In addition, the Company’s domestic business sells products bundled with access to the AURA database and mobile navigation products bundled with map updates. Revenues deferred from these arrangements were calculated using the relative fair market value methods. A summary of the deferred revenue for Cobra U.S. at September 30, 2012 and December 31, 2011 follows:

 

     September 30,
2012
     December 31,
2011
 
     (In Thousands)  

Deferred revenue - Cobra U.S.

   $ 278       $ 214   

(4) INCOME TAXES

Each quarter, the Company estimates the annual effective income tax rate (“ETR”) for the full year and applies that rate to the Earnings (Loss) Before Income Taxes for tax jurisdictions not subject to a valuation allowance in determining its provision for income taxes for the interim periods. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities, and the related valuation allowance requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws, and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The year-to-date ETR was less than the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which the Company and its foreign subsidiaries generate taxable income or loss and judgments as to the realizability of the Company’s deferred tax assets.

The Company continues to review the need for a valuation allowance at each quarter-end. The U.S. operations were in a current year loss position for the most recent quarter and the nine month period ending September 30, 2012. Based on this and other relevant information, management concluded at September 30, 2012 that the Company did not meet the more likely than not criteria for concluding that the valuation allowance for its U.S. operations, which totaled $8.8 million at September 30, 2012 (compared to $9.0 million at December 31, 2011), was no longer required in part or total. The Company will continue to evaluate the need for a valuation allowance each quarter. Management believes that, if the favorable trend in operating results for U.S. operations continues, it may, based on all of the relevant information available, determine that it is more likely than not that the U.S. operations will be able to utilize all or a significant portion of its net deferred tax asset, resulting in a reduction to all or part of the valuation allowance and the recognition of a corresponding non-cash tax benefit.

 

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(5) FINANCING ARRANGEMENTS

The Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, BMO Harris Bank N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto from time to time (the “Lenders”) on July 16, 2010. The Company amended the Credit Agreement to increase the borrowings available under the revolving loan facility from $25,000,000 to $30,000,000 on September 14, 2011. The Credit Agreement was further amended on April 16, 2012 to increase the letter of credit sublimit from $5,000,000 to $10,000,000. The revolving loan facility with a maturity date of July 16, 2013 remained unchanged at $30,000,000.

Pursuant to the terms of its Credit Agreement, the Company is required to make mandatory prepayments on the amounts outstanding thereunder in the event that the Company receives proceeds under certain circumstances or in connection with other specified events. Future changes in the applicable interest rate affect the interest expense incurred on the Company’s outstanding indebtedness. Borrowings under the Credit Agreement bear interest at either the base rate or the LIBOR lending rate (each as defined in the Credit Agreement), as applicable, plus the applicable margin set forth in the Credit Agreement. The Company will also pay certain fees and expenses, including a (i) commitment fee on the unused portion of the Lenders’ aggregate revolving commitment and (ii) a letter of credit fee equal to the product of the applicable margin set forth in the Credit Agreement times the face amount of the standby letters of credit and the commercial letters of credit outstanding at such time. The Credit Agreement contains customary covenants, including but not limited to financial covenants requiring the Company to maintain a specified Fixed Charge Coverage Ratio (as defined in the Credit Agreement) for the periods set forth in the Credit Agreement. The applicable fees and covenants for the Credit Agreement are as follows:

 

Commitment fee

     0.50

Fixed charge coverage ratio

     1.10 to 1.00   

Annual capital expenditures limit

   $ 3,500,000   

Annual dividend to shareholders limit for fiscal years after 2010

   $ 1,250,000   

The Company’s Fixed Charge Coverage Ratio, which is based on adjusted EBITDA less capital expenditures and cash tax payments in relation to the sum of the cash interest paid and the capitalized lease obligation payments, for the first nine months of 2012, exceeded the required minimum ratio of 1.10 to 1.00 and all financial covenants for the first nine months of 2012 were satisfied.

As a condition to the extension of the loans and the issuance of the letters of credit under the Credit Agreement, the Company has granted a security interest to the Administrative Agent, for the benefit of the Lenders, in substantially all the assets of the Company except (i) life insurance policies not collaterally assigned to the Lenders, (ii) any equipment subject to liens permitted under the Credit Agreement if such equipment is also subject to an agreement prohibiting the pledge of such equipment to the Lenders, (iii) deposit accounts used exclusively by the Company for payroll and employee retiree benefit purposes and (iv) the Company’s interest in the outstanding voting equity securities of any of its directly-owned foreign subsidiaries to the extent such interests exceed 65 percent of the outstanding voting equity securities of such foreign subsidiary.

The Company’s interest bearing debt outstanding and credit availability at September 30, 2012 were as follows:

 

     September 30, 2012  

Interest bearing debt

   $ 22,578,000   

Credit availability

   $ 2,667,000   

The borrowing base formula to determine credit availability includes the following:

 

Percentage of eligible accounts receivable

     85.0

The lesser of:

  

Percentage of lower of cost or market of eligible inventory

     65.0

Percentage of the appraised net orderly liquidation value of eligible inventory

     85.0

Percentage of commercial letters of credit

     65.0

The borrowing base is also subject to certain limitations and reserves established at the Lenders’ discretion. If necessary, the Credit Agreement permits an “overadvance” of up to $1,000,000 for sixty consecutive days.

 

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The weighted average interest rate for the three and nine months ending September 30, 2012 and 2011, which includes the amortization charges associated with the terminated interest rate swap described in Note 7, Derivatives, are summarized as follows:

 

     Three Months Ended     Nine Months Ended  
     2012     2011     2012     2011  

Weighted average interest rate

     4.7     4.8     4.9     5.0

(6) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash, accounts receivable, accounts payable, interest-bearing debt and letters of credit. The carrying values of cash, accounts receivable and accounts payable approximated their fair value because of the short-term maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its Credit Agreement approximate fair value because the interest rates are reset periodically to reflect current market rates. The letters of credit approximated fair value due to the short-term nature of the instruments. The fair value of letters of credit at September 30, 2012 and December 31, 2011 was as follows:

 

     September 30,      December 31,  
     2012      2011  
     (In Thousands)  

Letters of credit at fair value

   $ 4,661       $ 2,324   

The Company’s hedging activity is limited to foreign currency purchases and an interest rate swap, when applicable. The Company engages in foreign currency hedging to minimize the risk that the eventual settlement of foreign currency transactions would be adversely affected by changes in exchange rates. The Company did not have any open foreign exchange contracts at September 30, 2012 and December 31, 2011.

The Company occasionally hedges foreign exchange exposures by entering into various short-term forward foreign exchange contracts. The instruments are carried at fair value in its Consolidated Balance Sheets as a component of current liabilities. Changes in the fair value of foreign exchange forward contracts that meet the applicable hedging criteria are recorded as a component of Accumulated Other Comprehensive Income (Loss) and reclassified into earnings in the same period during which the hedged transaction affected earnings. Changes in the fair value of foreign exchange forward contracts that do not meet the applicable hedging criteria are recorded currently in income as cost of sales. Hedging activities did not have a material impact on results of operations or financial condition during the three and nine month periods ending September 30, 2012 and 2011.

(7) DERIVATIVES

The Company transacts business globally with various manufacturing and distribution facilities. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes. The Company regularly monitors foreign exchange exposures and ensures forward contract amounts do not exceed the amounts of the underlying exposures.

 

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The Company maintained an interest rate swap, which was terminated on July 16, 2010, to fix the interest rate for the term of the revolving credit facility and term loan under its previous Credit Agreement, thereby protecting the Company from future interest rate increases. The interest rate swap represented a cash flow hedge and was recorded at fair value and classified as a non-current liability. Changes in the recorded fair value of the interest rate swap were recorded to Accumulated Other Comprehensive Income (Loss). The termination cost of the interest rate swap will be amortized into interest expense through March 31, 2014. The interest amortization for the Company’s terminated interest rate swaps reclassified from Accumulated Other Comprehensive Income (Loss) into Interest Expense (Income) during the three and nine months ending September 30, 2012 and 2011 was as follows:

 

     Three Months Ended      Nine Months Ended  

Income Statement Location

   2012      2011      2012      2011  
     (In Thousands)      (In Thousands)  

Interest expense

   $ 21       $ 32       $ 69       $ 107   

(8) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings (loss) per share. The earnings or loss per share for the three and nine months ending September 30, 2012 and 2011 follows:

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2012      2011      2012      2011  
     (In Thousands, Except Per Share Data)      (In Thousands, Except Per Share Data)  

Net earnings

   $ 564       $ 1,378       $ 1,805       $ 1,076   

Weighted-average shares outstanding

           

Basic

     6,611         6,540         6,595         6,522   

Diluted

     6,633         6,540         6,610         6,522   

Basic earnings per share

   $ 0.09       $ 0.21       $ 0.27       $ 0.16   

Diluted earnings per share

   $ 0.09       $ 0.21       $ 0.27       $ 0.16   

 

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Table of Contents

The diluted earnings per share calculations include the incremental shares of common stock issuable upon the exercise of stock options that have a market price in excess of the exercise price. When the exercise price of an option exceeds its market price the incremental shares are excluded from the diluted earnings per share calculation. A summary of the options outstanding, the options includable and excludable from the diluted earnings per share calculations and the incremental shares included in the diluted earnings per share calculation for the three and nine months ending September 30, 2012 and 2011 follows:

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2012      2011      2012      2011  
     (In Thousands)      (In Thousands)  

Options included in diluted earnings per share calculation

     217         —           217         —     

Options excluded from diluted earnings per share calculation

     137         256         137         256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total options

     354         256         354         256   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2012      2011      2012      2011  
     (In Thousands)      (In Thousands)  

Incremental shares included in the diluted earnings per share

     22         —           15         —     

(9) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive income (loss) includes net earnings (loss) and other non-owner changes in equity that bypass the statement of operations and are reported in a separate component of equity. For the three and nine months ending September 30, 2012 and 2011, Accumulated Other Comprehensive Loss included the foreign currency translation adjustment and an interest rate swap.

The cumulative balance of the Accumulated Other Comprehensive Loss at September 30, 2012 and December 31, 2011 follows:

 

     September 30,
2012
    December 31,
2011
 
     (In Thousands)  

Foreign currency translation adjustment

   $ (1,908   $ (2,222

Interest rate swap

     29        (40
  

 

 

   

 

 

 

Total

   $ (1,879   $ (2,262
  

 

 

   

 

 

 

 

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Table of Contents

(10) OTHER CURRENT ASSETS

The following table summarizes the components of other current assets at September 30, 2012 and December 31, 2011:

 

     September 30,      December 31,  
     2012      2011  
     (In Thousands)  

Prepaid assets

   $ 1,824       $ 2,156   

Vendor and miscellaneous receivables

     1,469         563   

Deferred income taxes, current

     —           7   
  

 

 

    

 

 

 
   $ 3,293       $ 2,726   
  

 

 

    

 

 

 

(11) COMMITMENTS AND CONTINGENCIES

The Company is subject to various unresolved legal actions which arise in the normal course of its business. None of these matters are expected to have a material adverse effect on the Company’s financial position or results of operations. However, the ultimate resolution of these matters cannot be determined at this time.

The Company’s outstanding inventory purchase orders with suppliers at September 30, 2012 and December 31, 2011 were as follows:

 

     September 30,      December 31,  
     2012      2011  
     (In Thousands)  

Open purchase orders

   $ 25,813       $ 15,712   

(12) PRODUCT WARRANTY COSTS AND INVENTORY VALUATION RESERVES

The Company warrants to the consumer who purchases its products that it will repair or replace, without charge, defective products within one year of purchase. The Company also has a return policy that allows its customers to return to the Company products returned to them by their customers for full or partial credit based on when the Company’s customer last purchased these products. Consequently, the Company maintains a warranty reserve, which reflects historical warranty return rates by product category multiplied by the most recent six months of unit sales of that model and the unit standard cost of the model. A roll-forward of the warranty reserve follows:

 

     Nine Months
Ended
September 30,
2012
    Year
Ended
December  31,
2011
 
     (In Thousands)  

Accrued product warranty costs, beginning of period

   $ 1,191      $ 923   

Warranty provision

     1,653        2,867   

Warranty expenditures

     (1,805     (2,599
  

 

 

   

 

 

 

Accrued product warranty costs, end of period

   $ 1,039      $ 1,191   
  

 

 

   

 

 

 

 

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The Company maintains a liquidation reserve representing the write-down of returned product from its customers to its net realizable value. Returned inventory is either sold to various liquidators or returned to vendors for partial credit against similar, new models. The decision to sell or return products to vendors depends upon the estimated future demand for the models. Judgments are made as to whether various models are to be liquidated or returned to the vendor, taking into consideration the liquidation prices expected to be received and the amount of the vendor credit. The amount of the reserve is determined by comparing the cost of each unit returned to the estimated amount to be realized upon each unit’s disposition, either from returning the unit to the vendor for partial credit towards the cost of new, similar product or liquidating the unit. This reserve can fluctuate significantly from quarter to quarter depending upon quantities of returned inventory on-hand and the estimated liquidation price or vendor credit per unit. A roll-forward of the liquidation reserve follows:

 

     Nine Months
Ended
September 30,
2012
    Year
Ended
December  31,
2011
 
     (In Thousands)  

Liquidation reserve, beginning of period

   $ 999      $ 777   

Liquidation provision

     1,788        2,156   

Liquidation of models

     (1,816     (1,934
  

 

 

   

 

 

 

Liquidation reserve, end of period

   $ 971      $ 999   
  

 

 

   

 

 

 

The Company maintains a net realizable value (“NRV”) reserve to write-down, as necessary, certain finished goods, except for those goods covered by the previously discussed liquidation reserve, below cost. The reserve includes models where it is determined that the estimated realizable value is less than cost. Thus, judgments must be made about which slow-moving, excess or non-current models are included in the reserve and the NRV of such models. The estimated NRV of each model is the per unit price that is estimated to be received if the model were sold in the marketplace. This reserve will vary depending upon the specific models selected, the estimated NRV for each model and quantities of each model that are determined will be sold below cost from quarter to quarter. A roll-forward of the NRV reserve follows:

 

     Nine Months
Ended
September 30,
2012
    Year
Ended
December  31,
2011
 
     (In Thousands)  

Net realizable reserve, beginning of period

   $ 118      $ 206   

NRV provision

     350        315   

NRV write-offs

     (264     (403
  

 

 

   

 

 

 

Net realizable reserve, end of period

   $ 204      $ 118   
  

 

 

   

 

 

 

 

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Table of Contents

(13) INTEREST EXPENSE AND OTHER INCOME (EXPENSE)

The following table shows the components of Interest Expense for the three and nine months ending September 30, 2012 and 2011:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2012     2011     2012     2011  
     (In Thousands)     (In Thousands)  

Interest on debt

   $ (193   $ (181   $ (506   $ (513

Amortization of loan fees

     (63     (59     (190     (175

Interest rate swap amortization

     (21     (32     (69     (107
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (277   $ (272   $ (765   $ (795
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the components of Other Income (Expense) for the three and nine months ending September 30, 2012 and 2011:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2012      2011     2012      2011  
     (In Thousands)     (In Thousands)  

CSV income (expense)

   $ 274       $ (671   $ 509       $ (512

Foreign exchange income (expense)

     17         (253     48         (208

Other - net

     45         25        128         (18
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 336       $ (899   $ 685       $ (738
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ANALYSIS OF RESULTS OF OPERATIONS

Executive Summary — Third Quarter

Operating earnings for the third quarter of 2012 totaled $304,000 compared to operating earnings of $2.3 million for the year ago quarter, a decrease of $2.0 million. Key factors contributing to the decrease in operating income were as follows:

 

   

Net sales decreased $6.7 million or 19.7 percent, mainly in the Cobra segment

 

   

Gross profit decreased $2.5 million mainly due to lower sales in the Cobra segment

 

   

Selling, general and administrative expenses decreased $477,000 or 6.0 percent, mainly due to lower variable selling expenses in the Cobra segment

Interest expense was essentially unchanged from the year ago quarter. Other income increased $1.2 million mainly due to the increase in cash surrender value (“CSV”) income for the life insurance policy the Company holds to fund deferred compensation programs for certain current and former officers of the Company and a foreign exchange gain. The combined impact of the unfavorable change in operating results and the increase in other income generated a $813,000 decrease in pre-tax earnings.

The Company’s consolidated tax benefit totaled $201,000 for the third quarter of 2012 and was essentially unchanged compared to the same quarter last year. The tax benefit for the third quarter of 2012 was mainly due to the return to provision variances for returns filed in the current quarter and the lower tax rate in the United Kingdom. Net earnings for the third quarter decreased $814,000, or $.12 per share, from 2011’s third quarter. For the three months ending September 30, 2012 the Company reported net earnings of $564,000, or $.09 per share, compared to earnings of $1.4 million, or $.21 per share, for the comparable prior year period.

Executive Summary — Nine Months

Operating earnings for the first nine months of 2012 totaled $1.9 million compared to operating earnings of $2.5 million for the year ago period, a decrease of $566,000. Key factors contributing to the decrease in operating income were as follows:

 

   

Net sales decreased $2.6 million or 3.0 percent, mainly in the Cobra segment

 

   

Gross profit decreased $98,000 as lower sales in the Cobra segment were nearly offset by improved margin and favorable mix in the Cobra segment

 

   

Selling, general and administrative expenses increased $468,000 or 2.1 percent, mainly due to fixed expenses in the Cobra segment

Interest expense was essentially unchanged from last year. Other income increased $1.4 million, mainly due to the increase in CSV income for the life insurance policy the Company holds to fund deferred compensation programs for certain current and former officers of the Company and a foreign exchange gain. The combined impact of the improved operating results and the increase in other income generated a $887,000 increase in pre-tax earnings.

The Company’s consolidated tax expense totaled $25,000 for the first nine months of 2012 compared to a $133,000 tax benefit for the same period last year. The tax expense for the first nine months of 2012 was mainly due to the profitability of CEEL.

Net earnings for the first nine months of 2012 improved $729,000, or $.11 per share, from 2011. For the nine months ending September 30, 2012 the Company reported net earnings of $1.8 million, or $.27 per share, compared to net earnings of $1.1 million, or $.16 per share, for the comparable prior year period.

Valuation Allowance

The U.S. operations were in a current year loss position for the most recent quarter and the nine month period ending September 30, 2012. Based on this and other relevant information, management concluded at September 30, 2012 that the Company did not meet the more likely than not criteria for concluding that the valuation allowance for its U.S. operations, which totaled $8.8 million at September 30, 2012 (compared to $9.0 million at December 31, 2011), was no longer required in part or total. The Company will continue to evaluate the need for a valuation allowance each quarter. Management believes that, if the favorable trend in operating results for U.S. operations continues, it may, based on all of the relevant information available, determine that it is more likely than not that the U.S. operations will be able to utilize all or a significant portion of its net deferred tax asset, resulting in a reduction to all or part of the valuation allowance and the recognition of a corresponding non-cash tax benefit.

 

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Table of Contents

EBITDA

The following table shows the reconciliation of net earnings to EBITDA and EBITDA As Defined for the three and nine months ending September 30, 2012 and 2011:

 

     Three Months Ended September 30     Nine Months Ended September 30  
     2012     2011     2012     2011  
     (In Thousands)     (In Thousands)  

Net earnings

   $ 564      $ 1,378      $ 1,805      $ 1,076   

Depreciation/amortization

     768        1,009        2,743        2,866   

Interest expense, excluding loan fee amortization

     214        213        575        620   

Income tax (benefit) provision

     (201     (202     25        (133
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     1,345        2,398        5,148        4,429   

Stock option expense

     65        29        262        171   

CSV (income) expense

     (274     671        (509     512   

Other non-cash items

     172        (62     (31     (141
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA As Defined

   $ 1,308      $ 3,036      $ 4,870      $ 4,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other non-cash items shown in the preceding EBITDA reconciliation include exchange gains and losses and deferred revenue.

EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA As Defined represents EBITDA adjusted to conform with the EBITDA measurement used to measure compliance with the financial covenants under the Company’s Credit Agreement. The Company believes EBITDA is a useful performance indicator and is frequently used by management, securities analysts and investors to judge operating performance between time periods and among other companies. The Company uses EBITDA As Defined to assess operating performance and ensure compliance with financial covenants.

EBITDA and EBITDA As Defined are non-GAAP performance indicators that should be used in conjunction with GAAP performance measurements such as net sales, operating profit and net income to evaluate the Company’s operating performance. EBITDA and EBITDA As Defined are not alternatives to net income or cash flow from operations determined in accordance with GAAP. Furthermore, EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.

 

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Table of Contents

Third Quarter — 2012 vs. 2011

The following table summarizes sales and pre-tax income by business segment for the three months ending September 30, 2012 and 2011:

 

                                2012 vs. 2011  
   2012      2011     Increase  
     (In Thousands)  
     Net      Pre-tax      Net      Pre-tax     Net     Pre-tax  

Business Segment

   Sales      Income      Sales      Income (Loss)     Sales     Income  

Cobra

   $ 23,962       $ 304       $ 30,907       $ 1,338      $ (6,945   $ (1,034

PPL

     3,710         59         3,547         (162     163        221   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Company

   $ 27,672       $ 363       $ 34,454       $ 1,176      $ (6,782   $ (813
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cobra Business Segment

Net sales decreased $6.9 million, or 22.5 percent, in the third quarter of 2012 to $24.0 million compared to $30.9 million in the third quarter of 2011. The decrease was mainly in domestic net sales, driven by declines in sales of Citizens Band radios and Trucker Navigation, which dropped 31.6 percent and 67.1 percent, respectively. The decrease was also partially due to slowing sales at travel centers driven by reduced discretionary spending by professional drivers, resulting from higher fuel prices and a softening in truck tonnage shipments as manufacturing output dropped and inventories throughout the supply chain increased. Also, contributing to the decline in Citizens Band radio sales was a large sale of a new limited edition model in the prior year’s quarter that was not repeated in the current year’s quarter. In addition, a contributor to the decline in Trucker Navigation sales was a large return of unsold units of two older models, the sell through of which slowed considerably in the market place due to the slowing sales at travel centers during the current quarter as well as the impact of the introduction of two new models, the 6000 PRO HD and the 8000 PRO HD, in the second quarter of 2012. Partially offsetting some of the decline in domestic net sales were higher European sales, up 4.8 percent because of an increase in PMR two-way radios and detectors into Eastern Europe.

Gross profit decreased $2.6 million, or 28.3 percent, to $6.5 million for the third quarter of 2012, while gross margin decreased 2.2 points to 27.0 percent from 29.2 percent in the prior year’s quarter. The gross margin decrease was due to an unfavorable domestic product mix, principally driven by the declines in Citizens Band radio and Trucker Navigation sales, which was partially offset by gross margin improvements for Citizens Band radios, Detection and GMRS Two-Way radios. Contributing to the overall gross margin decrease was a lower gross margin at CEEL, primarily because of foreign exchange losses compared to foreign exchange gains in the third quarter of 2011.

Selling, general and administrative expense decreased $547,000, or 8.1 percent, to $6.2 million for the third quarter of 2012 compared to $6.7 million in the prior year’s quarter and, as a percentage of net sales, were 25.9 percent and 21.8 percent, respectively. Decreases in variable selling expenses of $743,000, primarily because of lower domestic sales, and management incentive expenses of $266,000, due to the decline in consolidated operating income, were partially offset by higher engineering and fixed marketing expenses for supporting new products.

Interest expense was essentially unchanged from the year ago period. Other income for the third quarter of 2012 increased by $977,000, mainly due to $274,000 of CSV income in 2012 compared to $671,000 of expense in 2011.

The Cobra segment’s pre-tax earnings for the third quarter of 2012 decreased $1.0 million when compared to the prior year’s third quarter. For the three month period ending September 30, 2012, the Cobra segment’s pre-tax earnings totaled $304,000 compared to the $1.3 million reported for the three month period ending September 30, 2011.

Performance Products Limited (“PPL”) Business Segment

Net sales for the third quarter of 2012 increased $163,000, or 4.6 percent, to $3.7 million from $3.5 million for the third quarter of 2011. The increase was primarily due to higher Satellite Navigation net sales, up 14.6 percent, primarily because of increased sales of the S7000 and sales of two new models, the S8000 and DB8500, introduced late in the third quarter. Partially offsetting the higher Satellite Navigation net sales were lower net sales of GPS products, due to manufacturing delays for two new products, Cobra iRadar™ and S250 GPS watch. Also partially offsetting the higher Satellite Navigation net sales were lower Outdoor Leisure product net sales due to declines in net sales of GPS tracking and golf range-finder unit in part due to one of the wettest summers on record, which dampened demand for these products.

 

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Gross profit increased $33,000, or 2.6 percent, to $1.3 million for the third quarter of 2012, while gross margin declined 0.7 points to 35.3 percent from 36.0 percent in the prior year’s quarter. The decline in gross margin was attributable to an increase in mapping royalty expense and the effect of higher deferral of bundled revenue.

Selling, general and administrative expenses for the third quarter of 2012 increased to $1.3 million from $1.2 million for the third quarter of 2011 and as a percentage of net sales were 34.3 percent and 33.9 percent, respectively. The increase compared to the prior year’s quarter was attributable mainly to increases in management incentive expense and advertising and promotion expenses.

Other income for the third quarter of 2012 increased $258,000 compared to the third quarter of 2011, principally due to foreign exchange gains in 2012 compared to foreign exchange losses in 2011.

As a result of the above, the PPL segment had pre-tax earnings of $59,000 for the third quarter of 2012 compared to a pre-tax loss of $162,000 for the third quarter of 2011.

Nine Months — 2012 vs. 2011

The following table summarizes sales and pre-tax income by business segment for the nine months ending September 30, 2012 and 2011:

 

                                2012 vs. 2011  
     2012      2011     Increase  
     (In Thousands)  

Business Segment

   Net
Sales
     Pre-tax
Income
     Net
Sales
     Pre-tax
Income (Loss)
    Net
Sales
    Pre-tax
Income
 

Cobra

   $ 72,071       $ 1,406       $ 74,428       $ 949      $ (2,357   $ 457   

PPL

     11,103         424         11,325         (6     (222     430   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Company

   $ 83,174       $ 1,830       $ 85,753       $ 943      $ (2,579   $ 887   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cobra Business Segment

Net sales decreased $2.4 million, or 3.2 percent, in the first nine months of 2012 to $72.1 million compared to $74.4 million in the first nine months of 2011. The decrease resulted from lower sales of domestic Citizens Band radios, down 19.8 percent, partially offset by higher CEEL sales, up 25.5 percent. Citizens Band radio sales were lower due to several factors, including sluggish sales at travel centers as discretionary spending by professional drivers fell due to higher fuel prices and a softening in truck tonnage shipments, the leveling of the demand for the popular 29 LX, introduced in early 2011, and a large sale of a new limited edition model in the prior year’s period that was not repeated in the current year’s period. Strong sales of radar detectors and PMR two-way radios (up 27.5 percent and 22.6 percent, respectively) into Western and Eastern Europe drove the higher CEEL sales.

Gross profit decreased $309,000, or 1.5 percent, to $20.2 million for the first nine months of 2012, while gross margin improved by 0.5 points to 28.0 percent from 27.5 percent in the prior year’s period. The gross margin improvement was primarily the result of higher domestic gross margins for Citizens Band radios, Detection and GMRS two-way radios. The higher gross margin for Citizens Band radios was driven in part by the introduction of two new LX models, including the high-margin 29 LX BT, the first-ever Citizens Band radio with Bluetooth® technology that allows drivers a better way to have phone conversations on the road because calls from a mobile phone are synched with the CB radio. Detection gross margin increased in part due to the introduction of new, high-margin products, including the new Cobra Vedetta™ series of detectors, which all have a 2.4-inch thin film transistor color LCD display that allows mounting virtually anywhere on the windshield or dash, and new Cobra iRadar models, including the iRadar 200, which is universally compatible with iOS and Android™. GMRS two-way radios gross margin was higher primarily because of lower airfreight in the current year’s period compared to the prior year’s period. Also, contributing to the gross margin improvement was the favorable mix impact due to of the increased sales of high margin products at CEEL.

Selling, general and administrative expense increased $490,000, or 2.7 percent, to $18.6 million for the first nine months of 2012 compared to $18.1 million in the prior year’s period and, as a percentage of net sales, was 25.9 percent and 24.4 percent, respectively. The increase was due to higher fixed selling, general and administrative expense, partially offset by lower variable selling expenses because of the lower sales. Fixed selling, general and administrative expenses increased principally because of higher engineering, trade show, public relations and media expenses to support new products as well as higher professional fees and deferred compensation expense.

 

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Interest expense was $765,000 for the first nine months of 2012 compared to $795,000 for the year ago period. Other income for the first nine months of 2012 increased by $1.2 million, mainly due to higher CSV income.

The Cobra segment’s pre-tax earnings for the first nine months of 2012 improved $457,000 when compared to the prior year. For the nine month period ending September 30, 2012, the Cobra segment’s pre-tax earnings totaled $1.4 million compared to the pre-tax earnings of $949,000 reported for same period last year.

Performance Products Limited (“PPL”) Business Segment

PPL’s net sales decreased $222,000, or 2.0 percent, to $11.1 million in the first nine months of 2012 compared to the same period last year. This decrease reflected the impact of an unfavorable swing in the pounds sterling exchange rate as well as lower net sales of GPS and Outdoor Leisure products.

Gross profit increased $211,000, or 5.5 percent, to $4.1 million for the first nine months of 2012 and gross margin increased 2.6 points to 36.5 percent from 33.9 percent in the prior year. The gross margin improvement was due to an improved product mix and lower amortization expense attributable to certain fully amortized acquisition related intangible assets.

Selling, general and administrative expenses were essentially unchanged from the year ago period and totaled $3.7 million and as a percentage of net sales, were 33.2 percent and 32.7 percent, respectively.

Other income for the first nine months of 2012 increased $197,000 compared to 2011, principally due to foreign exchange gains in 2012 compared to foreign exchange losses in 2011.

As a result of the above, the PPL segment had pre-tax earnings of $424,000 for the nine months ending September 30, 2012 compared to a pre-tax loss of $6,000 for the same period in 2011.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, the Company had interest bearing debt outstanding of $22.6 million borrowed under the Credit Agreement. As of September 30, 2012, credit availability was approximately $2.7 million under the Credit Agreement. Additionally, the Company’s Credit Agreement permitted an “overadvance” of up to $1.0 million for sixty consecutive days.

A failure to comply, absent a waiver from lenders, with the covenants contained in the Credit Agreement could result in any outstanding indebtedness under the Credit Agreement becoming immediately due and payable and in the inability to borrow additional funds under the Credit Agreement. The Company believes that, for the foreseeable future, it will be able to continue to fund its operations and seasonal working capital requirements with cash generated from operations and borrowings under the Credit Agreement.

For the nine months ending September 30, 2012, net cash flows provided by operating activities totaled $62,000. Net cash inflows from operations and non-cash add-backs included net earnings of $1.8 million, non-cash depreciation and amortization of $2.7 million, and a decrease in accounts receivable of $5.6 million. Offsetting these inflows was an increase in inventory of $4.6 million, a decrease in accounts payable and other liabilities of $4.0 million and an increase in other assets of $1.0 million. The decrease in accounts receivable was due to the normal collection of year-end receivables and lower sales for the third quarter of 2012 as compared to the fourth quarter of 2011. The increase in inventory was mainly due to the holiday season build-up and lower than anticipated sales for the first nine months of 2012 as compared to 2011. The decrease in accounts payable resulted from improved payables turnover and the implementation of a cost reduction program with one of Cobra’s larger vendors starting January 2012 that allowed discounts for earlier payments of finished goods invoices. The decrease in other liabilities was attributable to year-end management incentive payments and lower promotional and warranty accruals due to the sales decline from the prior year’s fourth quarter.

Working capital requirements are seasonal, with demand for working capital being higher later in the year as customers begin purchasing for the holiday selling season. The Company believes that cash generated from operations and from borrowings under its Credit Agreement will be sufficient in 2012 to fund its working capital needs.

 

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Net cash used in investing activities for the first nine months of 2012 totaled $1.8 million. Property, plant and equipment additions, which totaled $948,000, included building improvements, tooling, and a new telephone system in the Chicago office. Premiums for life insurance totaled $317,000 and intangible asset additions which totaled $523,000 included in-house development of software for new products, patents and trademarks.

Net cash provided by financing activities for the nine months ending September 30, 2012 totaled $4.0 million and mainly resulted from additional bank borrowings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates consist of those that reflect significant judgments and uncertainties and could potentially result in materially different results under different assumptions. For a description of the Company’s critical accounting policies and estimates refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 found at Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the SEC, press releases or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, liquidity, plans for acquisitions or sales of assets or businesses, plans relating to products or services, assessments of materiality, expansion into international markets, growth trends in the consumer electronics industry, technological and market developments in the consumer electronics industry, the availability of new consumer electronics products and predictions of future events, as well as assumptions relating to these statements. In addition, when used in this report, the words “anticipates,” “believes,” “should,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report or in other Company filings, press releases, or otherwise. Factors that could contribute to or cause such differences include, but are not limited to:

 

   

global economic and market conditions, including continuation of or changes in the current economic environment;

 

   

ability of the Company to introduce new products to meet consumer needs, including timely introductions as new consumer technologies are introduced, and customer and consumer acceptance of these new product introductions;

 

   

pressure for the Company to reduce prices for older products as newer technologies are introduced;

 

   

significant competition in the consumer electronics industry, including introduction of new products and changes in pricing;

 

   

factors related to foreign manufacturing, sourcing and sales (including foreign government regulation, trade and importation, and health and safety concerns, and effects of fluctuation in exchange rates);

 

   

ability of the Company to maintain adequate financing, to bear the interest cost of such financing and to remain in compliance with financing covenants;

 

   

impairment of intangible assets due to market conditions and/or the Company’s operating results;

 

   

changes in law; and

 

   

other risk factors, which may be detailed from time to time in the Company’s SEC filings.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date set forth on the signature page hereto. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks related to changes in foreign currency exchange and interest rates are inherent to the Company’s operations. Changes to these factors could cause fluctuations in the Company’s net earnings, cash flows and the fair values of financial instruments subject to market risks. Future changes in the applicable interest rate will affect the interest expense incurred by the Company on its outstanding indebtedness.

There have been no material changes in the Company’s market risk since December 31, 2011.

 

Item 4. Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures have also been designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2012, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2012.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 6. Exhibits

 

a) Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

 

b) Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

 

c) Exhibit 32.1 Section 1350 Certification of the Chief Executive Officer.

 

d) Exhibit 32.2 Section 1350 Certification of the Chief Financial Officer.

 

e) Exhibit 101 Financial statements and footnotes formatted in XBRL (eXtensible Business Reporting Language).

 

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SIGNATURE

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.

 

COBRA ELECTRONICS CORPORATION
By  

/s/ Robert J. Ben

    Robert J. Ben
   

Senior Vice President and

Chief Financial Officer

   

(Principal Financial Officer and

duly authorized signatory)

Dated: November 13, 2012

 

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INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Document

  31.1    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
  31.2    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
  32.1    Section 1350 Certification of the Chief Executive Officer.
  32.2    Section 1350 Certification of the Chief Financial Officer.
   101    Financial statements and footnotes formatted in XBRL (eXtensible Business Reporting Language).

 

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