Audiovox Corporation F4Q09 (Qtr End 02/28/09) Earnings Call Transcript

| About: VOXX International (VOXX)

Audiovox Corporation (NASDAQ:VOXX)

F4Q09 Earnings Call

May 15, 2009 10:00 am ET

Executives

Glenn Wiener – GW Communications

Patrick M. Lavelle – President and Chief Executive Officer

Michael Stoehr – Senior Vice President and Chief Financial Officer

John Shalam – Chairman of the Board

Analysts

Jim Barrett - C.L. King

Richard Greenberg - Donald Smith & Co., Inc.

[Dan Thomason] – Harvard Management

[Mike Neery – Neery Asset Management].

Operator

Good day ladies and gentlemen, and welcome to Audiovox’s conference call. My name is Dan and I’ll be your coordinator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today’s call, Mr. Glenn Wiener. Please proceed.

Glenn Wiener

Thank you and good morning. Welcome to Audiovox’s fiscal 2009 fourth quarter and year end conference call. Today’s call is being webcast from our website, www.audiovox.com and is under the Investor Relations section.

With us today are Patrick Lavelle, President and Chief Executive Officer; Michael Stoehr, Senior Vice President and Chief Financial Officer; and John Shalam, Chairman of the Board.

Before turning the call over to Pat I’d like to read our Safe Harbor language. Except for historical information contained herein, statements made on today’s call and on today’s webcast that would constitute forward-looking statements may involve certain risks and uncertainties. All forward-looking statements made are based on currently available information. The company assumes no responsibility to update any such forward-looking statements.

The following factors among others may cause actual results to differ materially from the results suggested in these forward-looking statements. These factors include but are not limited to risks that result in changes from the company’s core business operation, their ability to keep pace with technology advances, significant competition from mobile and consumer electronics business and accessory business, relationships with key suppliers and customers, quality and consumer acceptance of our newly introduced products, market volatility, non-availability of products, excess inventory, price and product competition, new product introduction and the possibility that a review of our prior filings by the SEC may result in changes to our financial statements, and the possibility that stockholders or regulatory authorities may initiate proceedings against the company and/or our officers and directors as a result of any numerous statements of their actions.

Risk factors with our business including some of the factors set forth herein are detailed in our Form 10-K which was filed yesterday after market close.

With that said I’d like to now turn the call over to Pat Lavelle.

Patrick M. Lavelle

Thank you Glenn and good morning everyone. A lot has changed since our last conference call. Unfortunately the momentum that we had from our strong third quarter was impacted by global economic turmoil and a string of events that arose in our fourth quarter that we simply could not overcome. Weakening retail sales, severely depressed automotive sales, markdowns driven by customer and vendor bankruptcies, and several non-cash charges related to goodwill and intangibles severely cut into fourth quarter and resulted in an annual loss.

In a few moments Michael will cover the quarter and the year end numbers. My focus this morning will be on the events and the issues that impacted our results and my thoughts on the immediate future.

Through the first nine months of the fiscal year we operated at near breakeven, and despite the faltering economy which led to lower sales versus our initial forecast, we stayed even by quickly adjusting overheads to match sales throughout the year and by making aggressive cuts over the past few months. Overall we cut approximately $23 million from our overhead during the year and we will realize the full effect of those reductions during fiscal 2010. These cuts include a combination of salary, staff and program reductions as well as consolidation of certain services that both maximize productivity and reduce expenses.

Additionally, in an effort to increase margins and compensate for higher shipping, warehouse and transportation costs, we instituted price increases which took effect in the second half of the year.

As I indicated on my last call, we had significant sell in for the holiday season. In fact we were better placed at retail than any time in our history with more SKUs at more retailers than ever before. However, the economic climate and lower consumer spending created a poor retail environment that left virtually every one of our retailers with heavy post-holiday inventory. This has had a major impact on our fourth quarter consumer sales and it continues to effect our first quarter as certain program launches were pushed back so retailers could clear the last of their holiday stock. The good news is that retailers for the most part have moved that inventory and have begun restocking for spring and summer promotions.

On the automotive side we were severely impacted by the continuing year-over-year decline of car sales, both at our OEM customers and in our after market car dealer programs. Unfortunately sales of new vehicles continue to be depressed and we are anticipating lower levels for the balance of the year. The uncertainty surrounding the Chrysler bankruptcy and the current situation at GM, along with the targeted dealership reduction programs, will not allow for a rebound in car sales this year. Fortunately we believe we can offset some of these negatives with some of our new product introductions with Qualcomm’s FLO TV, our Sony PlayStation and Sirius XM.

The fourth quarter bankruptcy of Circuit City affected our results in a number of ways. Reported fourth quarter sales were down considerably without contributions from Circuit, our third largest customer. In addition we purchased a [foot] option to protect us in the event of a Circuit bankruptcy which despite the heavy cost allowed us to protect receivables for up to $10 million. Finally we took certain inventory writedowns to move goods that were destined for sale at Circuit during the quarter.

In addition to Chrysler and Circuit, we had to weather the bankruptcy of two Asian vendors who could not navigate the downturn. Deteriorating economic conditions escalated during the fourth quarter and while I believe the business was managed effectively, as we were able to increase annual sales to $603 million and hold pricing in this climate, we nonetheless posted a loss of $15 million for the year after non-cash impairment and valuation charges. Within that loss there are a number of one time charges that we do not expect to repeat, $6.4 million in expenses related to bankruptcies, $2.9 million reported earlier this year for the discontinuance of our Nav line, $2.3 million in IP settlements, provisions and related legal fees, and $1 million in severance and related restructuring charges. The total reported loss was approximately $71 million. Nearly $54 million was non-cash impairment charges related to goodwill, intangibles and deferred tax valuations.

On the positive side, we increased our cash position by $31 million year-over-year and built it to approximately $70 million as of the end of our fiscal year. This gives us sufficient resources to manage our business through this economic cycle.

Make no mistake. Fiscal 2010 is going to be a challenge. Sales continue to be affected by the events I outlined. However, we are starting to see a bottom and with the introduction of some of our new programs we will begin to reverse the negative impact of the recession. New products in spring retail programs should help us get back to projected sales levels and on a considerably lower cost basis, as the complete effect of our reduction plans take hold. I expect to see ramp ups sequentially in the second quarter with the big season coming in our fiscal third quarter.

Critical for us will be sell through, and despite that caution I also have reason for optimism when I look at our longer term potential. We continue to do everything we can to deliver successful results and despite cutting costs we have not strayed from our stated objectives of investing in technology and delivering the latest consumer driven mobile, consumer and accessory products.

As you know this past year we developed partnerships with Sony PlayStation and Qualcomm’s FLO TV that deliver proven consumer preferences. This should help drive sales and enhance our number one brand position in the mobile entertainment category. Our integrated Sony PlayStation rear seat entertainment system will launch early in the third quarter and in time for the holiday season. FLO TV service will launch through our expedited channel in the fall and we’re targeting retail introduction shortly thereafter. Both these alliances should boost sales and contribute to margin improvement.

Our program with Sirius XM will solidify our position as the number one provider of satellite radio products in the after market. As I said last quarter we expect to double satellite radio sales this year.

We’ve been successful in our brand strategy of increasing our retail presence and growing business with many of our key accounts, so when consumers get back to the stores and start buying we will have strong representation. We have nearly 60 new products scheduled for delivery over the next couple of months from our mobile and consumer groups, and another 200 from the accessory group. We enter the key selling season ready with one of the best assortments in our history.

Our RCA Small Wonder line of digital camcorders launches with the Webslinger EZ209 leading the way. A brand new line of high function RCA clock radios and acoustic research infinite radios arrive in stores in the next 60 days. New products in our MP3 and digital voice lines arrive in June. Several new Jensen multimedia products set to be delivered to one of our largest customers add to our market leading product line. A brand new line of [VOE] look alike mobile multimedia systems will also arrive in time for new car introductions this season.

Adding to my optimism is the strong fourth quarter growth in our accessory business, up 23% that has continued into our first quarter, driven by our new line of digital antennas that have captured number one market share. We have several significant new customers and in September plan to introduce our new Excite line of high end TV remotes that we’ll deliver in time for holiday sales.

Among our goals this year is to generate free cash flow and manage the cash on hand prudently to run our business and pursue acquisitions that make sense, ones that will grow the top line and allow us to leverage much of the fixed overhead that we have. We believe there are opportunities that have developed as a result of the economic downturn and they may become more attractive over the coming year.

Last quarter my closing remarks were positive about our third quarter with caution about what may lay ahead. I am afraid that no amount of caution could have prepared us for some of the extreme events that marked the fourth quarter. The continued demise of the overall global markets have forced us to adjust quickly and we have. I believe we’ve structured this business accordingly and made some very, very difficult cuts, but we also focused on what we think will be sound business decisions for the future. I’m not happy with losses. No one is. But when things do turn I am confident shareholders will be rewarded for their patience.

I’d like to thank you for your time today and your continued support, and with that I’d like to turn the call over to Michael.

Michael Stoehr

Thanks Pat. Good morning everyone. I would like to start my presentation with a discussion of the fourth quarter as there were several challenges we faced in the quarter, all of which occurred in rapid succession. We will discuss impacts on revenue, effects on gross profit and overhead, results of valuation tests and a discussion on anticipated liquidity position as of the fourth quarter with a view for the remainder of fiscal 2010, and finally a brief summary of events for our year end 2009.

Net sales were $115.6 million in the fourth quarter, a decline of 12% versus a comparable quarter last year. Electronic sales were $72.1 versus $95.8, a decline of 24.8%. The decline in electronics is due to lower consumer goods sales as our customers experienced a slow holiday season and did not reorder during the fourth quarter as they sold through their inventory. Our consumer goods sales declined principally in DVDs and digital products. Offsetting these declines were higher sales in our clock radios and voice recorders. The decline in consumer group was 48%.

The decline in our electronic group was also due to lower mobile electronic sales. As a result of the economic uncertainties during the fourth quarter and a large decline in not only domestic but foreign vehicle sales, the group experienced the declining sales in all product categories such as auto audio and security. This group’s sales were down 29%.

Our international sales increased by 15% as a result of sales increases in Mexico and Asia, the results of our recent acquisitions. We also experienced sales increases in Venezuela. These increases were partially offset by decline of sales in our German and European operations.

Our accessory group had sales of $43.6 million for the fourth quarter, an increase of 23% compared to $35.5 million last year. This was a result of increased digital antenna sales, new customers and new product coming on stream.

Gross profit and gross profit margins. Our gross margin is based on product costs, increased due to our recent price increases during the quarter. We took several charges that cost of our product. They were one, a bankruptcy of a retail customer left us with inventory we purchased for them. We decided to markdown the products to move them. This charge was $2.1 million. As a result of the slow holiday season we did not get the reorders as forecasted by our customers and had excess inventory in a specific model which we increased our LCM reserve by $800,000.

With the large decline in auto sales we further increased inventory LCM reserves by $2.2 million for inventory related to this category of distribution. Our defective and future warranty charges increased by $2.2 million, fourth quarter ’09 versus ’08, mainly due to the full year of the Thomson AE acquisition. Offsetting some of the previously mentioned charges was the decline in our warehouse and assembly costs as a result of our overhead reduction plans.

Our gross margin for the fourth quarter was 11.9% versus 18.8% last quarter. If we try and normalize the quarter to the events mentioned, it would have been 18.4%.

Overhead for the quarter was $66.8 million versus $28.2 million last year. The following items impacted the quarter’s overhead. One, impairment charges $38.8 million. Due to the market value of the company in relation to the equity value we conducted a 142 Review of the company’s goodwill and intangible assets. The assumptions used to conduct the test were impacted by a higher discount rate and lower multiples. As a result we had an impairment charge for goodwill of $29 million and $9.8 million charge for intangibles. Two, for the quarter we had increased professional fees as a result of nonstandard charges of $2.3 million. This relates to IP settlements, legal action and other miscellaneous charges. Three, we had an increase in our allowance to doubtful accounts as a result of the recent Chrysler bankruptcy which was $500,000 and an increase due to a small amount of Circuit post petition for about $223,000.

To summarize, to pro forma the impact of these non-standard charges had on our overhead, which we reported at $66.8 million, the non-standard charge that I mentioned equaled $41.8 million. Our pro forma overhead would have been $25 million for the quarter versus $28.2 million last year, a decline of $3.2 million. This comes from declines in our selling expenses and engineering and technical support.

Other expenses for the quarter increased by $3.6 million versus last year’s quarter as a result of the following. One, there was a charge of $1.9 million for costs related to a vendor bankruptcy which occurred in the fourth quarter. We were unable to get our merchandise from the vendor. And two, during fourth quarter 2008 we sold shares of an investment which did not repeat in fourth quarter 2009.

Deferred tax valuation. The company conducted a review of its deferred tax assets and based on the results a valuation reserve of $14.5 million was booked for the fourth quarter. After all of the discussed expenses, the company reported a net loss of $70 million or $3.06 a share loss for the quarter.

To bring some clarity to the fourth quarter financial statements, adjusting this loss for the only non-cash valuation charges and non-standard charges the quarter would be, and we reported a net loss of $70 million, we had an impairment goodwill charge of $38.8, we had a deferred tax valuation charge of $14.5, we had bankruptcy costs and vendors of approximately $6.4, increased professional fees of $2.3, would bring the loss for the quarter to $7.9 million or $0.35 a share. We have seen improvement in our overhead expenses and when these non-standard charges clear we anticipate further improvements in overhead.

Fiscal 2009 our sales were $603 million versus $591 million last year, an increase of 2%. Our electronics group had sales of $449 million, an increase of 2.8% and our accessories group had sales of $153, a decline of four basis points so basically breakeven.

Gross margins for the year were impacted by charges we took in the fourth quarter as well as our exit of portable navigation. Adjusting our overhead of $153.7 for $42.8 million of non-standard charges related to impairment, severance programs, legal fees, allowance for doubtful accounts and two bankruptcies, our overhead would have been $110.9 million versus $106.9 million fiscal 2008. Our second half year overhead has declined versus the first half of the year. As most of our non-standard charges took place in the fourth quarter the only remaining non-standard items we have was $2.9 million for portable Nav and $1 million for the severance program which took part in the early part of the year.

Our net loss for the year was $70 million or $3.11 per share. Adjusting for all these non-standard charges our pro forma loss would have been $4.5 million or $0.20 a share. There is a reconciliation of these pro formas in the 10-K.

Liquidity and capital resources. Even though the company has had a challenging year, we increased our cash accounts from $39 million to a balance of approximately $70 million, an increase of $31 million. Accounts receivable terms sustained within terms, and our inventory terms have improved from last year.

During the fourth quarter the company entered into a contract with Sirius XM and purchased inventory stock of program. This purchase of inventory accounts for the large increase in the accounts payable shown on February 28, 2009 versus February 29, 2008. This accounts payable was subsequently been paid down during the first quarter. Our cash position today after the pay down of these receivable balances is still $70 million, and we anticipate over the next two months to build this balance further.

Based upon our customer forecast we have begun to purchase inventory to support anticipated sales which will use some of this cash. Looking towards the third quarter we anticipate we will have cash balances to support a seasonal increase in sales which occurs in our third quarter. We have also paid down some debt in Europe and have no outstandings in Venezuela or Mexico. [Accounting] currently has a small $10 million credit facility which we use for letters of credit. Our European company has facilities which are in banks which are more than adequate to support any growth they may have.

I am pleased to report our [stocks] audit was completed. There were no material or significant deficiencies of any in any of our operations or financial controls.

It has been a tough quarter for us with all that happened to the company, but the company’s balance sheet has been able to handle these unforeseen events. We have the ability to grow as things improve. But I wish to caution everyone that we are concerned about the current economy and will be extremely cautious as we move forward this year.

I’d like to turn the meeting back to Pat.

Patrick M. Lavelle

Okay Michael. Thank you. If there are any questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Barrett - C.L. King.

Jim Barrett - C.L. King

Mike I think these are questions for you. Can you first talk about the growth you’re seeing in your accessory business with the antennas? You mentioned that was, I think Pat you mentioned that was continuing into Q1 of this year. Does that suggest that the gross margin should be relatively positive given the fact I assume your accessories still have significantly higher margins?

Michael Stoehr

Well I think what I’d like to do is not only the antennas but talk to the accessories group as a whole. We have seen as I’ve mentioned and we’ve seen increases not only in the digital antennas which have come up, but we’ve got new customers coming on stream plus we do have new product coming in. So that margin in that area has started to move.

Patrick M. Lavelle

Yes, one thing Jim when you’re looking at modeling, we are seeing an improvement in our margins in the accessory group. But the program that we have with Sirius will offset that increase. As you know we’re planning a substantial increase in sales and in many cases we work on a more or less a fulfillment type basis with Sirius. So you’ll see a drag on margins from some of those sales.

Jim Barrett - C.L. King

As a rule of thumb is your accessories business still about 1,000 basis points higher gross margins than the consumer electronic business?

Michael Stoehr

Yes.

Jim Barrett - C.L. King

And Mike of the $23 million of overhead that you’ve been able to remove from the system, assuming the economy recovers in a few years, how much of that overhead reduction should we view as permanent as opposed to overhead that’s likely to come back in a normal operating environment?

Michael Stoehr

The bulk of the overhead reduction that took place that we did was in personnel and personnel related costs. And it was cost to company. So as, let’s say as business improves there is a gap that’s always there that you can take on some improvements to a certain point. Then after that you would have to start placing more salespeople and more clericals and more warehouse people into the system. But we can take some growth with the internal staff exists now. So you would assume this year we pretty well could handle what’s coming at us with what we have.

Jim Barrett - C.L. King

And you may have touched upon it, do you plan on any further material overhead reductions in fiscal 2010?

Patrick M. Lavelle

We’re going to look at the first quarter results and make any determination. Right now like I said that we expect this $23 million to be realized during the year. Okay? You know one of the things that we do have is we do have some temporary payroll cuts that we’ve put in place that may come back if, you know, if we see things starting to improve. But we’re going to wait and see. The end of our first quarter is this month so we’ll look and see if we’re hitting our numbers, our internal forecast, and then make any further adjustments from there.

Michael Stoehr

And Jim the [overheads] in the company as we discussed went from 1,033 to 812 which is what the headcount is right now.

Jim Barrett - C.L. King

From 1,033 to 812?

Michael Stoehr

Yes. And we also what we’ve done is as Pat mentioned we’ve also besides reducing the headcount itself we’ve reduced people’s compensation by a certain percentage, and that goes for senior executives all the way down. And we hope to take some of the 401k charges off and everything else.

Patrick M. Lavelle

Right now we have capacity to grow without adding much to the overhead. I would estimate that we could probably grow this company $700 million in sales without really having any major increase to personnel or overhead.

Jim Barrett - C.L. King

Pat, my last question and although I think you touched upon it briefly, I mean the company is sitting on close to $70 million of cash. What does the acquisition horizon look like considering the, you know, what has happened economically to the industry and to the economy?

Patrick M. Lavelle

As I said there are some opportunities that have presented themselves to us, and we certainly are looking at the ones that are interesting and ones that make sense to us. As I’ve stated in the past I think you’ve seen how we conduct an acquisition. We’re not going to overpay. We’re going to be looking for a discount. But I do think the economic climate has created some opportunities that we could take advantage of during the year.

Jim Barrett - C.L. King

Is it reasonable to conclude that private equity is not competing with you in evaluating these acquisition targets?

Patrick M. Lavelle

Well, in some cases yes, but actually I would say in some of the deals that we are looking at they’re more strategic. But no they’re not private equity firms we’re up against.

Michael Stoehr

Sometimes it’s the size.

Operator

Your next question comes from Richard Greenberg - Donald Smith & Co., Inc.

Richard Greenberg - Donald Smith & Co., Inc.

Pat just to start out with you. On the sales I’m sure you guys are not inclined to give any guidance for the year, but just a general sense. I mean from what you’re seeing right now do you think sales will be up this year versus last year?

Patrick M. Lavelle

You know again it is difficult to say. You know a good portion of our business is related to the car business. We do have some positives, you know, as I’ve indicated that we do will offset some of that weakness. But it depends on how, you know, how weak the car sales really are. We’ve got baked into our numbers between 9 and 10 million new cars and trucks sold this year. Okay? And that will give us a substantial reduction in our core mobile business. But like I said we have other programs that are coming in that would offset that. To the extent I really can’t say at this particular point. It’s a little too early to tell.

Richard Greenberg - Donald Smith & Co., Inc.

And then on gross margin, given what you said, you know, about the Sirius is lower margin, the accessories are higher. I mean just ballpark are we somewhere, you know, in the 18% range?

Patrick M. Lavelle

I think you can look at the margins that we’ve run historically.

Richard Greenberg - Donald Smith & Co., Inc.

And then on, you did $111 million in overhead costs last year. You had this $23 million some of which, you know, hit last year and some of which will still hit this year. Mike are we kind of talking $100 million for, you know, assuming you hit your targeted sales level whatever that is? Is that the ballpark number we should be targeting is roughly, you know, four times the fourth quarter level?

Michael Stoehr

Yes, you’re in the ballpark, Richard.

Richard Greenberg - Donald Smith & Co., Inc.

And then just finally and I know we’ve had this discussion, you know, many times before but, you know, the whole issue of you know how you look at your stock. And right now your stock’s at one-third of book. It’s selling at less than half of working capital. I know you guys want to grow the company in acquisitions but it all has to be balanced versus what really may be the cheapest asset out there which is your own company. There’s not too many companies that have those kinds of valuations statistics. Is there no way that you can find allocate any of that cash towards buying back a little bit of stock?

John Shalam

Hey, Rich, we’ve had, this is John Shalam. We’ve had that discussion many, many times in the past and you know our feelings about that. You know our strategy and the strategic importance of maintaining strong cash reserves for purposes of acquisition and diversification. And buying back stock really in our particular case of the small companies we are has a very limited short term impact. And in the long run you’re better off preserving your cash and having it available for opportunities that come up. And that’s my feeling and I don’t think it’s changed in the last four years.

Richard Greenberg - Donald Smith & Co., Inc.

Yes, I would just point out, John, to me this is not a short term impact. I’m just trying to buy the cheapest asset around for the cheapest price and when I would see something at one-third or one-half of true underlying value, you know, that’s the reason you’re buying it back because that adds value to the rest of the shareholders.

John Shalam

That’s true.

Richard Greenberg - Donald Smith & Co., Inc.

It has nothing to do with trying to create a short term [prof]. That’s not really what we’re interested in. It’s buying the cheapest thing out there.

John Shalam

Yes that’s true, Rick, but what’s really going to make the stock move is as the economy begins to improve and as past programs that we’ve outlined begin to take hold and we start showing some earnings on the bottom line and quarter by quarter, you’ll see the stock perform the way that it should perform. That’s going to be based on strong fundamentals and a good outlook and not just on the fact that we’re buying back shares. And I think we can achieve that strategy and improve on that strategy by making some good, tactical acquisitions depending on what we’re able to find and to put together. That’s going to accelerate the revenue and the profitability of this company and reflect itself in improved stock performance. Rick, I’m sorry, I just don’t see it any other way.

Operator

Your next question comes from [Dan Thomason] – Harvard Management.

[Dan Thomason] – Harvard Management

Could you please characterize any remaining exposure you may have to Chrysler and GM in addition to what you’ve already reserved for in the quarter?

Patrick M. Lavelle

Right now we’ve taken the charge to the receivables that we had open with them. Obviously we do have inventory. Okay? But we do believe that they will start up again and that we will be able to sell that inventory and they’ll get their [DIP] financing and we’ll be able to move that out. So we think at this particular point the worst is over with Chrysler.

Operator

Your next question comes from [Mike Neery – Neery Asset Management].

[Mike Neery – Neery Asset Management]

Just a question on acquisitions going forward. How does your experience with the recent acquisitions we’ve done effect the value you put on new things you look at buying? You know we exchanged $100 million over the last two years for intangibles and you know our revenues are basically flat with where they were a few years ago and operating profits down. How do you, is it just that things were more expensive then and we paid a little more than we should have and now we’re going to buy things more cheaply? Or, you know, can you just give me a sense on how we can be sure that new acquisitions really are going to be good deals for the shareholders?

Patrick M. Lavelle

Well if you look over what we acquired, the different companies for over the past few years, we have paid some very good prices, discounted prices against the value of the businesses that we purchased. I think the problem that when one is looking at the sales being flat, the economy has done a pretty good job in knocking out the sales of some of the acquired companies as well. But the core strength of each one of those acquisitions remain in place, the product categories remain in place and the customer base does. So when we see a pickup in the industry or a pickup in the economy where the consumer comes back to the stores, I think you’re going to see us ramp up very nicely.

[Mike Neery – Neery Asset Management]

But when you look at buying these brands for more than their tangible book, what about their businesses assures you that those intangibles really are worth what they’re worth? I mean we just wrote off our goodwill which, you know, is a portion of that. But how, when you buy these things for much more than book, how do you know that they’re actually worth the price that we pay?

Patrick M. Lavelle

Well obviously when you look at the price that you’re paying and you look at what you’re anticipating as far as generated sales and gross profits from the operation that you’re purchasing, every deal that we looked at is accretive. And those are the fundamentals that we look at when we do an acquisition. The goodwill doesn’t really, in my estimation, you know, enter into that decision. It really is on the sales that we’re picking up and the gross profit and the income that’s generated from that gross profit, along with our ability to leverage our existing overhead so that we can reduce the overhead of the acquired company. Is that accretive and is that business as far as the categories that we’re picking up, do they have a life cycle that will allow for a good return on our investment? Those are the fundamentals that we look at when we do an acquisition.

[Mike Neery – Neery Asset Management]

What multiples did we use on the purchases that we made on what we assume that they would do? And then, you know obviously they didn’t do that but is that just because of the economy and we can expect a pickup here in those and they’ll get the multiple that we thought? What are kind of your thoughts on that?

Patrick M. Lavelle

Let me give you our last acquisition that we did was Thomson’s AV group, where we picked up approximately $150 to $160 million in sales that we’ve stated. And we picked up some good brand names in RCA. And the cost of that for us was under $10 million. Okay? So when you’re generating that kind of sale and the resulting gross profit from those $150 million in sales, that again is what we’re looking at. So, you know, the problem that we’ve had this year is that pretty much across every group whether it’s our international group, our domestic group, North American or South American, and even our Asian groups have all been impacted by the slowdown in the economy. Our internal forecast for sales to be much greater than $603 million. And a lot of that, a lot of those sales would have come from the acquired companies.

[Mike Neery – Neery Asset Management]

But it does seem like the more recent acquisitions, Thomson, were done in much better multiples than some of the earlier ones and obviously we’re getting more deals like that, so.

Patrick M. Lavelle

I would say that some of our most profitable deals have been our earliest ones. Our Code deal in 2002 has worked out very, very well. We bought a company with sales of in the $20 million range. I can tell you today sales are at least 35%, running 35% above that and they’re very profitable. I can also tell you that the record [con] business has worked out very, very well for us when you include our German operation, okay, and the sales that we’ve made in domestically. So as far as the multiples, there are really no multiples.

[Mike Neery – Neery Asset Management]

Well, you know, I hope you’re right and I think you probably are. You know we buy these things at more than book and then somehow when they get translated into Audiovox the market says they’re all worth less than book, so.

Patrick M. Lavelle

I think that’s a function of the economy and what’s gone on. Most companies today are taking impairment charges for their intangibles and goodwill and I think we got caught up in that this year. More so that being the reason than how the acquisitions are doing.

Michael Stoehr

And one of the things that are impacting all these 142 evaluations are the changes in the risk free capital rates and multiples that you look at. It has been quite a change.

John Shalam

But as Pat pointed out, really when we look at an acquisition we look at the revenue of the company, the profitability of that company, what are the synergies that we can derive? How can we improve our own balance sheet by bringing that company in? And how can we improve our sales and our profits and build it up? And the rest of these [matters] with goodwill and these are more accounting [invention] that really don’t impact the operation of the company on a day-to-day basis, and bring in more revenue or more sales or more profits.

[Mike Neery – Neery Asset Management]

No I understand, but the only reason we had to write down the goodwill was because the cash flows weren’t there. I mean we didn’t have an operating profit from these businesses that we acquired.

John Shalam

Yes, that’s correct.

[Mike Neery – Neery Asset Management]

And we had thought we would, so, and I know the economy’s much worse than we had thought but.

John Shalam

We still think we will and really that’s what we need to be guided by as we proceed.

Operator

At this time there are no further questions in queue.

Patrick M. Lavelle

Okay. If there are no further questions I’d like to thank all of you for attending this morning and your interest in Audiovox. I hope you have a good day and enjoy your weekend. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!